Ladies and gentlemen, welcome to the Swedbank Interim Report, January to September 2014 conference call. Today, I'm pleased to present Mr. Michael Wolf, President and CEO. For the first part of this call, all participants will be in listen-only mode, and afterwards there'll be a question-and-answer session. Mr. Michael Wolf, please begin.
Thank you, and good morning, everyone, and thanks for participating at this three Q3 call. Let me start reflecting on the macro environment as well as the political and regulatory landscape. The global economy is out of step. The U.S. and U.K. continue to grow while the Eurozone is struggling, and we see declining growth in China. On top of that, we have an increasing geopolitical uncertainty during the quarter. Despite all of that, we have had a reasonably good development in our four home markets. We have a minority government in Sweden, as in many other countries, affecting the chances of major reforms being executed negatively. At the same time, we see more and more frustrated voters due to perceived inequalities.
The discussion around increasing household debt continued to qualify the debate in Sweden, and it's therefore promising to see a trend shift in the number of housing starts, although from a low level. During the fourth quarter, we'll get the results from the AQR in Europe, which hopefully will take us one step closer to cleaning out the balance sheets of the European banks, which is an important step in order to strengthen the sector. The question that I feel remain unanswered is if we have the political leadership to implement the necessary reforms required in order to return to sustainable growth and hence close the perceived inequality gap. To conclude, our outlook remains, i.e., lending demand will stay subdued, and the low interest rate and low inflation environment will be here to stay for quite some time. Let's then turn to the performance of Swedbank during the quarter.
We have had a good client activity despite the macro picture, and we are growing in areas where the real economy has been growing, and hence, we have gained an improved market position, especially in the corporate lending area and around mortgages. As a result, we have a strong quarter financially. In the Baltic Banking operation, credit demand has remained low as anticipated, and we have not seen any direct effects of the geopolitical uncertainty in the neighboring countries, i.e., credit quality remains robust. The activity level in the local economies remains on a good level and is reflected in our commission income. Our multi-channel approach is well appreciated by our clients and enables us to be cost efficient at the same time as providing competitive pricing towards customers.
In Swedish retail, we've benefited from the increased lending activity, both in the corporate sector, where we continue to increase our market share, as in the mortgage lending, where we now have a front book market share in line with our back book market share for the first time since 2009. Also, in the savings area, we see good numbers. We continue to take market shares in the corporate sector on deposits, and in the fund management area, we have seen better net inflows, compared to the same period last year. The new sales numbers confirms also that our clients are selecting more, conservative fund choices, like index funds. The uptake of new digital services remain very strong, those enabling our clients to a more efficient and accessible day-to-day banking experience.
During the quarter, we introduced Swish payments for our corporate clients, which together with our PAPS Micro card reader, allows smaller companies to digitize their sales and hence grow their top line, at the same time, get customer data digitally. In the quarter, 3,600 corporate clients signed up for Swish. Finally, the integration of Sparbanken Öresund is moving ahead according to plan. In LCI, credit demand continued to be okay, and we saw many corporates utilizing the falling interest rates to refinance themselves. We have seen a seasonally weaker quarter in the bond and corporate finance area, but I'm very pleased to note that during the first nine months during this year, we participated in five out of 10 IPOs in the Swedish market.
Our focus going forward remains clearly to ensure that our positive trend of improving market position will continue. Hence, we're going to further invest in accessibility and services and improved offerings, and we're also required more competitive pricing. Hence, cost efficiency remains core in our strategy, and we aim to reduce our cost base towards SEK 16 billion by the end of 2016. I will stop there and hand over to Göran, who will go through the results in more detail. Göran, please.
Thank you, Michael. Unfortunately, I think we are lacking pictures or?
The pictures are on the web.
Okay, so I can. How do I change picture?
Let's see.
Okay. So, before I then turn into the business areas, I just want to say that this quarter is a very strong financial quarter. It's primarily driven by lower interest rates that helps our treasury operation on money on, on that event. But it's very stable income stream in the three business areas, which I will go through very briefly and then open up for questions more. Yeah, starting with the Swedish Banking and the six regions, I think overall the strong message here is that we are taking market share. We are having strong volumes on the lending side.
We have had SEK 17 billion of lending volumes, whereof SEK 9 billion are in the mortgage market and remaining in the corporate market, very much relating towards a very vibrant property market, of course, in Sweden in general. The financial impact of lower deposit margins is visible. That is deteriorating NII, and it's being compensated by higher mortgage margins relating to the repricing of the capital situation in the banks, but also the volume growth helps there. Otherwise, I think, commission income and other types of incomes are following a very stable and good pattern. And we are continuing to work with integrating Sparbanken Öresund in the southern part of Sweden. Turning to large corporate institutions, we in this business area also had good volume growth in the quarter.
The result was slightly weaker compared to the previous quarter, but seasonally, the third quarter is a bit less activity since it's part of it is summer activity. And we saw mixed corporate activity, you could say, in the trading, trading side and on the corporate finance side, while the lending commissions were quite strong actually in the quarter. We had also a one-off credit impairment in the quarter that I think Anders will touch a little bit further on. But in general, I think the trend and the development of the business area is following plan and very good. Baltic Banking, like Michael was saying, was not affected by any degree of the Ukrainian and Russian situation. Of course, there is no credit growth.
We are now operating at the loan-to-deposit ratio of 97%, which should have been unheard of six years ago. So the Baltics are contributing with the liquidity to Sweden, in essence. And of course, we still wait and see how the macro picture in Europe develops and also how the Ukrainian situation develops in order to see what we can expect in terms of growth. In the meantime, I think the business area is operating very cost efficient and adjusting to the sort of the environment that prevails there.
Summarizing on group, as I said, a large part of the NII strength in the quarter is relating to treasury and the lowering of short-term interest rates, but also the net gains and losses are helped by lowering of interest rates, so that gives us good tailwind. Cost-wise, I think we in the third quarter are coming in as expected. We, we started to, what you call, we started to slow down the cost accumulation in the first and the second quarter of the year, and the third quarter continues to show that the cost measures that we are doing in certain areas are biting, and we will continue to see that help us going forward, actually.
Talking about the cost guidance, then I think we are, we are set to meet the cost target of flat cost underlying, excluding the recent acquisition, for 2014. And then, like Michael was saying, we are guiding for a cost base in 2016 of around SEK 16 billion, which will be a significant downsizing of the cost base. By the end of this year, the complete cost base for this year will be around SEK 17.6 billion-SEK 17.7 billion, of which SEK 600 billion is relating to a one-off charge that we took in the second quarter, or in conjunction with the Öresund acquisition, I would say.
So the underlying cost base with the run-up of the half year of Öresund is around SEK 17.1 billion, and we will, over a two-year period, manage that cost base down to a SEK 16 billion cost base for the financial year of 2016. Lastly, before I hand over to Anders, just on the capital, it was a strong quarter on volumes. All in all, I think we were up SEK 21 billion in volumes. That required an increase of risk exposure amount of SEK 12 billion. We continue to see some PD Migration on the positive side, actually, in the books. And also, we can see that the business is, the LGD is going down as a consequence of the IRB Advanced and the Steering of that as well, from here.
That helps us a bit. Quarter one is at SEK 20.7 billion in the quarter... With that, I think I hand over to you, Anders.
Thank you, Göran. Q3 is the 17 consecutive quarter with low underlying credit impairments, ending at SEK 234 million. The increase in this quarter is explained by one old exposure within LC&I. Baltic Banking continues to deliver reversals of SEK 59 million, at the expected lower pace. Total impaired loans increased in this quarter due to the single exposure in LC&I, but Baltic Banking continues to decrease, and Swedish Banking is stable. As Michael and Göran pointed out, we have not seen any negative impact on the credit portfolios in the Baltic countries due to the geopolitical situation in Russia and Ukraine. However, we continue to be in close contact with our customers in all three countries, and we follow the development closely. The Swedish Banking and LC&I portfolios continue to show good resilience in this ambiguous environment. Then it's Ektornet.
Sales continued in Q3, primarily in U.S. and Latvia, and Ektornet has now exited the U.S. market. During 2014, assets have decreased from SEK 1.8 billion to SEK 900 million at the quarter end, and no intakes in this quarter either. Thank you.
Okay, Anders, thanks. Then we open up for Q&As.
Ladies and gentlemen, if you'd like to ask a question, please press zero-one on your telephone keypad. Our first question comes from Mr. Peter Kessiakoff from Carnegie. Please go ahead.
Yes, hi, thank you. Regarding the cost savings plan, could you talk a bit about how you intend to implement this? Will it be evenly spread within 2015 and 2016, or will it be more back-end loaded? If you can talk about that first, and then I have some follow-up questions.
Hi, it's Göran here. I think we have, broadly speaking, three areas that we operate. One is the integration of Sparbanken Öresund. That is fairly back-ended because we need to convert clients into the bank, and that will materialize sort of during 2016, predominantly. Then we have another area is, you could say that the central functions, being group products and staff functions in general, have been working on cost measures for quite some time. The effect of that is rather front-loaded. You are starting to see that effect coming through already now, and that will be more evident going into 2015, actually.
And then you have a third area in which we say that, the effect of digitalization and the less traffic that we see in the branch network will entail us, digitalizing processes in the branch network even further. And that will be work that commence, have started, but are in more early phase than in the central staff functions. So if you summarize this, I think we, we hope to have an evenly sort of, split development over the two-year period. Since some of the measures are, more front-loaded, while other types of measures are more back-loaded. But it's important for us to- since it all comes down to managing staff and reducing number of staff, it's important for us to spread it over a couple of years, so we then don't end up with restructuring charges.
Okay, and then, just then going into 2017, I would assume that one should not expect costs to pick up significantly, given that to be evenly spread during 2015 and 2016.
I mean, of course, it's very difficult in 2014 to talk about the investment needs that we might see during the period, I mean, 2017 as well. So I would refrain from really drawing any conclusion that we operate on a even lower cost base in 2017. I think we have a plan now, and we will try to implement that plan.
Okay. And, more of a philosophical question, just, in regards to the cost-income ratio. I mean, how far, or how low can the cost-income ratio go? And just, on my figures, penciling in, the new cost base for 2016, I would end up the cost-income ratio around 38%-39%. Is, is there any, I mean, is there, how far, down can it go?
I mean, we're not steering the bank on cost-income ratio, but I mean, there will be, as Göran already alluded to, some pressure on the revenue side. So a parallel shift downwards, if you just do that mathematical calculation, will improve the cost-income ratio marginally. But what we are doing here is looking at ways to improve and adapting to new customer behaviors, and they are choosing less expensive ways of doing banking. And that means that we can't charge in the same magnitude as we could in the old way of banking. So don't look at this as a cost-income ratio type of issue. It's an issue to preserve our earnings capacity and our return on equity. That's what we're focusing on.
Okay. And then just one last question. The higher margins that we're seeing in mortgages in Sweden, would you say that that fully compensates for the increased risk weight floor to 25%?
I think it's been a gradual process, and the repricing that we have seen during the third quarter. After the market rates, I think, has been fairly stable, and then gradually the bank's different portfolios are being repriced as they mature. Of course, there is a fixed portion of that, and there is also a part of the variable component that hasn't repriced yet. So there are more repricing to come. On the other hand, you could say there is more pressure on deposit margins in general as well with more uncertainty. So it's difficult to give a clear guidance then.
How much of the back book has been repriced, would you say?
You could say of the variable component, two-thirds has been repriced.
Okay. Thank you.
Our next question comes from Mr. Richard Jansen from Nordea. Please go ahead.
Hi, good morning, guys. Just a couple of questions on the costs here again, and the potential headwind from the income. If you can start off with discussing the investment needs a bit, maybe you can give us some gross numbers in terms of how much, are you really expecting to increase your investments going forward? Or how much would you in gross numbers take down the cost base? Given that there seems to be some investment needs in the banking industry generally, it's quite surprising that you can reduce the net cost so significantly. So if you can start with that, please.
Of course. I mean, the major component of investment in banks are, of course, IT related, and w e haven't disclosed what we sort of spend in IT development, but it, I can say it's well over SEK 1 billion each year that you sort of put on new things. I think in general, our expectation is that the total IT spend bill will be static because we want to develop more, but we also want to simplify our product offerings, so we need to be better at, taking and ripping out old infrastructure and legacy system and reducing maintenance in IT. The general, savings will not be on IT.
The IT part, as a percentage point of the overall spend, will go up, and it will be more hands and humans sort of being replaced by automated processes.
But you don't think, you don't feel like you are pushing investments, you know, kicking the can down the road and are forced to take huge investments after 2016?
No, I think, if you look at what we have been able to put to the market, we have a good level of new offerings out there. We have new tips, Kollen, Swish for Corporate, Swish for Privates, etc . So as Göran is alluding to, it's more about, benefiting from that our client base, both on the corporate and the private side, absolutely appreciate these services, enabling us to, close down legacy type of services and processes, but it's a major undertaking. So, I think IT spend, development spend, it's on a good level, and we need to replace maintenance costs with further development costs. So that's how we look at it.
I just want to very clearly clarify that if you look at our age structure in the Swedish operation, we now benefit from the fact that we will have natural attrition due to pension and normal staff turnover to facilitate this staff reduction. So in essence, the door for new recruits will be very much closed. We will, of course, make an exception here and there, and this will force us to improve internal mobility, but it will also be a fantastic career opportunity for younger employees going forward. So that's how we need to look at the staff issue, and that's why we don't need to have any reserves for this change in staffing.
All right. Thank you very much.
If I just add the point on the IT investment side of things as well, I think one of the challenges for big banks is perhaps not the spend side, as it's the taking care of the legacy portfolio. So even if you threw a lot of money on the legacy portfolio, it's not necessarily fixed the problem. It's about understanding how it all fits together and do it need in an order that improves efficiency. And also, you could say that banks are very burdened by regulatory investments on the IT side as well, that we hope now we come into in 2016 in a much calmer phase, so we can increase the customer content of our development.
All right. Moving over to the income side, can you give us an indication on how much do you think the NII contribution from the treasury department will impact 2015 results compared to 2014?
As you see, the treasury result in 2014 is significantly better than the treasury result in 2013. We started to talk a year ago about sort of a headwind because we felt the interest rates were not sort of would probably not go down further, and then we've seen a development where interest rates have continued to go down, and we've continued to make money. We are approaching zero, so and we don't expect very negative interest rates. I think going into 2015, you can't expect the kind of development that you have seen in the treasury result, NII, and the net gains and losses combined that you see in 2014. That will be a year when we have a huge transition in interest rates that benefits us.
More of a guidance for 2015 would be to look at 2013 income in treasury.
All right, and then finally, you've mentioned some about, positioning yourself for lower prices, especially within the savings area. Can you talk a bit about this? H ow fast this can come? A nd what specific products you're expecting this?
I mean, the savings pattern will be very dependent on where macro is heading or people see a risk reward in the future. But what we have seen in the recent past is, of course, that people have moved towards index type of funds, et c. and they have a lower margin, and, and hence you have an implicit price pressure. So for the foreseeable future, we do believe that that trend is here to stay. And you have similar changes like, Swish payments, being almost free of charge, free of charge for at least private individuals. That is an implicit price changer, for us , and revenue changer. So there is a lot of that happening that we are trying to take a hike for when we do this, cost program for the next two years.
All right. Thank you very much.
Our next question comes from Mr. Omar Keenan from Deutsche Bank. Please go ahead.
Hi, good morning. Omar Keenan from Deutsche Bank. Thanks very much for taking the questions. Just a follow-up question on costs. It seems like the kind of real reduction that you're talking about is something like SEK 1 billion, and you've already talked about the impact of the reduction in staff costs. I'm just wondering that kind of building the rest of the bridge to the SEK 1 billion reduction, does this involve more closure of marginal branches? Or is this kind of more kind of changes within branches that you've talked about before? And then just on the treasury question, you talked about 2015 being more in line with 2013 treasury revenues. In the past, you've talked about NII and trading together.
So if I just think about what 2014 is relative to 2013, given the current levels of interest rates stay the same, are you thinking of this being a kind of NII and trading headwind of something like SEK 1.5 billion in 2015? Thanks very much.
If I start with the branch question, I think the main change there will be the number of staff at each branch and thereby the number of square meters needed. In the treasury there, I mean, to start with, we haven't finished, sort of, we have a quarter left to do in 2014, so it's difficult to talk about how much 2015 will go down from 2014, since we don't have the last quarter there. I would say that you are on the high side with SEK 1.5 billion. I would say in your assumption there.
Okay, I just kind of my thought process was in 2013, NII and trading together was roughly about SEK 1 billion. And if I extrapolate, kind of the Q3 to Q4, then 2014 NII and trading together in treasury looks to be something like SEK 2.3 billion-SEK 2.4 billion. So that was where I was getting the SEK 1.5 billion number from. Perhaps where I've been a bit too conservative is continued repricing of covered bond funding. Is that an ongoing kind of tailwind that you expect the treasury that kind of will mitigate that number down? Is that how you're thinking about it?
Now you're trying to get implicitly give you a guidance on the treasury result in Q4. So I'm not going to comment on that. I think I just give you the sort of broad magnitude of things. Then, of course, everything depends on volatility in the market, the steepness of the curve. So it's the same language that I think we have had previously. It will be difficult in a flat, not very steep curve environment to generate the kind of income we've done previously in treasury.
Okay. And perhaps just one more sort of follow-up, kind of related question. I guess, kind of, sort of, some expectations are that, kind of given the latest inflation print, the Riksbank might cut the policy rates by perhaps another 10 basis points further. So it looks like kind of treasury revenues might actually get better before they get worse, if that's what follows through. Is that how we should think about it? And then just secondly, if that does happen, do you think that more mortgage margin repricing could take place? will you have to pass the impact of that cut onto customers at this stage?
On the deposit margin, it becomes increasingly difficult to pass it on as more and more customer accounts actually end up being zero. So there will be some. As I said earlier, there will be some margin erosion on deposit margins in Sweden if they continue to cut. On the other hand, we have some more repricing to do on the mortgage side, so it's difficult to see how that will net out at the moment. I really don't want to speculate too much about what short-term interest rates will be in general. And, of course, on the margin, if you, if they cut another 20, 10 basis points, it will help treasury on the margin as well, or it's the same pattern as previously.
Okay, thanks so much.
Our next question comes from Mr. Peter Wallius from Handelsbanken, please go ahead.
Thank you, and good morning. I would like to ask a question on if you have any idea about, you previously talked about or said that you think an underlying, like normalized, volume growth for household and your mortgage lending would be 3%-4% in a more functional market. And then now we have a proposal for stricter amortizations. What kind of impact do you think that proposal, if implemented, would have on the volume growth for household lending in Sweden?
My best guess is that it will have a dampening effect. But how big remains to be seen. It's a combination of housing starts and of course, the introduction of a more, a high or higher level of amortization in society. But if you look at price levels in Stockholm, they are very much dependent on people's cash flow, and amortization will reduce cash flow, everything else equal, and that should have an effect on the price levels. But how big, it remains to be seen.
Okay, thank you. And then going into the corporate lending area, where you're doing really well? Could you give a comment on some like the pricing environment and the corporate lending? If it's like have been stable throughout this year? If the reason you're gaining market share is that you're offering very competitive prices?
I think in general, margins in the quarter has been stable to actually increasing somewhat small due to the increased capital charge in general. So, we don't, in this quarter, we don't feel that there is any new sort of margin pressure coming on, on the out there. I think, for the bank, with, I think, we are increasingly becoming relevant due to very strong balance sheet and also, so benefiting from sort of passing on cheap, cheap funding to clients as we are rated well in the financial market.
And secondly, of course, the economy is growing in sectors where we have a traditional strong position, i.e., in the real estate sector. Had we seen a broader demand also from industrial companies, the market position might not have moved as much as it has.
Okay. Then a question on your thoughts about, you started off by saying that it's, I mean, the macro clouds, if anything, maybe become thicker in the most recent months. Is it reasonable to assume this is like corporate activity levels, both in terms of commissioning, commission generation as well as lending or credit demand will prevail at the level we have seen so far this year? Or should one assume that those will, like, slow down for the starting from now?
Extremely difficult to have a macro view right now. We might get a green light after November stress test, but, as I said, extremely difficult to judge right now.
Okay, then thank you. And then a final question of mine regarding mortgage margins, where so far the repricing has been really successfully. However, the most recent days, you and some other players have been lowering the official list prices. Should d oes that mean that, like, the margin improvement seen so far is being capped at the current level, so that does these list price cuts still imply that margins might improve further?
I mean, the latest cuts are just a reflection of falling market rates.
Okay, thank you very much.
Our next question comes from Magnus Andersson from ABG. Please go ahead.
Yes, good morning. Two questions, one on capital and then on profitability. I mean, first of all, on capital, the Swedish FSA seemed to imply that you would need around 19% in Common Equity Tier 1 ratio here in September. You're now at 20.7%. So my question is, what kind of margin do you think you will need to have relative to the minimum requirement from the FSA? And secondly, when do you think you will be able to come back and talk more about a capital target? That's the first question.
And then secondly, on profitability, and your 15% ROE target, it doesn't really seem like a stretch, particularly not with the new cost-cutting ambitions for 2016, even if you just pay out your 75% in dividends. So that's my second question: What kind of profitability are you targeting, and when will you come out with an update on that? Thank you.
I mean, we'll come back in Q4 with the capital target, but, I mean, the regulator has sort of told us 20%, and that's how we read it, and we are at 20.7%, and we want to have a small buffer. So we can definitely once again conclude no excess capital, and we'll fine-tune and get back to you in conjunction with Q4. For me, I mean, I was alluding to the 15% earlier during the Q&A session, and we're doing the cost cuts to ensure that we are gonna be capable of delivering 15%. And I think Björn has been quite clear that the positive treasury results will not be there going forward. We're seeing transformation of customer behaviors.
I do believe that it's gonna be possible to reach 15%, but it will be a lot of hard work as well.
Okay, so just on the capital, you think you are right now in terms of Common Equity Tier 1 ratio, where you will have to be really until 2016?
What I said is we're gonna fine-tune it during Q4, and we need a margin north of the 20%, but it's not, we're not far off.
Oh, okay. Thank you.
Our next question comes from Mr. Alvaro Serrano from Morgan Stanley. Please go ahead.
Hi, thank you for taking my questions. Just one follow-up, in terms of summing a lot of the comments you've made is around the retail margin outlook. I think you've mentioned that two-thirds of the variable mortgage book is now repriced. Should we expect margins to improve after now the rate cut is fully factored in over the next few quarters? And more, the second question would be more on the sort of conceptually, now that it seems that amortization is gonna be introduced, and clearly, you're gonna be charging clients more for what is a less risky mortgage, given it's amortizing.
What do you think? Can you share your thoughts on the how sustainable you think the repricing is into next year, if you're gonna start asking clients to amortize more? And the third point, you mentioned that a lot of the cost cutting is, I think your words were, to preserve earnings capacity, which sound a bit bearish to me or cautious, not maybe bearish is a strong word, but cautious at least? Would you expect consensus to go up today after your cost-cutting announcements? Thank you.
On the last one, I don't think we will comment, but if we look at amortization, I mean, assume possibly 2% amortization per year. So it's gonna take a while before any client's risk profile significantly changes. Hopefully, we'll get more housing starts, which will give us more volumes. So, there are many factors here that you need to bear in mind when you do your modeling, but those are a few at least.
On the margins, I think it's very difficult to say what will happen from here, if margins will continue to go up or not, and how the competitive environment with, it's been fairly stable in the past quarter, actually. I would also point, don't forget the fact that Sweden is growing very, very much in population size, and that is really the really growth, the factor beneath everything. That we need to build more houses in order to cater for more, a larger population, and eventually, that will turn into credit growth, because we can't build more houses without extending credit.
So it's more also very much a question of when will the supply of housing starts increase and put a dampening effect on the real estate prices, which it would be good for the society.
So does that, would you interpret that as you're more confident on NII being driven by volume growth than the margins going forward?
I think volume eventually will become more important as the capital has been repriced by banks in general, yes.
Okay. Thank you very much.
Our next question comes from Mr. Daniel Do-Thoi from JP Morgan. Please go ahead.
Hi, good morning. Just one question, remaining for me, it's only about Baltics business. I know you, you stated that you haven't seen any real impact, to date, but your overall macro commentary does seem to turn slightly more cautious, if I'm reading that correctly. You flagged, for example, a few sanction, affected industries. But just looking into 2015, if we don't get, a material improvement in the, geopolitical situation, how would you expect this to sort of weigh down on, on your top line and/or asset quality, in the Baltics? Thank you.
I mean, we will be flat-ish on the revenues, I would argue. But, I mean, we have had a very bearish outlook for a prolonged period of time, and you could say some of the volume growth that we have seen in Q2 and Q3 has been on the positive side for us, as we have guided for very subdued credit demand the last two years. So at the end of the day, we are steering the company based on a subdued environment, and if there is growth, yes, it's important to participate, and so far we have. So that's how I look at it. We're not gearing up for a positive environment. But I would also say that the stress test could be a signal that certain issues are dealt with in Europe.
So there are positives, but I agree with you, the macro has become weaker after the summer. And I mean, everyone that was close to the IMF meeting got that very clearly articulated throughout all meetings there, and especially the Eurozone seems to struggle more than anticipated.
Okay, great. Thank you very much.
Our next question goes to Mr. Maryam Mansouri from SEB. Please go ahead.
Hi, most of my questions have been answered, just the one on the AQR. What's your expectations on your result there? Is there any chance you think that Swedbank will be asked to take additional reserves for any of your portfolios, please? Thanks.
I mean, we can't formally comment on that because we are under a confidentiality agreement. But I would take confidence in the stress test that you have seen from the Swedish Central Bank and the SFSA to guide you in the right direction.
Okay, thank you.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning, everyone. Two questions, please. The first one on back to the amortization theme. Thanks for the new disclosure on the proportion of your book, which is amortizing above 70%-75% loan to value. I just wondered if you had some equivalent numbers of how much of your mortgage book is amortizing above a 50% loan to value? And if the current proposal does come into play, I just wondered if you can make some more, get some more broad comments, let's say, on the implications of that. I know you've mentioned dampening credit demand. I just wondered how widespread an impact you think that might have in 2015, either be it house prices or consumption. Just any more broad commentary there would be welcome. Second question would be on capital.
Then you've talked about not having any regulatory access. I just wondered if you could make some observations about capital generation from here. Clearly, capital is down on the quarter, and I know there are some IFRS 9 impacts in there. But just thinking out to 2015 and 2016, if your REAs start to grow as they did this quarter in line with volumes, and you stick to 25% retained earnings per year, I'm just wondering, I guess a basic outlook would be for not much capital generation. Just wondering if there's anything that changes that picture from a PD perspective or a RWA efficiency measure perspective, or if you're quite happy to be not very capital generative from here? Thanks.
So Nick, I take the first question, then Göran will help you through the capital issue. I mean, as we get new regulation around amortization, we will also be disclosing numbers, but we haven't seen the need for that year to date, and we'll definitely do it as soon as we have some affirmation of new regulation around that.
On capital, I think, I mean, to change picture a little bit is, of course, that the growth of the business is eating capital, so the accumulation of capital is slowing down. I think in general, that is a very positive event. So it doesn't, it will translate into EPS growth for the shareholders as well, so I think it's good. Of course, with such a high, with such a high, capital position, it's important that the bank is efficient in utilizing its capital base, and I think, we always work on that, and we will continue to work on that.
Okay, thank you. And so on the amortization side, thanks for the more disclosure in time. Just broadening out the thoughts of the implications to Sweden in 2015, any thoughts on house prices or any shift in customer behavior in recent weeks based on the proposals that you've seen?
Nick, I think it's still too early to say that. I do believe that people look at their cash flow here now and take decision based on that.
Okay, thank you.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Good morning to everybody. Thanks for taking my question. So just a couple of follow-ups on the cost side and again on treasury. If I may, if I understand correctly, most of the roughly SEK 1 billion cost savings, because if I understand correctly, you said SEK 17.1 billion, excluding one-off related to Sparbanken Öresund at the end of this year, and then becoming something more similar to SEK 16 billion. So let's say SEK 1 billion less, including the inflation effect. And as far as I understand, you expect to reduce staff by roughly 600-800, let's say 700. 700 is more or less 5% of the workforce.
Looking at what you reported in Q3, staff cost this year should be, could be in the region of, let's say, SEK 10 billion, annualizing what you have reported so far. So SEK 1 billion cannot be just staff cost, it must be something else. Can you provide, please, a breakdown of how much you think this lower billion lower cost should be broken down between staff and other costs? And the second question I have is, again, on treasury NII. If rates remain as they are today with minor changes, why should the contribution from treasury all of a sudden change and worsen so much to get back to the same levels of 2013, where rates were completely different?
And also, looking at the contribution from derivatives, it doesn't seem to have ballooned anytime soon over the past few quarters. So I really don't understand why should all of a sudden worsen the NII component of the trading. Thank you.
Thanks. If I start with the cost, you're absolutely correct, that of course, it's not pure staff cost. I mean, I would say it, it's a fair bit of premises, consultants, it's also with regards to dismantling Öresund, it's also IT costs, taking away IT infrastructure in Öresund that will lead to cost savings. So it's a multitude of different cost items. If I simplify things, I would say roughly 50% being staff costs over that SEK 1 billion, and 50% being the remainder of the various sources of costs, so to say.
On your NII, I disagree a little bit with your. I must say that if rates go down so much, and if you have interest rate risk on the books, and if part of that interest rate is in the banking book as well, it will definitely deteriorate your NII, and also your net gains and losses that you have in your liquidity portfolio, where you get sort of. We have also seen sort of a credit compression on that side as well. So, I think it's quite easily contributed towards the changed market environment.
Okay, thanks. If I, if I may follow up, just one second. Getting back to the staff one second. If you say 50%, 50/50, it means SEK 500 million from staff. SEK 500 million would mean, let's say, 5% of the of the staff cost, and 5% is the amount of people that you are reducing through natural attrition over the next couple of years. So it looks like you have no impact on, let's say, wage inflation, which doesn't seem to be reasonable to me. Are you also expecting anything else that could explain why such a big chunk of staff cost when you're reducing the workforce by just, let's say, 5%? Is it you, you know, are you expecting to reduce the most expensive employees or whatever?
There are, different kind of components in staff cost as well, so it's not only, the number of persons. But I think the ballpark figures hangs together. Then I just want to highlight as well that, the, the actual savings are actually bigger than SEK 1 billion, because we have a run-up of the, the cost for running Öresund that we are taking care of in this picture. Since we incorporated it in the second half of the year, it runs up in 2014, and then we sort of dismantle it.
Okay. And let's say, the staff cost included in the SEK 16 billion includes variable compensation, too. That's correct?
Correct.
Okay. Thanks.
Our next question comes from Jan Wolter for Credit Suisse. Please go ahead.
Yes, good morning. Apologies if the questions have been asked previously, but, the first one on, on the cost side. Do you include the cost savings from the savings bank's acquisition, when you talk about the 600-800 PE- staff cut? Thank you.
The number of people that is coming out in the future year is included in that number. That's correct.
Thank you. And the second question is on the treasury here, the interest rate levels or yield curve, if they stay unchanged, would then the treasury result still come down? I guess what I'm asking is if it's just the effect of positions rolling off that you see the lower treasury result going forward in 2015. Thank you.
No, I mean, it's the effect of the positions rolling off on higher rates, so to say. And then, of course, the unknown factor for us is to know how steep will the curve be? Will we be given opportunity to add risk with steep curves at some point in time? And what kind of volatility will there be in the market that we can utilize for managing sort of the short-term end of the balance sheet?
Okay, many thanks for that.
Our next question comes from Jacob Kruse from Autonomous. Please go ahead.
Hi, thank you. I guess just a quick question on the cost. Could you talk at all about, how the savings break down between the divisions? Is it, it is mostly a retail impact, on your divisional basis? And on that topic, I think you used to talk about the Baltics as being oversized for its current business model. Is that an area where you would downsize as well, if that region is now looking a bit more, challenged? Thank you.
The Baltics, I think the Baltics are trimming their business model very nicely, and I think they manage the cost base very good. So I don't think that what we're talking about here is not relating really to the Baltics. It doesn't really relate to LC&I either. It relates to the Swedish regions, and I think it's part of the acquisition with Öresund, and then it's a part of the new technology enables you to distribute your retail household products primarily in a different way, and it also enables you to streamline your internal processes in a different way, and that is sort of the efficiency and productivity that we are to take out.
So it's in the back end that you could say belongs to all of us a little bit, and then it's predominantly in the six regions.
Okay, thank you very much.
Our next question comes from Mr. John Bäckman from Danske Bank. Please go ahead.
Yes, good morning. I'm just wondering if you are anticipating to take any extraordinary charges on costs in order to reach the new cost guidance? Thanks.
No, we will not. And that's why we are trying to be clear with the age pyramid that we have in the bank. This is natural attrition, i.e., the age pyramid, together with the fact that we have enormous staff turnover. Hence, it also means that we will be very restrictive with taking in people externally, and focus more on internal mobility, and it will, of course, be great career opportunities for young people in this bank.
Okay, thanks, and just a quick follow-up. You're saying in the report that you're seeing margin pressure on new sales in the savings area, and you said that previously that you're taking cost out of this area as well. Can you give us a feel for the magnitude of those savings? Thanks.
No, we'll not guide at that specifically. What we are seeing is that the clients are turning their flows towards index funds, which is, of course, price-wise, or margin-wise, a lower margin product. And you have data on the net inflow in the report on the product description.
Okay, thank you.
I remind you that if you'd like to ask a question, please press star one on your telephone keypad. Our next question comes from Adrian Cighi from RBC. Friday.
Hi, good morning. This is Adrian Cighi from RBC. Thank you for taking my question. I have one follow-up question on capital, please. Rate grade migration contributed around 30 basis points of the core Tier One in this quarter. Could you give us more color as to what's driving this? Is this additional collateral from corporates or a further increase in house prices? Swedbank's average risk rate is currently 32.7% for the corporate IRB, one of the lowest among its peers. How much lower can this realistically go? Thank you.
I think it's a combination, mostly of increased collaterals. So I think the business, as we have implemented the IRB Advanced, are sort of seeing the benefits of doing collateralized business, and that drives sort of behavior in a way. But also we have a slight PD Positive PD Migration also in the Swedish book, which is, you know, these migrations are late cyclical. So even if you feel that the macro has deteriorated, it won't show up in the models until at a later stage, if it were to impact the credit quality.
Okay, thank you.
Our next question comes from Andreas Håkansson from Next Sound. Please go ahead.
Yes, hi, one final question from my side. Just on that larger provision charge of SEK 355 million, could you tell us, did that come from Sweden? And could you also tell us, have you provided for the entire exposure, or could it be more in coming quarters, depending on how that company develops? Thanks.
Hi, this is Anders. No, it's a Norwegian exposure, and we made it. The entire amount is larger than the provisions.
Okay, thanks.
Our next question comes from Mr. Matthew Clark, from Nomura. Please go ahead.
Good morning. Just a follow-up question on the treasury net interest income. Presumably, the benefit you're seeing this quarter is because you're funding longer-term assets with floating rate liabilities, and as floating rate liabilities reprice downwards, you see a wider spread. What kind of duration are you investing those treasury assets at? So how long should we expect that wider spread to last before the asset side reprices downwards? Thanks.
I think, I think we have guided that the average duration is around the two-year node.
Great, thank you.
Our last question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Yeah, thanks. Just for a quick follow-up. You stated that there is, you think there is very little surplus capital on top of what the FSA is asking you. Are you happy with the current 4.4 leverage ratio? Do you think this will have to go up further and eventually till what level? Thank you.
I think bearing in mind the structure of the Swedish savings market, with a lot of savings in the pension area, that we have a robust system. Although it stands out in the European context and needs to be explained, anyone that has been looking more closely to it would say that the investments from pension companies into covered bonds could be regarded as a quasi-deposit type of investment. So we'll we'll see what the what the regulators end up doing. If they push it leverage ratios up, we will, of course, have to respond with the prioritization measures and and other things, but that is for tomorrow to tomorrow's discussion. We we don't have anything pending that we need can relate to.
Of course, higher leverage ratios would change some of the way the Swedish structure works.
Okay, thanks. If I may, just a quick follow-up. The EBA has stated that after completing this exercise next week, 2015, they will start looking again at RWA harmonization, something that they started and then they stopped. On the back of this, have you started any kind of discussions with your regulator, maybe with regards to corporate risk rates or something like that?
I think the Swedish regulator appreciated the ranking of risk, in Basel II. I think it's important that ranking of risk continues to be prevalent in the models. Otherwise, we'll get new anomalies. The question then is: How do you defend yourself from structured risks? And I think macroprudential boards is one answer. The other would be that every European bank could do what we do, i.e., publicize their stress scenario, including collateral levels, etc . And I think you guys would very quickly make up your mind where the risk actually sits. Flat floors is not gonna be helpful to create a dynamic growth environment going forward.
Okay, thank you very much.
There are no further questions.
Then I thank you very much for being so active this time around. It's always a pleasure to get your questions, and you keep us on our toes. So thanks for that. See you next quarter.