Ladies and gentlemen, welcome to the Swedbank Interim Report, January to June 2014. 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.
Good morning, and thanks for joining us. This is actually our first result presentation from our new head office in Sundbyberg. And, after a few weeks in these new localities, I would say that the energy level in the bank is higher, and it has enabled a lot of new cooperation. And not least, we are becoming more cost efficient compared to living in the middle of the city. Let's turn over to the quarter. If we look at the global economy, U.S. is seeing a recently sound recovery, while the picture in Europe remains mixed.
Hence, I'm very pleased to operate in four markets that are moving along nicely, and we see in the quarter a nice pick up in the activity level throughout our markets, and we haven't seen any effects of the Crimea crisis so far in the Baltics, although we're all shocked with the tragedy of yesterday's event. Sparbanken Öresund, the integration work has started, and it's led by our regional manager, Lars Ljungälv. So it's gonna be a year of full work to integrate that unit into the bank, but it enables us to have a larger footprint in one of the growth areas in Sweden, and that is, of course, a positive for us going forward. Overall, I'm very pleased with the fact that we grow where the economy grows.
In this quarter, we have seen a volume increase of SEK 47 billion, whereof SEK 16 billion relates to Sparbanken Öresund. Both the corporate business and mortgages is growing, and we are back to a 22% new sales market share on mortgages. Both LC&I and Baltic Banking have had a great development of their business. We start with LC&I. They are on a high level, slightly behind the first quarter, but on a high level. We continue to be strong in the DCM area, but more pleasing is that we are becoming relevant in the corporate finance area in Sweden and participated in a number of IPOs during the first half of the year. The Baltic business has done a wonderful job in repricing its lending book.
The domestic economy is ticking along, and we see that development on the commission side. And the cost efficiency on back of their multi-channel strategy, I think is stellar. A cost-income ratio of 39 is very pleasing to see. If we look at the Swedish Banking business, there we continue to invest in digital services to meet the demand of the client of more accessibility and cheaper alternatives. And a few examples of services launched during this quarter is the expense control, which is for private individuals. They can monitor their outlays in the mobile bank, and the pickup of this service is around 150,000 clients within the first couple of weeks. We have also enabled Swish payments between corporate clients and private individuals, and we see a quite nice pickup among consumers utilizing Swish.
This is, of course, a efficiency opportunity for corporates that normally handles cash, like sports clubs, et cetera, et cetera. So this is gonna be interesting to see how this develops. And the last one is that we now have a card reader that you can use for smartphones and tablets, and this is extremely important for small businesses to be able to drive their top line. So a good set of new services being launched during the quarter. Financially, I think we are well equipped to meet the new requirements that competition, regulation, and other things puts on us. And I do feel it's extremely important that we are in the forefront of these changes, especially on the digital side.
We need to be realistic that this will have to force us to become even more cost efficient over time in order to be able to invest into these type of solutions. That both Fitch and S&P are acknowledging our low risk and solid capital position, of course, improves our competitiveness on the funding side. To be able to have the lowest funding cost is extremely important in this part of the cycle, I would argue. Therefore, we feel that it's quite contradictory that Swedbank, which according to the stress tests of the SFSA and the Central Bank, have the lowest aggregated risk level, get the highest capital demand.
We can also notice that the last, the latest rate cut of the Riksbanken will put more focus on the lawmakers and the regulators to dampen the growth in household debt. We are all agreeing on the structural dilemmas, i.e., that the supply side on housing is the problem, but also the agility in the housing market. So this can only be solved through political decisions. With that, I hand over to Göran, who will go through the numbers for you in detail per business area. So Göran, please.
Thank you, Michael. Starting with Swedish Retail, I will present that excluding Sparbanken Öresund that was integrated in the end of May for us to start with, and then I will show you the effects of Öresund, and then the complete picture for Swedish Banking. The result has been very stable, as usual. I think we have seen somewhat decreasing deposit margins, and towards the end of the quarter, we also saw an increasing trend of the mortgage margins, which was encouraging. The different thing in this quarter is that we have a much stronger volume development that we have seen in previous quarter, which we feel very good about.
We are not only back on our sort of normal market share on mortgages, which is, which is nice, but we are also developing very nicely on the corporate segment within this business area. The commission income has been particularly strong. I think it's just a sign that we can sort of capitalize on the stronger GDP growth in the economy. So it's provision income relating to Robur but also to payment commission, and card commissions, et cetera. In the quarter, we are booking in this business area one-off income relating to one of our daughter companies that are sort of finishing off a distribution agreement that transforms into a sort of prepayment of an income for us there. So it's a little bit of one-off in that other income area.
As usual, the underlying business has very nice key ratios. Then, turning to the impact on the financial numbers of our Öresund, the actual numbers, and I think you have all received some sort of guidance on this previously. We partly have the impact then of having them six weeks, almost six weeks in during the report period, but also we have some one-offs. You see that we have an income of SEK 79 million and a cost of SEK 86 million for these six weeks.
Of course, you need to remember then that we have sold eight branches that have a large part of the old Öresund's income, and we are in Swedbank, sitting with very much the largest part of the cost base in Öresund, and that's part of the sort of a whole transaction going forward. The one-off effects relates to bad will, and that we book a bad will, making us having an income of SEK 460 million. On top of that, then we have taken a restructuring charge in order to meet the converting of clients into Swedbank from Öresund of around SEK 600 million krona.
That gives us a tax relief, and the net impact on the bottom line is close to zero, so the impact of the dividend policy relating to this transaction will be close to zero. Then moving into the full picture, where we include, it's just sort of a different set of numbers where you sort of have the two previous pictures on top of each others. And the only comment I really have on this page is, of course, that the volume growth, if you add both Öresund and the sort of organically created volume growth, is very healthy.
The other impact I would point towards is that the cost-income ratio becomes very much weakened as a result, not only on the one-off, but also if you start integrating something that has a very, very weak cost-income ratio. But that's work to be addressed for us going forward, and I'm sure you will have questions around that. Moving then into Large Corporates and Institutions, I would like to say that overall we had a very strong first quarter there. I think this quarter proves the point that we have really lifted this business area to different income generation and then a different return numbers for the group overall, even though it's slightly weaker than the previous previous quarter.
We continue to feel that we are relevant with the clients and that we add volumes. Margins are fairly flat in this area. In this quarter, we have had a drop-off of earlier accrued fees that to do on NII, that makes the comparison slightly weaker. But in essence, on the margins, we feel that it's flat. And we are able to continue to capitalize on sort of a strong market with regards to corporate finance-related activity, both on the debt and the equity side, really. So it feels good. Good cost control as well in this area. Have investment needs that we have talked about previously, but are managing that in a very well manner.
I think, if I were to add something here going forward, is of course, in a market that becomes more heated and where loan growth and loan demand increases, it's, it's important to keep track of risk awareness and not get carried away with covenant-lite transactions in doing business. And we are attracting new clients, so feels positive. Then, the last, but not the least, business area is the Baltics. A little bit the same story here, like the, when I talked about LC&I, we're happy to see that the financial impact, like Michael said, on Ukraine, is not there, nor on asset quality or really on the revenue line. There is still no loan growth to talk about.
So slightly different environment compared to Sweden, but good activity on many other, sort of products that we are selling with our clients, and we have a good feeling with the clients, and that manifests itself in a good commission income development. Even though we have a small one-off of SEK 35 million there, I think the, the numbers looks really good. If I were to say, something in particular that we are pleased about is, of course, the cost control, of this business area. In the quarter, we have a 0.39 cost income ratio, so I, I do think it proves the point that management are able not only to generate, whatever growth and income is out there with our clients, in a very good manner, but they are also, utilizing their resources in a, fantastic, optimal way.
Summarizing this on group level, what I would like to then add is Treasury, of course. Treasury has benefited in the quarter, not only slightly by the falling interest rates, but also by the fact that we have done slightly less buybacks than normal buyback pattern that has contributed positively on the net gains and losses. And then we have a small one-off income also in the Treasury area. So, the Treasury result is better than the last quarter. Cost target for the group overall, I would say that the cost, excluding Öresund, is SEK 275 million above previous year's cost. That is in the first quarter, we were 185 or so over.
So we are trending down cost-wise, towards last year's cost base, and we feel confident that we will manage to keep our cost at flat cost as we have previously guided. We have easier comparison in the second half, as well as we have measures that has taken place, such as having the impact of the new head office contribute into the cost line. So, the underlying cost control, I, I feel happy about. Right, then finishing off with the last slide and picture around capital. We have previously contributed the IRB Advanced, the effect of the sort of a couple of more weeks, and the final effect is slightly higher.
The Öresund transaction, coupled with the very good volume increases that we are seeing in the group, which we should be happy about, are also eating a little bit of REA. And the quarter one level going out of the quarter is 20.9. And the new target will be set, as Michael are saying, by the end of the year from the board. But if you take the requirement that will come from regulators, the 19.3 is with a new IRB Advanced around 20%. So we have a good buffer above of that, and we don't see any excess capital currently. With that, I think I hand over to Mr. Karlsson, our CRO.
Thank you, Mr. Bronner. This quarter is the sixteenth consecutive quarter with low credit impairments, ending at SEK 30 million in losses. Baltic Banking continues to deliver reversals, but as previously stated, at the lower pace. Impaired loans are increasing slightly in this quarter with SEK 59 million to SEK 6.3 billion. That's due to the inclusion of Öresund and one single exposure in LC&I. Baltic Banking continue to decrease, but as anticipated, at a slightly lower pace. In Baltic Banking, we, as I said, report net recoveries of SEK 16 million, which is in line with our expectations. At the same time, there is a continued low inflow of impaired loans and credit impairments. As Michael stated, we haven't seen any negative impact of the geopolitical situation in Russia and Ukraine.
However, we are continuing to follow this closely together with our customers. In Sweden, the Swedish Banking and LC&I portfolios continue to show good resilience. As Michael also mentioned, during 2014, the low risk position of Swedbank has been recognized by the Swedish FSA, by the Central Bank of Sweden, and in this quarter, also by Fitch and Standard & Poor's. Fitch changed the outlook to positive. Standard & Poor's increased the stand-alone rating to A flat from A minus, while the final rating was confirmed at A plus. Through the advanced IRB approval from the Swedish FSA, relating to our corporate exposure in Sweden and Norway, our risk weights have decreased and are more comparable to our peers.
... And finally, Ektornet, sales have continued during Q2, primarily in Latvia, amounting to SEK 140 million. Impairments in the quarter is SEK 67 million, and that is related to one single asset in the US. And then you have FX effects of approximately SEK 40 million on top of that. Thank you.
Thanks, Anders. Then, we open the floor for Q&A.
A reminder to press zero one to ask a question. Our first question comes from Mr. Peter Wallin from Handelsbanken. Please go ahead.
Thank you, and good morning. I would first like to hear your view about the quite strong commission momentum we've been seeing on the first half of the year. If you could elaborate a bit on the underlying drivers, and also if it's reasonable in your eyes to assume that the trend will continue in the second half of the year?
I can start with saying that what I'm pleased with is that our franchise proves that it can grow where the economy grows. I mean, traditionally, we have been perceived to be slightly weaker in the major cities, and we are performing well there. So in essence, we are having a franchise from Baltic banking through LC&I and retail that benefits from the general growth in the economy. The trends will definitely be dependent on the activity level in the economy, and as long as we can participate with, with that, I'm happy. Do you have anything to add?
No, I agree completely. I mean, I think it's a proof that we are sort of a reflection more of the society, really, that we grow with society. The thing that is sort of uncertain going forward is, of course, the margin development in certain certain product areas. Sort of in a more stronger environment, will there be more competition in there? A small question mark.
Okay, great. Thank you. And then I have a question on the Swedish mortgage market. And you're saying now that you're seeing, you're taking essentially your share of the new mortgage market and still also seeing your margin trending up at the end of the quarter. Should we expect that the mortgage margins will be continuing to improve in the second half, especially as the higher mortgage risk weight floor is implemented?
I think that's fair to say that margins will improve in this, on the mortgage side, in the second or the third quarter. I mean, there was a strong, strong momentum in the last weeks, and since then, you have seen widening list prices, compared to sort of market rates. So, you don't really know where the rebates goes with the clients in the end there, but, that we will have higher mortgage margins is very, I think is very expected, considering also the capital that has been added on there.
Okay, great. Thank you. And then a final question of mine, regarding the very strong, trading, revenues in the quarter. Money market rates have been continuing down quite significantly in, in, in the beginning of the third quarter. Should we expect to see the similar positive effect on, on, on treasury and also in Q3?
I think, treasury benefits clearly from a sort of a falling interest rate environment, and we haven't really seen the full positive effect of that yet. There are something to come in the second half or, or as well, since part of the risk is in the banking book that comes out, comes out there. You should though bear in mind also that, the long-term ability of that with a very low interest rate and a flat yield curve, will be more very difficult to uphold. So at the later stage of the sort of cycle, that kind of income will be very difficult for banks in general to uphold.
Okay, great. Thank you very much.
Our next question comes from Mr. Omar Keenan from Deutsche Bank. Please go ahead.
Good morning. Thanks very much for taking the questions. We had, over the past few weeks, some fairly material move in rates following the 50 basis point rate cut from the Riksbanken. And clearly, that's going to have a further impact on deposit margin in the second half. If I use your updated sensitivity that you published in your fact book, then it looks like the rates move that we've had will have an annualized SEK 700 million or so drag on net interest income from the third quarter. So we're all just wondering how much positive offset there is on mortgage margin now. So you've made comments that the margin has improved.
If I look at, you know, how rates have moved, STIBOR looks 40 basis points lower, and banks have roughly cut their list prices by about 25 basis points, which should roughly imply that margins have expanded by 15 basis points. So just wondering whether you could make kind of comments on those observations, and perhaps kind of help us sort of put it together and think about the net interest income outlook in the second half. Some of your peers earlier this week talked about flat development in H2, so just wondering whether that's something you recognize. Thank you.
I think with regards to the sensitivity to deposit or NII on the falling interest rates, you should not read that as a guidance on any kind of NII from management. Really, in there, it becomes very much a function of certain parameters. So it's very difficult to see from that what the exact impact will be going forward. So, a little bit of caution I give you in that one. To comment on your question is really that the drain you have on the deposit margins will be offset by your stronger expansion on lending margins.
I think it's very early days for us to calibrate where the marketplace is going, what the competition will take us, both in terms of deposit margins in the end, and also in terms of lending margins. As it looks right now, I would say that we should expect to have at least be compensated by the mortgage margin expansion on the deposit side, but that is as it looks right now.
Okay, perfect. That's, that's very clear. And do you have any benefit from repricing of, of deposits that helps you offset the impact of lower rates that, that you're including in your assumption?
Sorry, I didn't catch the question.
Is there scope for further repricing of deposits to offset the impact of lower rates in the third quarter?
That possibility is diminishing by the hour or by the fact that you come to zero.
You could say that customers are looking for yield, so you would probably see a conversion of traditional savings account into different asset classes. So you will see some rotation of the volume over the time.
Mm-hmm. Okay, that's, that's clear. Thanks very much.
Our next question comes from Ms. Viki Sarak from GE. Please go ahead. Our next question comes from Mr. Richard Hines from RBC. Please go ahead.
Hi, good morning. I have two questions and maybe a follow-up, if I may. Göran, when you said that you expect the increased mortgage margins to compensate for lower deposit margins and lower return on free equity, would that mean that the NII would grow in line with, you know, a stable margin, plus the volume growth that you're seeing as well in the second half of the year? That's the first question. Secondly, if you could comment on your corporate lending growth that you've seen in the quarter. Is that driven by underlying investments or increase in working capital, et cetera, in the companies? Or is it primarily driven by capital market transactions, et cetera?
And finally, on coverage ratio, coverage ratio declines from 60% to 56%, still a very healthy level. But if you could you give us an indication what you think is a normal level given the point in the business cycle we are in, and maybe a bit of a guidance going forward? Thank you.
If I talk about the corporate activity, it's primarily the property sector, and there we have seen quite a high activity. So, it's not yet underlying investment that drives it.
On the NII, we, I mean, we don't give sort of the, the, a specific guidance on the numbers here. I think there are many, many different variables affecting the NII. And, I mean, we have headwind on, the deposit margins, we have tailwind on mortgage margins and volumes. I would say we have a bit of a tailwind in the second half of the year on treasury, and, but that can later on turn into headwind. And then we have, funding, related tailwind as well in treasury that helps us a bit as well. So, I, I leave it up to you really to make the numbers out of that, actually. On the coverage ratio, I don't think, you shouldn't read anything in the, the move from 60 to 56.
It's more sort of specific on a particular credits. And I think over time, it's been a fairly stable number, around 60%, going, you know, from where we actually had SEK 42 billion of impaired loans to down when we have SEK 5 billion or SEK 6 billion of impaired loans. So, I think you have a history gives you a fairly good picture where the coverage ratio is.
All right. Thanks a lot.
Our next question comes from Mr. Magnus Andersson from ABG. Please go ahead.
Yes, good morning. I have three questions. First of all, on costs, where they were a bit higher now in the second quarter, but you also keep your guidance of flat costs, and I'll say that you will reach SEK 17.7 billion for the full year. That implies quite significantly lower cost in the second half than in the first half. So I'm just wondering, what does that imply for 2015? It seems like costs should be able to be lower in underlying terms in 2015 than 2014, unless you have some investments you feel that you will take. So if you could comment on that, please.
And secondly, on your outlook for the Sparbanken Öresund acquisition, you keep the same guidance as you gave in February, which implies a quite dramatic cost-income ratio improvement until 2016, 2017 from the levels you're at right now in underlying terms. So if you could give us some flavor of how you are going to reach that SEK 350 million-SEK 450 million in net profit? And finally, just on the capital, you're now at almost 21% versus the FSA requirement of around 19% or just above 19%. Do you see any scenario where you think you would have to be higher than the current level?
Your observation on cost is correct. I mean, we worked hard with cost in the past 3-6 months, so we are trending down. And that will create a space, everything equal in 15. So we have not today sort of decided what kind of investments needs are out there, or if we need to create even more space. So it comes really back to how we gauge generally the income level of the bank as well. But we are sort of, during the autumn, we will, we will formulate that. You should also remember that sort of a key strategic parameter has always been that we said that we want to be the most cost-efficient bank. So cost is an important driver.
We do think that you can, bank will be slightly different top line wise, in this new environment. We will come back on that one. Öresund, Öresund, you could say that what we talked about in conjunction with the transaction is all, everything is valid. We will not see any significant impact on the cost income ratio during 2015. It will be a year where we actually spend money, which we have now restructuring charges towards, but we will also have running costs for spending money, converting clients, and integrating all of those clients in the bank, and then start dismantling the whole cost base of Öresund, basically. We see significant, sort of cost synergies being realized during 2016 and 2017. The business case there is intact.
Do we see—the third question was, do you, do we see any regulatory aspects that could make us go higher than 21? I would hope not. Since I think we are very, very well capitalized compared to the risks that we are carrying, so it would be a very, very high drag on the growth of the economy. But there is, of course, leverage ratio and minimum risk rates on corporate. It's an issue that is outstanding, that we have heard our regulators being vocal on. So, that is something that we wait more clarification on. The only thing I can feel that we are doing quite well compared to peers on that one, so hopefully it won't affect us.
Yeah. So just if I just on cost, then it's not necessarily wrong to extrapolate the level in the second half into 2015?
I didn't say that. I said that we have the space, but the management might use the space.
Yeah. Okay.
So, you have to be in our minds then.
Well, okay. Thank you very much.
Our next question comes from Mr. Alvaro Serrano from Morgan Stanley. Please go ahead.
Hi, thank you for taking my questions. Just around volume growth in the quarter, could you explain your perceptions, why have you gained back some of the market share? And also, it looks like the risk weights were up underlying quarter-on-quarter, about a couple of percent, I think. Is there anything to read into that, given the trend of last for some time now of increasing efficiency and risk weights? And then I've got another question on the mortgage market. You've obviously touched on it already, but I just want your views on the increasing noise around introducing amortization, some sort of forced amortization or encouraging amortization.
I know you, you mentioned that you think it's a supply side problem, and it needs to be addressed by politicians, but what are your views on the probability or possibility of introducing some higher amortization rates, and what could be the impact of that? Thank you.
If I start with the mortgage issue and start with the amortization, I mean, we have I deem reasonably high amortization level in the book as we speak, and we test each client and their sustainability over time to carry their mortgages in a tougher environment. So, I would argue that the politicians are trying to make this a bank issue, while it's actually a structural problem. And we have an upcoming election, and they would like to have it in this corner. But overall, they do understand the problem of the structural measures that needs to be taken.
And I think the debate needs to include all measures, because if you're only addressing the amortization and not the supply side, or the agility of the market, or the interest rate tax deductibility issue, you will not get a stable solution. You will get a short-term solution, and that might be necessary if you can't sort the political side to ensure that existing clients are protected and that new clients are not taking on debt that they can't sustain over time. So this is, it's a very complex issue. That's the answer on that one. If you look at our new sales market share on mortgages, they are 22% in the last month.
... So we have step by step, moved up to our back book type of market share. So it's not like we are over participating in the market short term to regain that market shares. So it's been a very prudent, development over the last 18 months, and I think that is important to bear in mind. We have had in the market quite a number of outlier market shares in terms of new sales, while ours have been gradually improving.
If I just add on the volume there, I would say that, if we talk more on the corporate volume, I would say, of course, our sort of funding position and the effects of the risk transformation is something that gradually you benefit from gradually. That puts us, since the strategy is working there, it puts us in a very nice competitive situation, so that will help us. Another thing that I actually think helps us as well over time, has helped us over time, is, of course, that, as the SFSA has calibrated all banks, and they are now under IRB Advanced. All banks are under IRB Advanced. We have a level playing field in terms of how we put capital towards our transactions.
Swedbank started off in a very conservative position there compared to many of our peers, and we have now a level playing field there. From that perspective, that helps us in the corporate segment as well. So I do feel that we have a very nice relationship with the clients, so it feels good on that part. Your second question around risk weights, I did not really remember.
Yes, I was just saying that the risk weights were down SEK 40 billion, 40-something billion, SEK 42 billion, I think, quarter-on-quarter, that you had obviously the reduction of the IRB, and obviously the increase from Sparbanken. So but it's, it looks like underlying there's been an increase around 2% quarter-on-quarter. I'm not sure if you recognize that figure, and if so, is that related to volumes or the volumes are more in have higher risk weight charge or? Or you don't recognize the figure.
You're right, Alvaro. It's it is credit exposure as volumes go up, credit exposure goes up, risk exposure amount goes up. So it's a correct observation. If you take out the one-offs relating to the assumed and advanced IRB, the volumes drive up risk exposure amount in the quarter.
Thank you.
Our next question comes from Mr. Håkon Hansen from DNB. Please go ahead.
Yeah, hi. Good morning from me as well. Just one question left, really. Did you experience any negative lag effects from the STIBOR drop in the quarter? Given how steep and swift the drop was in June, were you able to fully reprice the higher yielding savings accounts you would usually reprice when STIBOR moves?
We couldn't really answer on that one. I mean, I think we adjusted very reasonably quickly, and
I mean, of course, you have seen some effect on deposit margin erosion already in this quarter, and but the majority sort of that effect will come in the third quarter.
Okay, and then a quick follow-up. Yeah, did you say that mortgage margins, the positives, would fully offset the negative deposit margin impact in Q3?
I think we said that, considering where we stand today, we have good hope to see the mortgage margin substituting the deposit margin erosion, but we said it's very early days to see where the competition takes us, both on deposit margins and lending margins.
Okay, excellent. Thank you.
Our next question comes from Mr. Masih Yazdi from SEB. Please go ahead.
Morning, Masih from Central Stockholm here, at SEB. A couple of questions for me. You were saying that you like the fact that you're growing with the economy in the quarter, and that led to underlying lending growth of about SEK 37 billion. Do you think that's a growth level you could sort of uphold going forward if the economy or businesses continue to grow at that pace, given that you have a pretty sort of high payout ratio of 75%?
And then secondly, on mortgages and the mortgage market, if you could choose sort of between going back to your back book mortgage market share of 25% and protecting the margin improvement we all already see now in Q3, which one of these would you prefer, if it will be difficult to combine these two? Thanks.
I mean, first, I wish you guys welcome out to Solna in a year or two. So it's going to be good to have you as neighbors. On the market share issue, well, I think you need to bear in mind that the savings banks are very strong at present with good liquidity, so they are putting a lot of their mortgages on their books, which used to be with us. So if you exclude them, I would say that we are at our back book market share. I don't foresee that there is that trade-off, bearing in mind our improved funding cost, and strong position in the major cities, because that is traditionally our weak spot.
But, Region Stockholm and Region Gothenburg West are doing fine in this area, and as long as we participate in the major cities, we'll probably not have to make that trade-off. But it's all about where competition moves us.
...On the first question there, I don't think you can take the second quarter's volume and annualize it. That's not our interpretation of where the macro picture is really. You have intra-quarter effects. It's always, corporates wants to do transactions in front of the summer and so forth. So, it's not the new growth rate of the lending, I think. And you should also bear in mind that there is a lot of talk about amortization for mortgage mortgages and so forth, and all of these are directed towards slowing lending growth. So, we will have to wait and see on that one as well. And a lot of the corporate exposures are relating to property. So, the property market can't continue being as hot in the same pace, I would say.
So risk awareness is important going forward as well. So, the conclusion is, the dividend policy is intact.
Okay, thank you. Just one follow-up question to you, Michael. Just your note there on the fact that it's illogical for Swedbank to, with evidently lower risk, have higher capital comments than, than your peers. Just sort of, more color on why you make that remark. Do you think there are any chances that any of the capital comments that have been, guided for introduced could change in your favor, or why, why do you make that comment, please?
If you look at the logic that the SFSA is bringing forward, for example, the countercyclical buffer, they argue that we have seen abnormally high credit growth the last few years, especially in the mortgage market, or particularly in the mortgage market. We haven't participated with those type of growth rates the last five years, and we are penalized because we have the highest back book. If you go sort of look at the price development of housing the last five years, when we haven't participated, it's been quite in stellar. So the LTVs on the old book is very fine and can cater for a big house price drop. And hence, a player with a large back book is penalized in this type of model. And there is no correlation then between risk and capital demand.
Can I also just add that, of course, if you, if you, put the largest buffer in the bank with the mortgages, all stress tests from the SFSA themselves, from ourselves, and also from the Riksbank, shows that the largest credit losses in case of stressed scenario does not appear in the mortgage book. It appears actually in the corporate book. So in all stress tests, the Swedbank comes out the best, but we have the highest buffer. That's pretty illogical, unless you actually want to put the capital there in order to get the steering effect of increased margins. So, and but from the buffer, buffer perspective, it's very illogical.
Thank you very much for that. Very clear. Thanks.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning, everyone. Three questions, please. The first one, our usual quarterly question, please, on treasury net interest income, which I think this time a year ago, you started to become very cautious on, an original guidance that you put through, despite long rates actually falling in the period, hasn't come to pass. In fact, I think if I look this quarter, your contribution to net interest income from interest-bearing securities has gone up Q on Q. I don't know if that's a right observation. But, anyway, treasury NII seems resilient. I just want to get some update, please, of what you're seeing on that side and what your outlook is. Second question, please, on this amortization point. You mentioned that you've stressed your borrowers for enforced amortization at various levels.
I just wanted to get some flavor, if you can give it to us, please, on, on what actual tangible impact you think enforced amortization can have on the market, will have on the market, as far as impacts to debt affordability and, and whether or not you see this actually having any kind of a meaningful, deceleration impact on, on credit demand. Just any, any kind of incremental color you can give us would be helpful. Third and final question on Pillar 2 A buffers. I think at the time of, of the last quarter's results, you gave us a range on capital outcomes, and I think the worst end of your range, potentially allowed 3 percentage points of, of Pillar 2 A buffer.
Seems like the original proposal or the initial proposal from the Swedish authorities is a Pillar 2 A buffer lower than that. I just want to understand whether that's given you any more insight, whether you can become even slightly more constructive on where Pillar 2 A ends up for you, or whether there's something inherent in your book or how you think Pillar Two is actually calculated for you, which is somewhat worse than the standardized number, which is being put around for all the banks. Thank you.
Yeah, treasury result there. I think you need to view treasury result, NGL and NII together. I think we have become, in the past two quarters, slightly more positive as interest rates have come down. And we are saying that there will be some effects in the autumn of that as well going forward. But the long-term outlook in a very low inflation and interest rate environment is challenging to keep the profitability up. I don't think we will guide more, more than that. If I can take the third question, then the Pillar Two add on there. We haven't disclosed anything on the Pillar Two discussion with the central bank, so forth. So, and we will come back on the capital at year-end.
and, the only thing we are saying is that the 19.3 that the regulator put us on when they disclosed to the market, is 20%, incorporating IRB Advanced. We have, we have a sort of, no negative or positive view, sort of, with regards to the buffer. We think the buffer we have, we feel good about the buffer. It's an adequate buffer out there. So, but at the same time, we don't see an excess capital.
And Nick, this is Anders. On your question about, I understood it as the resilience of the mortgage portfolio and credit losses popping up in-
Sorry, if I can clarify. Not too worried about the credit loss side, more interested in whether it will actually have an impact on demand, on credit demand. So we've seen an acceleration in credit demand, even ahead of the interest rate cut. And I'm just wondering, really, if, if the discussions around enforced amortization in H2 are, are gonna have any kind of tangible decelerating impact on that household credit growth?
I mean, that's definitely the purpose of this discussion from the legislators. They want to dampen the growth among household debt. That's how we should read it, I think. And they utilized two ways of that. One is the capital, and the other one is, of course, discussions around amortization.
Thank you.
Exactly what the impact will be, time will tell, of course.
Okay. Clear. If I could ask a quick follow-up question on the Pillar Two side and on the overall capital guidance. So you- you're now saying this 21% level doesn't seem like excess capital to you. I'm just wondering at what point you start allocating 21% capital to each of your divisions, if this is the new reality? If you would comment on that.
Just to make a distinction, I mean, 21% capital is a new reality. We will allocate that to all business area as soon as possible, and we work with it, start to work with that. So that will happen in reality during the second half of the year. But then you, you must distinguish what the regulator pushes you to have and what you, as, sort of, CFO thinks is an adequate, need of capital in terms of carrying your risk towards your bond investors and equity investors. And of course, we think 21 is way too high. There is a price that, Sweden will pay for being so conservative.
Very clear. Thank you.
Our next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead.
Thank you. Just, I think most things have been answered, just a few quick follow-up. So in terms of the capital, can you just update on what remaining capital efficiency measures that you might have? And also, if you have any views on timing or potential AT1 issuance. And then secondly, just on the rundown of Ektornet. I mean, we saw quite a substantial reduction in the revenue contribution, and I guess in the expense side as well. Is this a new level, or should we just expect a gradual wind up there, wind down there? And then finally, just we saw the associate income very high, clearly because of the EnterC ard impact. How should we view that line going forward?
I mean, is there a big sustained impact from that transaction? And also the new contribution from Sparbanken Skåne, how substantial is that relative to the recurring associate contribution?
If I start the last one there, the other income line, that's always a difficult one because it can, it has a tendency to be plagued by one-offs every year in some effect there. I mean, the EnterCard thing is a prepayment by a distributor, sort of taking back their volumes. They are prepaying margins that we otherwise would have had coming in later on. So you're correct there, that the SEK 230 will disappear, for the back, or in the future, sort of. Ektornet, I think, I mean, we have always guided that we wind down Ektornet, and particularly 2013 was a very strong sales year for Ektornet, and therefore we had income, in other income there, but we also had a lot of costs.
So it sort of improves the quality of the whole bank of winding down Ektornet. And now we are down to how much in Ektornet, SEK 1.5 billion or so?
Down to 1.3.
SEK 1.3 billion. So we're doing very nicely there, and we're observing that the peers in the market are actually increasing their collateral overtake. So we feel that we are in a good position there. But if you look, if you... To give you an... I don't have it in my head to give you any guidance on that, really. I have to come back on that one for future. AT1, I think, I mean, we will issue AT1 at some point in time. We don't feel that we are in a hurry to do it since we are filling it up with core equity.
We think that by waiting with all these capital-alike instruments and the T2's have been a good strategy to be late because we are on a good journey risk-wise, and we continue to be that, and we have rating institutes like Anders are saying that are formalizing things that the market has already said. We will come, but we won't disclose when. Our ambition is, of course, to be from an investor point of view, expensive.
... Thank you very much. Just to clear, what do you have left in terms of capital efficiency measures?
There, there is always capital efficiency measures to be done. Anders is working with AMA, we're working with other things. You could also say that as you start to steer the organization more on, on a certain system, you, you tend to see more effects out of it. So the introduction of the IRB Advanced sort of did increase during the application period. That's an effect, because we started to steer on it, because we already implemented it in the business earlier on. So, so from that perspective, it's, it's an ever ongoing story. We don't have anything that we put on the table for you, because there are so many other aspects in this. And the big journey in terms of capital efficiency in Swedbank, i-i, the major bulk of that is over.
Very clear. Thank you.
Our next question comes from Mr. Andreas Håkansson from Exane. Please go ahead.
Yes, hi. Well, I was gonna ask on mortgage margins and capital, and I think we've gone through that, so we can go to next questions. Thanks.
Our next question comes from Mr. Jan Wolter from Credit Suisse. Please go ahead.
Yes, morning, Jan Wolter here, Credit Suisse. A couple of questions, if I can. First, Johan, you—I think you commented, it's still, that it will be difficult to uphold the treasury result. And, what kind of time frame are you thinking about? And can we assume, that higher short rates will have a negative effect on the treasury result, just based on your current positioning? So that's my first question, please.
No, I'm not gonna take it, talk how the immediate impact will be. I think what all banks' treasury department needs is a steep yield curve. It doesn't matter, you can earn money on the steepness, so to say, because you lend longer than you fund yourself, always in the sort of the day-to-day exercise of a bank. That makes you money. That's one thing. The other aspect, if interest rates in general are falling, especially short rates, long rates doesn't matter. It has less of an impact.
In terms of how the treasury result it will gradually fall off if we can't sort of substitute the interest rate risk with new interest rate risk that gives us carry, and that will happen particularly during 2015. And the effect will be backended, of course. That, but of course, part of that, you expect that we will have occasions where the yield curve is still a little bit steeper, and we can extend our risk maturities a little bit. And so, normal part of it is a normal business in treasury. But this time, you should also remember that we come to a floor on interest rates. We are sort of closing up on being, soon we might be at zero, so.
Thanks. And the LC&I trading income was down slightly Q on Q, and the swing came in group functions. Is it a fair observation that client activity didn't have much to do with the high level of, on the net financial items this quarter?
No, that's a correct assessment. I would say.
Thanks. And then the final question is just, you say that you don't have excess capital anymore. So does that imply that there is not much capital left for further acquisitions, or, or how do you see that? And if you do feel that you have capital to deploy in acquisitions, do you see any further objects in the Swedish market, please?
I mean, we have said that we operate in the four countries. There is always small, sort of add-on acquisitions that we look at. In terms of that, there is nothing that requires huge amounts of capital. We did one acquisition in Öresund, the SEK 3 billion. It's sort of there might be similar type of acquisitions, but of a lesser magnitude. But we don't see any really big thing requiring capital at this point in time.
Okay, many thanks for that.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Good morning. Good morning to everybody. Three questions from my side. The first one is a bit of a strategic one. Before you stated that the fact that the Swedish FSA is imposing the same basically risk weight on mortgages, and the fact that all Swedish banks now are on advanced IRB, is creating a kind of even playing field. But the reality is that Swedbank is required to hold 4-5 percentage points higher capital than your peers. And I think this may be due to the fact that you are the most Swedish among the Swedish banks. And this is just so... I might be wrong, but my view is that the regulatory regulation in Sweden is generating a kind of regulatory arbitrage.
So I just wonder whether there is an incentive for you to become, to start becoming less Swedish than you, than you are today, to allocate the capital somewhere else, where you are not required to hold 25% of your risk-weighted assets? ... that you look at, it's something that you agree with, it's something that you want, want, want to do it? This is my first question. The second question I have is on NII on customer loans. You provide a very good detail quarter by quarter of the NII breakdown, and the NII of loans to the-- on customer loans is up just 0.5%, Q2 on Q1. The loan book, actually, the average book is up more than 2% in the quarter.
So my question at consolidated level is, has the growth in the loan book materialized the most toward the end of the quarter? Or because if this is, if this is the case, we're gonna see an impact in Q3, or otherwise, the only thing that I can think about it is the new origination has much lower margins than the back book. So which one of the two? And the third question I have is, if, if I remember correctly, before you stated that, you know, corporate risk rates, maybe leverage ratio are an issue, but on leverage ratio, what we see is that this is constantly down quarter after quarter, and now it's just about 4%, where you started from something like 4.6% or 4.5% right at the end of 2013.
So you flag it as a possible concern, but it keeps going down. So I just want to understand how you, how you play with the leverage ratio in managing the bank? Thank you.
Okay, if I start, I think, what we tried to say is that there is a level playing field on corporate risk weights. Whilst we don't agree with, the logic of us having the highest capital requirement through the risk-weighted asset floor on mortgages, which, is the lowest risk, which is confirmed by all external stakeholders. So there is an inconsistency. And then you could argue that the reason for the regulator to do something like that is that they want to have a steering effect rather than a buffer for risk, thinking. So, that's how we try to paraphrase, those issues. So I hope that brings some clarity for you.
With regards to the NII question there, I think we are saying that margins on corporate loans are fairly flat. Margins on mortgage loans in Sweden are increasing towards the end of the quarter, the end of the period. And in the period, you're also seeing shrinking deposit margins. That is making sort of the quarter roughly flat on margins or on NII in total. And then I've guided on the future a little bit as I did. With regards to the leverage ratio and how it sort of incorporate into our steering, I think we are on a very high capital level today as a result of the mortgage sort of add-on.
We are rather well placed compared to peers in terms of leverage ratio, but we are following that sort of development and see what will happen there. If there were to be sort of a regulation that puts leverage ratio higher than 4.5 or up towards 5, of course, that, that's something that will impact our steering.
Okay, thanks. Just, just to get back one second on the first question. From your answer, I understand that you will not privilege growth outside of Sweden-
Oh, yeah.
Rather than in Sweden. This is correct?
Yeah, back on that conclusion that, or clarification I made, I do believe that we are very much benefiting from our geographical footprint. We are operating in four economies that has good outlook, good, stable, fiscal policies and, a very strong corporate environment. So we are quite excited to be operating in these, these geographies. Of course, over time, if you get more regulation around leverage ratios, et cetera, what you might see is that the Swedish mortgage market goes to a securitized market if you can't reprice. So but that's out there, and it, it's a possibility, but not the reality of today.
Okay. Very clear. Thanks.
Our next question comes from John Bäckman from Danske Bank. Please go ahead.
Yeah, good morning. It's John from Danske. Most questions answered already, obviously, but just regarding Swish, I think you've said previously that you have something like 40% market share on the retail side in Sweden on Swish, but you don't make any money on it, or, and, and a lot of money on it. And now, we're starting to see Swish with corporates as well. Is the setup different, or is it more you saving cost rather than getting paid? Thanks.
I mean, the way I look at it is that this is a very good replacement product. You see less ATM withdrawals, and you see less manual cash handling. So we are benefiting through that. The corporate client, they will benefit from avoiding to handle manual cash and all the administration that comes around that and security issues. And of course, they would have a willingness to pay to make that transformation happen from cash to Swish. So it's logical to build up a big customer base among the consumers that utilize Swish to give that benefit to the corporate environment in transactions between corporates and consumers. So that's the reasoning behind our pricing strategy.
... And we are also with Swish, making life difficult for other payment methods that are coming to market by other entrepreneurs. So I think this is an excellent digital solution for the consumers in Sweden, and I guess that most countries would envy to have something like this. And the infrastructure in Sweden allows this, and we should be very happy with that.
Okay, thanks. And then just to follow up on Öresund , I think you've had the SEK 16 billion of loans transferred already, but those are not mortgages, right? Because there is another SEK 17 billion residing with SBAB. Will we see those starting to come in to Swedbank in Q3? Thanks.
They will come in over a longer period of time. There is an agreement there with, so it will come gradually over a longer period of time. But you are correct, that we don't have any mortgage loans there.
Okay, many thanks.
Our next question comes from Mr. Jacob Kruse from Autonomous. Please go ahead.
Hi, thank you. Just two quick ones. So first, on the Öresund book. Would you expect the risk weights of those loans to fall roughly to your average corporate risk weight level going forward? And secondly, on the cost side, just to be clear, so you have, you're effectively guiding for an annualized cost base, or for a cost base of just over SEK 8.5 billion for the second half, so annualized just over SEK 17 billion. And then you have Ektornet cost, which I suppose will come out sometime by the end of this year, and potentially some synergies from Öresund over perhaps more 2016. So it looks to me like you should be able to target a cost below SEK 17 billion before investment.
Is that, is that roughly your thinking in terms of that space of cost that you were, you were, mentioning previously? Thank you.
It doesn't say anything about the thinking. You - if you extract sort of Öresund's one-off going into next year, and then you annualize Öresund, you come to the number that you're talking about. So it's, you're doing your... The analysis is correct, sort of. Whether we will be there or lower, we will come back to. In terms of risk weights for Öresund, I think there are some of the clients are duplicating clients, you could say there, where you have some short-term benefits on the capital. But then there is a re-regulation that says that we can't sort of just rebook all of these clients in our book and have the risk weights that we, Swedbank has.
We have to follow the sort of the background history with Öresund. So we... It actually requires us to approve or seek approval for an IRB Advanced with the SFSA for this part of the portfolio. And the regulation is that way, so, and which we will most likely do. And that means that the capital synergies of the whole equation, a rather good proportion will come rather quick, but the major part of the capital synergy will be realized at a later date.
Okay, thank you.
Our next question comes from Mr. Christoffer Rosquist from Barclays. Please go ahead.
Thank you. Just one follow-up question on your investment banking fee income. So you commented before that, you're growing in line with the economy. I was just taking a look at public data. So announced deals in M&A, it looks like they built up to a very high level, in Q1 and beginning of Q2, but then dropped off significantly in May and June. I just wanted to understand, is that some kind of seasonality, or if this is the end of pent-up demand, or if you could give us any visibility of your pipeline for these kind of transactions? Thank you.
This is Magnus Geeber, in charge of LC&I, and we have, of course, seen a very good activity during the first half of this year, where we have been actively participating in the IPO market, not so much in M&A from that perspective. But we do see that we have a continued demand during the second half of the year as well. We are actually comfortable with our pipeline.
Okay, thank you.
Our last question comes from Mr. Adrian Cighi from RBC. Please go ahead.
Hi, this is Adrian Cighi. I have one additional question on mortgages, please. When you allocate capital internally and establish your internal pricing, do you already price in a 25% mortgage risk weight, or do you expect that to start at a later time? I know one of your peers stated that they're planning to introduce the 25% mortgage risk weight sometime in October. Thank you.
We have not allocated out the capital yet on transaction level, so that is yet to come, the positive push that comes from that. But there are many other ways that you can steer your margin development with, not only capital allocation.
Just a quick follow-up on that. Do you expect any potential upward list price move on the back of such, sort of pricing or capital allocation move?
You have to weigh... The list prices are set by the market, not by internal capital allocations.
Okay, thank you.
That's our last question. Please go ahead, speak.
Then, I truly thank you for being so active. We really appreciate all these questions, as it helps us clarify everything in a complex report and in a complex environment and a complex bank. So thanks for doing that and helping us clarify, and I wish you a good summer, and see you in Q3. Bye.