Ladies and gentlemen, welcome to the Swedbank Interim Report, January to March 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 will be a question and answer session. Mr. Michael Wolf, please begin.
Thank you, and thanks for attending this Q1 presentation. Despite the fact that the geopolitical situation in the East increased the uncertainty during the quarter, our results are very stable. The business area that shows the best improvement is LC&I. Our long-term efforts to improve relations with a select group of clients continues to pay off in terms of getting more and more of their ancillary business. We have improved our position in corporate finance area and participated in a number of IPOs, and the pipeline is strong. On top of that, we defend our position in the debt capital markets area. Baltic Banking also shows strength with a cost-income ratio of 45, despite running the operation on a loan to deposit ratio of 100. It proves that we are able to adjust our operations to the prevailing economic situation.
The key to this has been our multi-channel strategy, i.e., digitalization and client focus. With the existing geopolitical uncertainty, improved credit demand will be further delayed. Swedish Banking is performing well financially, and we improve step by step our market position in the corporate segment, whilst we continue to be weaker on the private segment, where the competition is strong. We have to up our game and focus on improving market position in this segment. The key to this is that we become the leading bank in digitalization to simplify for our clients and reduce cost to serve in order to mitigate the price pressure that will be a critical success factor. I do think we are on the right track.
Just in the last two years, number of logins to our digital banking platforms have increased from close to 300 to close to 600 million, and at the same time, number of errands in the bank branches have been reduced with 30%. A service that many clients seem to enjoy is Swish. During the month of March, 1 million transaction was done in this system, compared to 3 million for the full year of 2013. Swedbank and the savings banks have 40% market share of the number of active clients in Swish. We have been clear that our focus is on our own market, and after exiting Russia and Ukraine, it was with great pleasure we announced the acquisition of Sparbanken Öresund. We want to grow in the growth areas, and Skåne is one of the most interesting ones in Sweden.
We will provide Sparbanken Öresund corporate clients with a broader capability of services and know-how, and their private clients with a digital platform. We're also a 22% owner of the newly formed Sparbanken Skåne. They will become the largest savings bank in Sweden, and through our cooperation agreement, we will also get indirect access to the volumes of, from the branches of Sparbanken Öresund, which were sold to Sparbanken Skåne. Let's turn over to the environment we operate in. The economy in our four home markets are still relatively strong and performs mainly back on a strong domestic demand, but the global economy is affecting our export industry, and credit demand remains low. Where there is growth, we participate.
Our strong balance sheet and low risk level continues to support us in terms of lower funding costs, and it's a signal to our clients that we are there to support them. This is our last quarter at our existing head office. Next time, we'll be reporting from Sundbyberg, a move that is more than a move and a cost saving. Our new office will provide us with an opportunity to gather all relevant units under one roof, and I'm convinced that the future, requirements of more flexible and more collaboration will be facilitated in the new office. So thank you for that, and I hand over to Göran, who will give you some details on the numbers.
Thank you, Michael. I will start by going through the three different business areas, starting with Swedish Banking. The results continue overall to be very stable. It is a very low volatile business area. In this quarter, we have seen lower deposit margins, much of that reflecting to previous decreases of STIBOR, but we are also affected in the quarter by shorter quarter, so to say, a fewer number of days. Volume-wise, it's been good, I would say. We are slowly regaining our market share and our market position on the mortgage side, while the lending on the corporate sector in the six regions has actually been very good in the quarter. Mortgage margins are stable, which is positive, I think.
And, we have seen a very good commission income during this quarter. Part of that is, of course, related to ruble and the increasing stock market, but we continue to benefit sort of from GDP growth in the payments and card business as well. So that's good. Asset quality continues to be very solid. Looking forward, I think, though, the competitive environment is heating up, especially for the household sector. We are seeing a larger number of niche players competing on different products with us. So cost and cost focus and efficiency will continue to be of utmost concern in this business area. Then turning to large corporate and institutions, I must say that this is a business area that has been gradually improving during the years, and it's really nice to see the very strong...
that we are now able to deliver in this quarter. Very much based on higher activity in the IPO and corporate finance market in Sweden, but also in Norway, where we continue to have a very, very strong position, and this quarter was particularly good in the debt capital markets area. FX and fixed income were more subdued during the quarter, but even though that we were able to produce one of our best quarters ever here. We are looking to invest. Part of the investments are needed investments due to regulatory changes. We have IT investments to do in this area, but the other part is to continue to strengthen our product and service capabilities within the corporate sector in general. Lastly, looking at Baltic Banking.
Here, I think, of course, the most important issue here is what will happen as a result of the Ukrainian crisis. But, I think we are continuing to be happy to see that we haven't seen any impact in financials, of a slower economy. Yet, we expect it to be more visible since credit growth most likely will be stalled for the future a little bit further. Even though that, I think we have a business area that's been generating good returns, we continue to reprice weaker clients. That's evident in the NII, so we're happy with that. We have been affected in this quarter, for the first time that Latvia joins the euro, so we lose some, we both lose some income, and we have slightly one-off costs in there.
We have seen nice credit impairment reversals during the quarter, which will, Anders will come back to. Summarizing these, three business area on a group level, we see a slight decline in the NII. Adding on there, we can say that the treasury NII has continued to benefit from a good funding position. So the strategy of moving us into a low-risk area has really paid off, I think, over time. And, in the quarter, we did a number of transactions that came out very well on the market, and we continue to see tailwind in the NII in the funding position. So the decline in the NII and the result in treasury was lower than expected in the quarter.
Other than that, I think, we have in the quarter decided to take dividends from our Estonian subsidiary, which will make our tax bill a little bit higher. So we've been charging SEK 50 million extra in tax in this quarter. We have also on the cost line, one-off cost of SEK 80 million relating to the move to Sundbyberg that Micke was talking about. Looking ahead, I think continued cost focus and continued client focus. That's the two main focus areas for the whole group. Just on capital and other regulatory measures, I think we can say that IRB advanced is hopefully coming in the Q2 . We have seen an increase in risk-weighted assets, or RWA, as it's now called, by SEK 8 billion in the quarter.
Four of those are relating to operational risk, which is changed once in a year, according to our standardized models. So it's, and it's about relating to the income, really. And then we have small increases in market risk and credit risks. NSFR, with the new interpretation of where we are, regulatory-wise on the new directives there, we think we are at 102%, so we are fully compliant with something that the banking system most likely will be compliant in 2018, which is also good, that we have moved ourselves in that respect. With that, I think I hand over to Anders.
Thank you, Göran. Yes, Q1 is the fifteenth consecutive quarter with low credit impairments, ending at SEK 100 million of reversals. Total impaired loans are decreasing with SEK 1.4 billion in the quarter, which means that we end up at SEK 6.25 billion, an equivalent of five basis points to total loan portfolio. And we expect it to continue to decrease. Baltic Banking, net recovery is of SEK 101 million. However, we expect this to lower in terms of pace in the coming quarters. At the same time, we see a continued low inflow, impaired loans, and credit impairments. So all in all, credit quality is strong in Baltic Banking. In Sweden, the Swedish Banking LC&I portfolios continue to show good resilience.
When it comes to Russia and Ukraine, as you know, our operations are discontinued and the exposure is limited. To Russia, we have an exposure of SEK 1.5 billion, of which SEK 963 million stems from a remaining corporate portfolio of 17 customers. The rest is exposure related to trade finance. In Ukraine, the only remaining exposure is assets taken over by Ektornet at the value of SEK 124 million. Indirect effect from the geopolitical situation in Russia and Ukraine on the Baltic countries are assessed to be limited. In our base scenario, we assume credit impairments to increase, but to a limited extent. It is more on a case-by-case basis, and we are in close contact with our customers in all three Baltic countries. Ektornet sales continued in Q1. The intake was 0.
We had a negative FX effect in the quarter of roughly SEK 75 million due to devaluation of the Hryvnia, and we have continued impairments stemming from Ukraine and US of SEK 138 million.
Okay, thank you, Anders. With that, I open the floor for questions.
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 Wallin, from Handelsbanken. Please go ahead.
Yes, good morning, thank you. I would like to start off with a question on the quite strong commission revenues we saw in the quarter. If you could elaborate a bit on if you think that this is sort of like a sustainable and kind of normal activity level for a cyclical recovery, or if it was an exceptionally good quarter, and we should not extrapolate this going forward?
No, I think the commission income was partly driven by sort of the external market. And, I mean, it becomes a guess whether or not you think the stock market will continue to go up or over. For LC&I, I think there is a structural move beneath there, where we actually do increase our relevance, and we become better with clients. But around that trend line, you have volatility coming up and down, and in this quarter, it was particularly good on the IPO side, so you can't expect that to be every quarter. But I think we are on a very good business trend line in LC&I, actually.
Okay, great. Thank you. And then, I would also like to ask a question regarding LC&I. You're mentioning that you had a very strong quarter as well there, NII-wise, but you're seeing that there's some slight increase in competitive pressure on margins in the quarter. Could you say anything about where... Is this, like, domestic players becoming more competitive, or is it a higher share of the international players entering the market, trying to fight for this business?
I think, you could say, there are quite long lead times in the corporate exposure book, much longer than mortgages that reprice much more quickly. So, I think front book margins has been lower than the peak of the back, of sort of where the market's been for quite some time. So you would expect some, margin pressure at some point in time, but it's not evident in the numbers yet, because we have volume growth, and we also have, older transactions that actually reprice as well. So, so, the NII is holding up quite well, even though we see a more intense competitive pressure from mainly the domestic, domestic banks, but also occasionally more, foreign banks.
Thank you, and if I could just continue on that track. Is there any specific area of lending which is sort of like heating up competition-wise, or is it, like, across the board?
I think with a little bit better macro feeling outside, I think people are a little bit more interested in doing investments. So acquisition finance and IPO-related activities sort of have been a bit better.
Okay, great. Thank you. And then just one final question of mine, regarding your mentioning that the mortgage margins were very stable in the quarter, and I just would like to have a clarification. Does that still mean that your front book margins are about 5-10 bps below your back book?
Correct. Something like that. On the margin, you're seeing a slight—a slight uptick in margins, but nothing really visible yet.
Okay, great. Thank you very much.
Our next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead.
Thank you. If we could continue maybe a bit on the revenue side. I guess fees were very strong, and you specifically cited Norway as one of the reasons, and there's been a number of press reports of quite material staff departures in Norway. Is that something that you've already been able to replace, or should we expect any financial impact from those departures? And then just coming back to the net interest income. You said that the sort of downward trajectory in the treasury NII has been somewhat less than you thought it would be. Given that you've now reached the
... billion, SEK 2 billion year-on-year decline in the treasury NII this year?
I can start with the first. I mean, the staff departures in Norway are by no means significant, and it's part of ordinary business, and we have good successors and already replaced the head of equity. So, I would see it as business as usual and possibly a thing that we are a strong bank right now, and people like our people. So that's part of the game, and but nothing of significance, to be honest.
On the NII side, I think it's correct to say we've been slightly more optimistic on treasury NII or the end result there, as a result of an improving front book funding-wise, really. So, credit spreads and our spread has continued to come together, and we see a lot of good sort of funding progress really, from a spread perspective.
And so can you quantify that? I think you said SEK 0.5 billion-SEK 1 billion negative last quarter. Has that changed dramatically or are we talking, you know, just directionally a positive move?
I would say a directional positive move is a good guidance that you just created, and we don't like to quantify it.
And just finally, on, when we think about your other income, and I guess the impairment to tangible assets that goes with it through Ektornet , are we now in a—you know, we've started to see a downward trajectory there, I guess, as the number of assets on your books continues to shrink. Should we expect that to continue? I mean, are we really in the wind down phase of that, or was Q1 an extremely slow quarter in terms of transactions?
No, that's definitely a structural move. We only have SEK 1.5 billion left of assets in Ektornet . I think we were up to almost SEK 7 billion at the peak. So, so, if you take year-on-year comparison, it's a quite big difference there. The good part is, of course, that cost is coming out as well.
Of course. When should we expect the other income contribution from Ektornet to be zero? Is that a 12-month view, or is it a three-year view? It does have a very long tail.
I do think you have a quite long tail, but by the end of this year, we should be below SEK 1 billion in assets, still within the bank. Yeah, and then you have a slow tail, especially in Latvia. I think the market of a very small granular properties relating to private individuals and small companies are quite long.
Excellent. 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. I just have two questions related to capital and regulation, please. Firstly, just on the advanced model approval, which you said you'd expect to come through in the Q2 . You previously indicated that the benefit to risk-weighted assets is roughly SEK 40 billion-SEK 50 billion. I was just wondering if you sort of were any closer to kind of narrowing whether it would be nearer 40 or nearer 50. And then my second question, we don't have any new information yet on sort of Pillar Two, or when there'll be action on the mortgage risk weights. But could you give us a sense of the regulation timetable as you see it in May and June? Thank you.
Michael, here. If we take it, the second question first, our belief is that, there will be paper out from the regulator prior to the meeting that the Stabilization Committee has at the end of May. That's our best, knowledge on that one, and that should bring some clarity on how they want to treat Pillar Two, going forward. On the first question, I mean, nothing new there. I mean, we have a guided range for quite some time, and, and that range you mentioned, and we're still in that range.
Okay, thanks very much. Could I just ask a follow-up question on the Pillar II? My understanding was that at least in relation to the corporate risk weights, it wasn't something that was immediately on the agenda that so was being sort of flagged by the regulator or any of the other banks. You've just put it up on your presentation as something to watch. Is that because you're expecting something on corporate risk weights in May, or is it kind of more a kind of medium term concern that you have? Thanks.
No, I think it's a more general comment, where in which we comment also with regards to what our regulators are talking. As I say, and are talking quite a bit about sort of the low and uneven corporate risk weighting system in Europe, and the review on that from a European perspective, and how that potentially can impact Sweden with a risk-based system and with quite low corporate risk weighting. I think that has also been one of the reasons for them keeping transitional rules in order not to let the low corporate risk weights come through in anticipation, perhaps, of something that comes out of Europe.
Okay, thanks. That's very clear.
... Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning, everyone. Three questions, please. First one, on cost. You took the SEK 100 million provision for some sort of restructuring in Q4. These seem stable to slightly up in this quarter. Can you just give us a flavor of what's been done with that SEK 100 million, or when or if we'll hear more about that, please? Second question, on NPL coverage. You've got in your appendix slides, the tick up there to 60% NPL coverage. If I'd kept your NPL coverage stable on the course, it would have been quite a meaningful reversal through the P&L. So I just wanted to better understand what we can read into that move in NPL coverage.
Are you preempting what you think is going to be quite a severe shift in asset quality trends in the Baltics, or is this just a mathematical oddity, please? Thirdly, and finally, on mortgage margins. We asked you last quarter where you felt these would go under a harsher regulatory scenario. We asked—you told us to ask your competitors. We have, and everyone seems to be more or less of the same view, that if regulation harshens, mortgage margins should go up, but no one's willing to commit to being the first mover there. I just wanted to pick your brains and see if any attitudes have changed, and whether or not you'd be willing to be a first mover, if and when we get more regulatory clarity. Thanks.
Okay. Shall we start on the last one? I think we have always said that we think it's fair that the more capital we have to carry should be repriced with the end client. It's also the intention of the regulator to do that. So, we hope that will happen. We tried, and we will not go first this time, but it was nice to hear some of our peers talking about repricing as well, so we take encouraging signs from that. Very good. On the coverage ratio, I think the coverage ratio in the Baltics is pretty much the same. So the overall fluctuation on the group number is very much based upon the Swedish, which has very low level of impaired loans.
So it gets a little bit distorted, actually. So I don't think you should read anything into that big, the coverage move, actually. Follow the Baltic one, it gives you a better sense for the coverage in general. And the last one was about the restructuring reserve. Yeah, I'm chasing the organization on that, Jonas and all the others, to start utilizing it. And they are speeding up in terms of finding efficiency measures and increasing the productivity. Much of it based on what can be done in terms of digitalization over time.
So, let's say none of the benefits from that seen in this quarter's numbers-
No.
Impact.
None of the benefits of that in the quarter, I would say.
Okay, thank you.
Our next question comes from Mr. Masih Yazdi from SEB. Please go ahead.
Yes, good morning, everyone. I just have one question for you on capital and Pillar Two. I know we're waiting for some more clarity there from the Swedish FSA to come this spring. But could you already now give any kind of indication on how much capital you are holding as of this week in Pillar Two, based on the most recent ICAAP that was approved by the Swedish FSA? Thanks.
No, I don't think we are prepared to make our sort of Pillar Two process public before we know really the regulation and what they will require from that point of view. But we will... I mean, we have as a philosophy to be open and transparent, so we will come around in that issue. And we do definitely favor a more transparent view from the regulator on that one. It must be in their interest that we are all in the transparent.
Okay. Does this mean that as soon as you have an announcement from the FSA, you might actually go out and be transparent about what your Pillar Two requirements are, ahead of any of your competitors doing the same?
That's something we have to deal with at that point in time.
Okay, thank you.
Our next question comes from Mr. Andreas Håkansson from Exane. Please go ahead.
On Russia, you said you had SEK 1.5 billion, I think you said SEK 960 billion to, to corporates. Could you tell us, are these mainly Swedish corporates with business in Russia, or is it Russian corporates? And if it's Russian corporates, how do you see the development? When do you think you would have to take bigger charges on that, or, or what's your outlook for, for that Russian exposure? Thanks.
This is Anders. It's Russian exposures mainly towards real estate. All the 17 are performing clients. So we, at this point in time, we don't see that we need to make any more impairments on these specifically.
The backdrop here is that the interest rates charged on those loans are pretty favorable for the client, so there is no keen interest to annul those lending commitments, so from their side, so we're just sitting them out.
Okay, thanks.
Thanks.
Our next question comes from Miss, Sofie Peterzens from JP Morgan. Please go ahead.
... Yeah, hi, here is Sofie Peterzens from JP Morgan. Just a couple of quick questions. In terms of the Baltics, your NPL ratio is now under 4%, around 3.8%, versus around 12% two years ago, and 20%, four years ago. I mean, how should we think about the Baltic recoveries? You mentioned that they will disappear or at least fall soon, but kind of what is the normalized loan loss provisioning level in the Baltics? And then I was wondering if you could give any color on what you expect from AQR. And lastly, will you give a new capital target with the Q2 results if we kind of get more clarity now in May on the Swedish regulatory rules?
Should we use 16.5% as the minimum Basel III for equity tier one level, or do you think it will be even higher than that? Thank you.
On the capital targets, I mean, as I said earlier, we hope to get a paper from the regulator before we start the summer, and then there will be a hearing out period. So all the different stakeholders will, during the summer, have time to give their views on that paper, and the paper will then be firmed up later this year. So I would not envisage any firm clarity at the Q2 result presentation due to this timetable of the regulator. I mean, we haven't changed the guidelines. We talked about the range last time we spoke, and that created some noise in the market, and that range that we gave for the regulatory outcome still prevails. We haven't heard anything new.
And then I hand over to you, Johan, for the AQR and the NPL number.
The NPL number, I think it's been very nicely coming down since the crisis back in 2009, and we don't see in this quarter any tendency for it good to go up. We have no inflow of impaired loans at all in the quarter. Having said that, of course, the risk picture with what's going on from a geopolitical point of view has increased. But we have very little hard facts, and we see very, very little concrete effects of it, so it's just a wait-and-see game, really, how things develop. The AQR question, I don't really understood what you were asking for. Maybe, Anders, you put that.
Yeah, I think you asked about the possible impact and, as far as capitalization comes in the Baltic countries, this will not be an issue whatsoever. It's extremely time-consuming, but it's not gonna have an impact on our Baltic operation, is our assessment at this point.
Okay, thank you very much. Just on the Baltic losses, what is the normalized level of losses, given that you have had recoveries now for the past few years?
Well, if you go back to banking statistics in the Nordic atmosphere or in the past 25 years, so it seems to be a banking crisis, and then you have 15 years of no loan losses, and then you have another banking crisis. So, I won't give myself into the subject of trying to guide you on normalized levels.
Okay, thank you very much.
Our next question comes from Mr. Jan Wolter from Credit Suisse. Please go ahead.
Yes, morning, Jan Wolter here, Credit Suisse. Two questions from my side. First, any thoughts on if you're actively looking for more deals like Skåne Bank, or was that deal more of an exception? And the second question is, you mentioned earlier on the call that the previous indication that treasury NII could come down by SEK 500 million-SEK 1 billion, that reduction could be less now. What is the reason for this, and what has changed in the market or in how you run the treasury? Thank you.
Michael here. I mean, we want to grow in the growth areas in our four home markets, and we'll continue to be opportunistic. When opportunities arise, we'll evaluate them.
And, I think if you look at banking, it's, it's more like GDP type of growth, business. And, after 20 years of, of quite upward trend, I think this industry have to get used to constant improvement, automation, digitalization, in order to defend the, the natural pressure that will be applied to the industry. So, and it's, it's, more a effort to make all staff realize how fun it is to, to constantly improve, something that the industry has been able to create as a culture. So I think you will see banking more emulating industries in the, the, the traditional industries in, in the outlook going forward.
The NII, I think we tried to answer, saying that the funding has surprised positively, sort of, in the quarter, and that credit spreads are coming down, and we've been able to attract to fund ourselves on good levels. I think also with regards to Skåne, you can add on, of course, we would like to participate in consolidating, but Öresund was a bank not part of the selling bank's agreement. And if you are not that, you have a significantly-
... a weak cost efficiency, so it's quite natural for you to give up at some point, and there are very few banks that are not on that agreement.
Okay, perfect. Many thanks for that.
Thanks.
Our next question comes from Mr. Christopher Rose. Chris from Barclays, please go ahead.
Yes, hi, it's Chris from Barclays. I have two questions on the primarily on the Swedish Banking business. You just mentioned, or early on the call, how you want to grow in your key markets, and you mentioned that you will continue to be optimistic. So I suppose that covers the acquisition bit, but we still see that your share of new mortgages is below your share of the total stock, although that market share is growing. So, and my understanding of the background to that, and if please, if you can validate that, is that you don't want to compete on price, but are focusing on relationships where you see potential for ancillary income.
So if you can validate that that's still the sort of approach to growth and to the market. But also, if you could perhaps provide some color as to why you're still below your sort of market share. Is that because your strategy is taking time to implement, it takes time to educate the branches, or is it simply that you have not come across a sufficient amount of relationships that you want to fight for? The second question I had on the Swedish Banking business is around the deposit margins. So I think you had a growth with regards to volumes, but also some pressure on the margins.
So is that a deliberate development, or are you in a position to actually cut prices to, if, if you would be willing to, to risk, losing some volume, but to, instead improve margins? If you just could, elaborate on your, your decision process around that, please. Thank you.
If you look at the mortgage business, I think that what we have seen in the last sort of 18 months is this gradual improvement of front book market share. So, and that is a reflection of us not utilizing price as a main driver to recuperate market position. Secondly, we have seen improvement in the growth areas, especially Stockholm, and that's the key to being able to deliver on 25% back book market share level. So, I'm cautiously optimistic that we continue to close that gap between front and back book market share.
And then on top of that, I mean, you never know what competitors are doing, but we're not seeing any outlier behaviors to the extreme we saw a few years ago, where we had a few players really taking active part of the front book market share at abnormal sort of historical levels. So, cautiously optimistic. On deposits, I mean, we, we don't, we don't engage in price wars there, but we don't either want to lose customers. So it's a more a matter of keeping our customer base and, and gauge pricing based on, on that parameter rather than anything else.
Thank you. Just to understand how you will close that gap, as you mentioned, Stockholm as one example, is that, as now when prices have sort of converged for mortgages in Sweden, that based on your brand and your network, that you will gradually, automatically recover as your natural option for mortgage holders? Or are there other levers that you can use to close that gap?
I mean, one of the levers that we are utilizing is that we're increasing staff, client-facing staff, so our ability to cover a greater customer base is being enhanced, and that is the most important issue here. But also, of course, our brand, and the better we do in the higher segments, like in LCI and private banking, the more our brand in Stockholm gets understood and known that we also are a viable player in the higher private, or the higher segments in the private segment, and higher private market.
Understood. Thank you so much.
Okay, thanks.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Good morning to you, everybody. I have just a couple of questions. First of all, on risk-weighted assets. They are up quarter-over-quarter, while a peer of yours that has reported a few days ago was actually reporting risk-weighted assets down. Now, maybe I am too naive to say that you do the same thing in the same place, but at the end of the day, you have, you do banking in the Baltics, you do banking in Sweden. They are more corporate than you, fair enough, but it's a bit surprising to me to see such divergent trends. So the only possible explanation that I can find is that you, on the corporate side, do not calculate all the parameters with internal models. If you had full IRB in this quarter, would you have experienced reducing the risk-weighted assets in this quarter?
Can you elaborate a little bit why your risk-weighted assets are up also on the credit side, if I remember correctly, one of your previous answer? The second question I have is losses in LC&I. How should we see this quarter, this particularly benign quarter? Is it gonna go on like that for quite a while, or do you think this is exceptional?
... That's been good for, like Anders said, a long number of quarters. We don't see any change in that of the asset quality during this quarter. So, but I agree, it's very, very low levels, and it's the same in all Swedish banks. On RWA, I haven't really looked what the number was in the full IRB, actually. So since we do parallel reporting to the SFSA at the moment, I could see. But, it's important for you to understand that the reason, the main reason for RWA going up in this quarter was that we once a year, we change our standardized model for operational risk according to the income levels of the bank and then adjust the RWA.
I think some of our peers, or one of our peers, are on a different modeling there with AMA, which requires less operational risk RWA. So it's not really a relevant comparison. We have increased slightly on credit risk relating to our volume increases, so it's a quite natural quarter in terms of RWA, and we're still awaiting our big model approval.
Basically, what Göran says is that operational risk has not increased. Income has increased, and as a consequence of that, the capital requirement.
Okay. Okay, thanks.
Our next question comes from Mr. John Beckman from Danske Bank. Please go ahead.
Yes, good morning. It's John Beckman from Danske Bank. Two questions, please. The first one is how much do you charge for capital internally now? You take 15% mortgage risk weight or another number, please? And second one relates to the Öresund acquisition. If you get the full approval from the FSA, do you expect Q2 to include one month of consolidated Öresund? And has your view changed on synergies, or is there any update on the cost or IT synergies? Thanks.
The consolidation will be either one or two months, depending on when we can close the transaction. We're just waiting for the final approval from the SFSA. We got all other approvals, so we are very close to closing. That was... What was the first question?
The first question was regarding how much you charge for capital internally now.
Ah! That I don't think we have disclosed externally, but I think since we have a rather wide guidance for where capital is going, we know it's gonna be more capital required, but we haven't really started changing out the capital allocation. We are waiting for something to come in the Q2 . But I think we've been early on having a lot of capital out in the business side previously, so we've been working with a higher capital target for quite some time compared to some of our peers, I think.
Okay, thanks. Then just to follow up on the synergies expected in the Öresund deal.
Nothing has changed in the Öresund transaction from what we communicated around that transaction. We are, as I said, very close to closing, and as we have closed, we will be trying to give some more information ahead of the Q2 reporting in order for you to update your models.
Okay, thank you.
Our next question comes from Mr. Magnus Andersson from ABG. Please go ahead.
My questions have been answered. Thank you.
I remind you that if you'd like to ask a question, please press zero one on your telephone keypad. Our next question comes from Mr. Carlo DeGrande from HSBC. Please go ahead.
Yes, hi. Just one question on the trend of the group NIM. You just suggested that margins for the mortgages are flat or flattish, whereby deposits will continue to improve. So I was wondering if you can give us some guidance about the trend for the group throughout the year, this year, given the pressure that we have seen in Q1. Thank you very much.
I normally speak about tailwind and headwind, sort of. I think small headwind is deposit margin continue to be, and there you have the risk of further cuts in STIBOR. I think also we've talked about as interest rates become lower and the curve become flatter, it's more difficult to make money in treasury and treasury-related activities. That's a headwind as well. On the tailwind side of the story, I think we have positive signs for funding-related tailwind, and we, of course, expect to see some tailwind on mortgage lending as new capital are being priced in.
Can we say that the combination of the two will lead to tailwind then?
I will leave that to you, because some of that is predicting macro and so forth, and some of it is regulation. I leave that assessment to you.
Thank you.
Our next question comes from Mr. Matthew Clark, from Nomura. Please go ahead.
Good morning. A few follow-ups, please. Firstly, on the operational risk, where you're working under the standardized approach, I just wanted to check, are you looking to move to the advanced approach? Is that part of your, your pending model approval? That's my first question. Second question is on the interest rate outlook. Are you expecting an interest rate cut to come through... this summer, and then associated with that, are you expecting any offsetting specific measures to help try and cool the housing market while stimulating other parts of the economy? And how do you think that might affect you? And then finally, just coming back to this issue of the the treasury net interest income and the SEK 0.5 billion-SEK 1 billion headwind that you previously mentioned.
I mean, it's very hard for me to reconcile the better net interest income result in treasury as coming purely from funding. I mean, I can only really get to tens of millions SEK of benefit from lower funding, looking at the volumes you've issued. Is there anything more you can say to just help us understand why that's coming better and why that may or may not be sustainable? I guess is it just that you've had a lucky or a good quarter this quarter or is there anything more specific that's led to that strong and resilient result? Thank you.
Hi. Yes, we are working on AMA. We don't have a timetable for that, but that's one of our projects. When it comes to the second question, that was, again, sorry?
Interest rates.
Interest rates. Well, I mean, there are six people in that board that decides on that, and they will tell us in a few weeks time. The professional community seem to be inching on a lowering of the reference rate. But, I mean, that's something for us to just relate to once it's decided, nothing much we can influence on.
On the treasury NII, I can only reiterate what I said really, that, when I look at my front book, margins on funding compared to my back book, I continue to see that we fund ourselves on an increasingly better levels. And that will come to the benefit of the clients primarily, but also to the benefit, to some degree, to the shareholders.
I, I would like to add that, I mean, we have worked extremely hard the last five years to up number of investor meetings on debt side, but also through transparency, through rating agency meetings, to show the transformation of the balance sheet. In my book, we are rewarded for the low risk of our balance sheet and nothing else.
But just to come back to the orders of magnitude, SEK 500 million-SEK 1 billion is a pretty big number. And it's hard for me to see more than tens of SEK millions of benefit from incrementally lower funding costs. Would you dispute that comparison?
I think it's very difficult for you outside to reconcile the PNL in treasury, because there are so many moving parts, and there is traffic between NII and NGL, and valuation effects as well. So I don't think you can draw any big conclusions really from sitting outside. So unfortunately, you have to trust me.
Okay, and then just to follow up on the operational risk, is that advanced operational risk project part of the SEK 40 billion-SEK 50 billion previous guidance, or is that in addition to it?
That's. It's not included in that number.
Right. Thank you.
Our next question comes from Mr. Jacob Kruse from Autonomous. Please go ahead.
Hi, thanks. Just a quick one on the treasury. You said you had some covered bond buybacks in the quarter impact on the result. Could you just give some numbers on what that did and what the impact on NII will be going forward? Thank you.
So sorry, I didn't get the SEK 16 billion.
No, no, no. In the treasury division, I think in the interim report, you say you repurchased some covered bonds in the quarter.
Yeah. Yeah, yeah.
Could you just say roughly how much of an effect that would have on your treasury trading income, and also what it would do to NII going forward?
No, I don't—we haven't published that. It's a part of a normal activity. We have big benchmark bonds in Sweden. We work with one, three, five years maturities, and they, as they come in towards one year and above, we start to buy them back. So at the maturity date, we don't have to sort of have a big liquidity drop of SEK 100 billion. So it's a normal procedure that you fund yourself with more than sort of your maturities are, and that's why you have that traffic, and it goes for all Swedish banks.
Okay, thank you.
Our next question comes from Mr. Chintan Joshi from Nomura. Please go ahead.
Hi, good morning. I just wanted to follow up on Maths' question. If I think about monetary policy risk in Sweden, clearly appears to be more dovish, more downside risk to rates. But at the same time, housing market needs to be cooled down. How do you see this debate playing out? Clearly, capital requirements on mortgages are likely to go up, but it also has a bearing on what your thoughts are. What your thoughts would be about margins to offset any dovish monetary policy.
I think that by the end of the day, all Swedish banks will strive towards repricing an increased capital charge due to higher capital charges on the mortgages. That is the ambition, and I think we have already shown to everyone that we are ready to do that. We take positive signs from having some of our peers also now talking about that. It's also the intention of the regulators to make, in a relative perspective, the house loan more expensive.
That's clear. Thank you.
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I thank everyone for participating, look forward to hearing from you next quarter. Bye.