Ladies and gentlemen, welcome to the Swedbank Interim Report, January to September 2013. 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 attending this telephone conference. If we look at the quarter from a result point of view, one needs to conclude that it's a strong, stable quarter where all business areas are delivering. If we start with retail, there, our focus to keep clients in the upper segment is getting traction. In September, we actually had a net surplus of gained customers. We're making good progress to regain our market position within mortgage lending, as well as to become more relevant in the region of Stockholm, where our corporate volumes are increasing. The effort to move clients to channel and concepts are progressing according to plan and should provide more and better coverage of the entire customer base. LC&I is step by step building the relationships within our selective client strategy, which is evident in the P&L.
The markets area had a slightly slower quarter. Our Norwegian market position continues to improve. In the Baltics, our repricing efforts gains traction, which is a signal of strength as it shows that the client base is more robust, able to cope with higher lending pricing. Our credit quality remains very robust and our cost focus is still strong, and it is a critical success factors in today's competitive environment. The banking sector, including Sweden, struggles, however, with declining customer satisfaction levels, despite that the Nordic banking product is probably one of the best worldwide. Of course, demanding clients is also an advantage, and we need, in order to address this challenge, become even more transparent. We need to simplify our offering and continue to invest in our digital solutions to meet a changed behavior among our customer base.
We have last year struggled with our service levels, but we are seeing improvements in many, many areas. Our IT stability has improved, and we have reduced number of incidents with over 60% this year. This is, of course, essential, essential in today's banking environment, where accessibility is a key prerequisite to deliver good service levels. The transformation of the ATMs into a commonly owned company created lower accessibility, but have now returned to agreed service levels. Our telephone bank has been able to reduce the waiting time to communicated service levels. Our cash margin strategy is broadly accepted. If we look at number of ATM transactions, they have declined with over 8% year-over-year, and at the same time, we have seen an 11% increase in the use of credit cards.
Buying chewing gums in 7-Eleven with your card is today a common behavior among our Swedish population. Our mobile bank has more logins than our internet bank and provides more and more services. The latest additions is that you can now monitor your credit card transactions, and you can also see your e-invoice in the mobile bank. Our mobile bank customer base grows with some 30,000-40,000 clients per month. The key issue here for us is to continue the transformation of the Swedish retail unit and the establishment of channel and concepts. This effort has been present in the Baltic banking operation for quite some time, and we see quite some success in the multi-channel strategy, where we get scale advantages and better customer satisfaction and better penetration, which is quite evident in their P&L numbers this quarter.
With that, I thought I would hand over to Göran, who will give you more details on the P&L and the balance sheet.
Thank you, Michael. Firstly, I would like to say that the quarterly result is very strong. I think it's very good to see that the financial return that we have in each business area is very good, and it's also improving. So I think we are very pleased with this result from a financial aspect. Starting with our six regions, the retail, as usual, we continue to have a very stable result. We have, as Michael said, started to gain a better market position on the mortgage market, so you can see some loan growth, particularly in the Stockholm area, but also in the Stockholm area, corporate portfolio, we feel that there is a potential for loan growth. The margins has been better than expected.
We have been expecting more erosion on NII than we actually have in the quarter, and the reason for that is that we continue to get benefits from better funding environment that we can filter through to the business area. So the... You could say the back book margins are fairly stable in this quarter, which is, of course, a positive development. And we have also seen a slight improvement in deposit margins during the quarter. All in all, that makes NII actually on a quarter-on-quarter basis improve. Credit quality, Anders will come back to, but it continues to be very stable. Turning to our large corporate division and trading environment, I think it's very much the same story as we have conveyed earlier on.
The loan book and the client-driven part of the trading activities continues to perform well. The volatility in trading makes the result fluctuate. This quarter is slightly weaker than a normal quarter due to uncertainties and mostly related to FX fixed income. Cost-wise, good control, good progress in the changed business, work with the changed business environment, and we continue to feel very good regarding the asset quality. Return-wise, I think we are very happy considering where we are in the cycle for this business area. The last business area being Baltic Banking also continues to improve their result, which I think is good to see.
Part of that is, it's a slight foreign exchange effect in there, but we are seeing progress in the repricing and margin expansion that we have on the weaker part of the portfolio, and it's been a good progress in the work there from our three Baltic countries. We do also see that the client activity in commission-driven income sort of is very good, and we do feel that this business area is in a very good position to gain from a better macroeconomic environment. In this quarter, we have seen a little bit higher recoveries on the impairment side that fluctuates from quarter to quarter. It doesn't change the picture dramatically, but of course it improves the return on equity number.
The important thing here, I think, is to remember that, if we strip out goodwill, we have a return on tangible equity, even with normalized credit losses in this business area, around 20%, which we feel is very good, considering where we are in the cycle in this business area as well. So well-positioned, going forward, I think. Summarizing this on a group level, we are witnessing improved NII, contributing factors being all business areas, but also treasury. In treasury, we are also witnessing the trend with lower funding costs, but also the risk result in Jonas' area has been a little bit above expectations, which is good to see. Commission income very much in line with expectations.
Net gains and losses, slightly weaker, but much of it relating to weaker trading activities in LCNI and slightly weaker, NGL in the treasury area. Costs continues to be on track for a flat cost, the guidance of flat cost in 2013, which is good, and the credit quality overall, as I mentioned earlier, is very good. The financial key ratios are very solid. We are in the quarter reporting return on equity of a little bit over 16% return, and with a cost income ratio of 0.43, and that is on a quarter one ratio of 18%. So we are of course extremely happy with the financials.
Lastly, if I leave you just with an explanation, most of the explanation why we end up on 18% in quarter one, is that we continue to reduce our risk-weighted assets. And in this waterfall, you can follow sort of the different components of that. It's a slight mix shift. While we have increased the volumes on the mortgage side, we have actually had a couple of repayments of some loans, and we have some FX effects also making the mix shift less capital consuming. We do also see positive rating migration, both in the Baltic operation, but also in the Swedish operation, which is very encouraging. And lastly, I would just point to the fact that we have lowered risk-weighted assets also relating to our market risks in the LCNI department.
So this being the main explanation together with a good result and a small effect on IAS 19, leading up to very strong capitalization. With that, I think I hand over to Anders.
Thank you, Göran. If we start off with credit impairments, as you can see, the third quarter is a continuation from previous quarters with low credit impairments. If you look at Baltic Banking, you can see that we have net recoveries at a slower pace than last year, which is in line with our expectations. The inflow of impaired loans and credit impairments from the portfolio not stemming from the crisis continue to be on a very low level, which essentially mean that we expect continued low impaired loans and credit impairments in the portfolio, but also smaller recoveries going forward. When it comes to Sweden, you can see that it, the portfolios continue to show good resilience. Being on such a low level implicates a certain degree of volatility between the quarters.
If we look at impaired loans, especially in the Baltics, it has continued to decrease through the quarter with SEK 900 million, and the year to date, it's SEK 2.5 billion down. We expect this to continue next year, and our ambition is to
... work down the legacy portfolio, more or less, fully next year. In Sweden, the development is quite stable, with one exception of LCNI in the second quarter, which is related to, basically one single exposure.
If I just can add on the Ektornet there, I forgot to say that in the quarter also, we have a little bit extra income on Ektornet, and also we see that we have some intangible impairments relating to Ektornet as well. I think that is a reflection of actually a good progress of selling out our repossessed assets. So Ektornet is moving ahead very nicely and according or ahead of plan, and we are today at SEK 2.7 billion in assets in Ektornet, and we hope to dismantle Ektornet as soon as possible, basically.
Okay, I guess with that, we leave the floor for questions.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question comes from Mr. Chintan Joshi from Nomura. Please go ahead.
Hi, good morning. Three questions, please. First one is on model approvals. Can you give us an update where you are, and what kind of time frame should we expect these approvals in?
I think, I think we have earlier said that we hope to get the approval around year-end. That is still sort of the hope. We, it's, we haven't seen anything that changes that picture other than that we come closer to year-end. So of course, from that perspective, we are more anxious to see that we don't have a hiccup. But so far, the discussion with our regulator is good, but we also need to make sure that it materializes in the end.
Thanks. The second question is on the treasury NII. It's almost SEK 500 million this quarter. How much of this is sustainable going into the following quarters? Are there any elements within treasury which you would expect to fall away going into 2014?
I think we have earlier spoken about that, we have benefited NII-wise in treasury with relation to the falling interest rates earlier in the year, and that will gradually tail off. I do think that that's still valid, so we do see if everything is pari passu in the market on where all rates are and so forth, it would be natural to see a lower NII in next year. But it's of course, as you know, impossible to predict, sort of risk-related income. It can continue to be opportunities, and it can be a very slow year in 2014. We don't really know.
How much would you say was risk-related NII this quarter?
In essence, what should be left in treasury by the end of the day as a result is what we basically see as the risk result. Everything else is something that we allocate out to the business areas in order to get the right capital and liquidity cost in the system for doing transactions as far out in the system as possible. I think year to date, we are around SEK 700 million in around that level in overall result in treasury. I'm not going to give you a precise guidance of where we are, but I do expect Jonas and his team over a year to make money on the risk limits that they do have.
Fair enough. And final question is on your hedge guidance that you had given. We were told that it will fall off at about SEK 100 million per quarter. But within kind of the period that you've guided, we've seen two-year swap rates go from 1.8% to 1.2%, and currently 1.5%. So we probably passed the worst of the rate cycle, so shouldn't the hedge guidance of negative SEK 100 million per quarter reduce because of the improved rates?
I think when you look at the risk result, I mean, it's a variety of different risks. It's credit spreads, basis swaps, et cetera. So it's you can't just look at sort of one point in the market and try to get guidance from that. But also, you know, our positions obviously change all the time, and vast majority of the risk that we have when it comes to interest rate and basis swap risk is not mark to market. So you have a quite long tail on that.
Understood. Thank you.
Our next question comes from Mr. Peter Wallin from Handelsbanken. Please go ahead.
Yes, good morning. I would like to have some, if possible, further clarity on the Swedish mortgage market, and especially the margins. You seem to be reiterating that your front book margins are 10-15 basis points below your stock margins, but also, at the same time, saying that you're seeing that the margin outlook is somewhat more positive, or at least not as negative as it was in Q2. Was that mainly referring to your own improved funding situation, or is it also that you're seeing competitors becoming less aggressive?
I think that's relating to both of these facts. I, I think, the funding is definitely one part of it, but I also think, feel that the margin pressure that was, was more intense in the beginning of the quarter than it, it was on in the end of the quarter, and much of that is, of course, relating to the discussion around regulation, countercyclical buffers and so forth.
Okay, thank you. And then, a situation, more a hypothetical one, in terms of your excess capital and, and you're reiterating your stance that, that you need regulatory clarity before any sort of, like, significant distribution could take place.
Considering the, I mean, with the speed you're building capital right now, could it be a hypothetical scenario that you actually in connection with Q4 see that you have so much headroom that maybe you'll sort of like split up this excess capital distribution, saying that maybe probably we can, we can shift out, whichever kind of amount, into kind of extra dividend, and then, and then awaiting regulatory clarity for, for the remainder?
I think the way we look at it is that we have the IRB Advanced process with the regulator pending, and we want to complete that. And then once we know whether they come through at year-end or not, that is a big input in the whole debate of this issue. And we will come back as soon as we feel that there is more clarity.
Okay, great. Thank you.
Our next question comes from Mr. Alvaro Serrano from Morgan Stanley. Please go ahead.
Hi. Thank you for taking my question. I just wanted to ask for a bit more color on a couple of issues that's already been asked. On the mortgage margin pressure, could you give a bit more sort of explain a bit more what you're seeing in terms of volumes during the quarter and maybe in early Q4? You've mentioned that you think that competition might have eased because of the concerns around risk weights. But have you seen that 10-15 basis points margin pressure increase during the quarter or decrease? And what could we expect for the rest of the year and your best guess of next year?
On the capital front, the IRB approval, I think in the past you've said it could add around 200 basis points, which could place you next, basically close to 20%, fully loaded Basel III. What do you think? There's obviously been a lot of rhetoric around pushing risk weights up in the floors in mortgages up. What do you think will be the outcome? Do you think the countercyclical buffer would be the preferred option? Do you think floors could be increased to 25-35 as well? What's your perception of what might happen into next year? Thank you.
If I start then with the last question, I think we are quite clear in my CEO statement today that if you look at the financial stability report from the central bank in Sweden, Riksbanken, it's quite obvious that Swedish banks are well capitalized to to mitigate any stress scenario. So there is not really a necessity to build more buffers from that point of view. What is happening here is that we are lacking housing starts in all major cities in Sweden, and that is creating a pressure on house prices and, of course, the indebtedness level of existing owners of housing.
So, I mean, what I see is that rather than dealing with the structure problem of the banking system, which is not possible, you should start more housing starts in Sweden, and that is the key issue going forward. If that is not happening, then, of course, amortization and capital will play an important role to mitigate the risk for existing mortgage holders. So that's how we look at it. Göran, should you go at the other two?
Yeah. If we start with the margins and your... The flavor you were after there, I think, the front book margins currently are more sort of 10 basis points lower than the back book margins. It's, of course, very difficult to see what happens over time, but I would say, if you disregard any regulatory changes coming and affecting the price picture, I don't think the margins are on its way up because banks in general are restoring and becoming very profitable. So, but I don't feel there is, there's a risk either for a sort of intensified price pressure at this point in time. So I, I'm quite content with the level where we are for the foreseeable future. With regards to your question on IRB Advanced, you talked about 200 basis points.
I think we have mostly talked about SEK 40 billion-SEK 50 billion of reduced risk-weighted assets, and that is still a valid guidance for you with regards to IRB advanced. And then we just have to wait and see where the regulatory landscapes takes us with regards to minimum risk weightings and leverage ratio and so forth. Personally, I don't think that that will be a hard regulation, but it has a lot of sort of backstop information that is important that we need to address as a banking community. But from a Swedbank point of view, I think we are in a good position there as well, even though we have a large part of our business model in lower risk weighting, so to say.
Thank you very much.
Our next question comes from Mr. Paweł Wyszyński from Nordea. Please go ahead.
Yes. Hello, Paweł here from Nordea. A quick question on, first, in the NSFR. You can see that the NSFR decreases from 95% to 91% Q-on-Q. Could you give us some flavor why this is happening right now, and also what the effect of NII was in the quarter? And secondly, could you possibly give us the LCR in Swedish crowns, what that is? And lastly, you're stating that the margins in the corporate portfolio in the Baltic countries increasing. Could you say what it is and by how much it is increasing?
Let me start with the NSFR and LCR questions. I think when you look at the NSFR, it will be some volatility in that number, given that you measure the 12 months cash flows, then as soon as we get large maturity coming into that 12-month window, you will see a dip in the NSFR. I think, if you look in the, in the past sort of 12 months, you've seen a fluctuation between the 91%-94% that where, where we've been. And I wouldn't see sort of a change to that. So then I would more regard this as a volatility, and you have no impact on the NII from that. On the LCR, I will actually need to get back to you.
It's fair. It's clearly below 100%, but I don't have the number from the top of my head. It's not a number that is regulated, as you know, so we don't track that quite as closely. But I can get back to you on that one.
Yeah, that would be great.
On the corporate margins, I didn't really catch your question there. Was that relating to what was behind the increase in margins in the Baltics, in the corporate sector?
Yeah. I mean, what's behind, and also, I mean, how much can we expect it to come up further? So I guess, the reason is where we are currently today, how much it's increased the Q on Q, as you are writing about it in the report.
I don't really have a very precise guidance to give there, other than saying that, we have worked with, during this year, the weaker part of the portfolio, which are in sort of lower risk classes. We do think we have reached sort of the necessary railroad hurdles. And the clients, so we are sort of going a second round of repricing towards that for client segment, and it has been so far, rather good activity, and we intend to continue that work, for the remainder of this year at least. And then we just have to wait and see what, our peers are doing and so forth in that aspect.
Okay, thank you.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning, everyone. Three questions, please, from my side. The first one, if I could just follow up on Chintan's question on treasury NII. I appreciate you don't want to give us an exact number of what the risk result is and the various components, parts of it. But clearly, it's been a huge swing and a key area of uncertainty. So just any more color that we can get there, the better, please. If we look through your statement of interest income and interest expense, it seems like you've had a big fall downwards in the quarter in the cost of average funding. I think you've given us some flavor in the past about your average back book of liabilities being at about swaps plus 85.
If you could start with just giving us a sense of whether that number holds true, and then how much expensive funding's rolled off in the quarter. Then finally, any color, please, on how often you update your internal fund transfer pricing model, just so we can get a sense of what's sitting in treasury that might be allocated out into various divisions over time. Just a bit more flavor there, please. The second question will be on RWA, and we keep coming back to this RWA target of 40-50 billion or so. I think that target's existed for the last year or so, in which time risk-weighted assets have already declined 30-35 billion already.
So, could we please just revisit that number and just give us a sense of how much of that is linked to A-IRB, and therefore, how much scope there is to do more than that on just migration and mix effects like you've seen in this quarter? And the third question, please, on costs. You're running down about 2% year-over-year in the first nine months of the year. Just interested to see why you stick to flat costs for the full year, whether there's anything to come at Q4 we should be aware of, and any early observations about the improving efficiency from channel and concepts, just to give us a flavor of what costs might look like into 2014 and 2015. Thanks.
Okay, Nick, I think I hand over to Göran. He is looking at all your questions. You might,
Let me start backwards here. We talk about flat cost for the year. Seasonality, the fourth quarter is normally quite a bit higher than the seasonally low third quarter. So, that's why we stick to flat cost. It's very difficult to say SEK 1 million, SEK 100 million krona here or there, really, because it's many aspects by the end of the year. I think you should notice, though, that costs in the third quarter of 2013 is higher than cost in the third quarter of 2012. So, we benefited from our comparisons in the early part of the year, and we have reached sort of the bottom of the cost cycle. Then, with regards... And therefore, we stick with the flat cost target.
With regards to 2014 and 2015, we will not say anything now. We will come back to you on that, at sort of once we've been through our planning process a little bit more, and hope to have more communication around that on the next occasion. RWA, it's correct. We've talked about SEK 40 billion-SEK 50 billion for a long time. I think we continue to do that because we think that IRB Advanced will give us SEK 40 billion-SEK 50 billion. That doesn't mean that we work with a more, an organization that has become much more capital-focused over time. It's, of course, continue to deliver on that aspect. There are certain factors that you can't influence, like FX and rating migrations and so forth. So it's a mixture of external events and also your internal focus.
And if you go back for the past year and a half, we have also done smaller model changes that we have talked about that has released capital for us. And I think we have, in many, many occasions, talked about where the bank not really fully integrated the capital adequacy models in their steering back in 2005 and 2006 when it was implemented, while the new management has fully worked with implementing them in all steering and allocating out capital and focusing the steering and the performance review on the return on capital. So, and that continues to give effect, sort of, which is very good.
So I think overall, that's, it's a bank that was perceived five years ago to be extremely risky, and it's proven to be less risky, much more well-collateralized, and asset quality in Sweden being very good. Treasury NII is the most difficult here. I don't think it's so many components affecting treasury on NII, so it's very difficult for us to guide on it because it always swings on different components. The ambition is to everything that's funding related should be going out to the business areas, and the remaining part should be risk income that we don't want to give to the business, because then we are subsidizing the business with risk money in treasury. It's very important that we don't price credits on that.
And then it could be traffic between NII and NGL in treasury, of course, due to valuations effects. Jonas, could you give some more flavor on that, on regards to earlier communications, that gives a little bit more in-depth?
I think if you go back to what we've been sort of saying early on in the year, we've had more volatility than we could foresee, which is, I think, natural when it comes to risk, risk income. But also, if you look at the NII and NGL, you have actually had a declining trend throughout the year that we have been talking about. I think if you look at the NII and NGL together, and listen to Goran's comments about, sort of expecting that to be a net positive over time, because we also, we do have our risk mandate, I think that's the best guidance we can give. But then, then you might also have some sort of quarter by quarter fluctuations, depending on when we change the allocation of funding costs towards the business.
In our internal pricing model, it's impossible to get 100%, netted out zero funding result in treasury each quarter. Over time, it should be zero. Over a year, it should be zero.
We happy with that, Nick?
We might try a bit more at lunch tomorrow, but-
Good.
Thank you. Thank you.
Thanks.
Our next question comes from Ms. Claire Kane from Royal Bank of Canada. Please go ahead.
Hi there. Just to follow up again on the capital regulatory outlook, and just really to look for some points on time, and I know you mentioned the leverage ratio there. Are you now expecting that maybe Sweden will move ahead of the 3% from Basel and set the minimum higher, given most of the banks are already there? And also, could you see a counter cyclical capital buffer coming in any time before the actual 12% minimum is due to come in at the beginning of 2015? Do you think that's a reasonable timeline to look at? And then also, I noticed in your presentation appendix today, you've put a few asset quality or a bit more on certain credit portfolios.
I was wondering, is this ahead of what you're expecting in the asset quality review? What's your kind of thoughts on how Sweden will be involved in the whole balance sheet assessment? Thanks.
I mean, as you have experienced, regulators have been early in communicating intention, but late implementing the actual regulation, and it's impossible to guide on timing. So far, they have missed all their deadlines and been delayed. There has been some clear language from the Minister of Financial Markets and the Supervisory Authority around the countercyclical buffers, but we still need to get that in written language. So I can't guide you, unfortunately. We do feel that we broadly understand the direction and the material, but the details are in the devil is in the details, and we need to just sit and wait on those firm languages and firm documents before we have an answer on that, to be honest.
When it comes to leverage ratio, I think it's a more important sort of measure. It's a backstop type of measure. There is no indication that Sweden would be harsher than anyone else. And mind you, the Swedish model has some merits, and I do believe that the regulator and the political environment see the validity of that model. But we'll see when things are progressing on that matter. But leverage ratio is one of the latter sort of regulations, and I think it would work as a backstop, not be a totally firm measure.
Okay. I can just feel or add on that, that there is a very broad consensus between the banks and the Swedish regulator, that the risk-based system has worked well for Sweden. So for them, I think the more important issue is how the international investor community look upon leverage as a backstop regulation, and how that fits with how other countries
... regulate that question. So I, I'm, I do not think that we are in a situation where Sweden will move on this regulation in any early way, like they've done on capital. They are not there mentally, which I think is an important distinction. With regards to your question around the disclosure, it has nothing to do with the EBA stress test. I know very little about the EBA stress test.
Essentially, what we know about the asset quality review is that the first stage, which is now, is to harmonize definitions, basically. The second round is to get an extract of the loan portfolio by the local authorities. This is under the supervision of EBA and the ECB, by the way. The third step, if I'm correctly informed, is to follow the asset quality review with the balance sheet review. And the fourth step is the stress test, which we expect to be around Q2 next year, and then possibly presented Q3, Q4 next year. So that's. We are in a definition phase right now, as far as I know.
Okay, thank you very much. Could I just get one follow-up on the countercyclical buffer? I guess, I guess we've all seen the finance minister's comments, and we know the direction it's coming. But would you expect it to be set somewhere in the middle at the start, or do you think they'll just go all for the higher end, 2.5%?
I wouldn't like to speculate on that. We'll have to await the outcome. But overall, what we tried to allude to earlier is that Swedish banks are well capitalized also for a stress situation in Sweden affecting the Swedish house price levels. So it's rather for politicians to take actions on housing starts than trying to make it more difficult for newcomers into the market to lend money. This is just gonna continue to press prices up on lending in the market, which needs housing starts. So I think they are addressing the wrong issue here.
Okay, great. Thank you very much.
Our next question comes from Mr. Geoff Daw es from SG. Please go ahead.
Hi, good morning, everyone. It's Geoff Dawes from Soc Gen here. Just one question left from me. It's one on the mortgage book and some of the distributions between the variable and the fixed product, because I don't quite get enough detail on the flow between those products in the fact book. Essentially, I wanted to know two or three things. First of all, in terms of current business that you're writing, how much is variable and how much is fixed, and whether that's any different to the back book? Second of all, whether you're being more aggressive on one of those two products than the other, so trying to build market share more aggressively in the fixed or the variable.
Third of all, if there's any difference in the margin, that you get, obviously, as the yield curve begins to steepen, I would expect those two to move around a little bit and prices to move around a little bit. So just wanted to get that clarity on the variable versus fixed. Thank you very much.
I think, I think when it comes to the Swedish market overall, you have to remember that the fixed market is very short term. I mean, typically the majority of the volume that is written in the fixed market is 2-3 years. Pricing-wise, there's no real difference. I think most banks price it the same way, just looking at a sort of funding cost add-on and margin to the swap curve. So we can't really see any difference there. When it comes to volumes, on the back book, it's around 55%, 55-60%, that is floating. But I don't actually have the front book numbers on the top of my head, but we can get back to you on that. But it's around 50/50.
Our next question comes from Mr. Andreas Håkansson from Exane. Please go ahead.
Yes. Hi, Andreas here. Just a follow-up question on your, on the capitalization. I mean, if we look at the 12% minimum, and let's say we add 2.5% countercyclical buffer, and then 2% for your mortgage risk weight score, just to be aggressive, so you're up to 16.5. But you're at 18 today, and if we add 200 basis points from your IRB models, you're at 20. How do you view the difference between that 16.5 and 20, and, and how do you think you're going to address that in the future? Thanks.
How do I view the difference? Well, a delightful problem. I think we, as Michael said, one thing is to understand the IRB advanced in its details. The other thing is to, once you have that, you can start to think about sort of swapping capital or repatriating capital. It's two different issues. For starting swapping capital, you also need to have a point of no liability and to have a sensible idea of what the right price would be for additional Tier One capital. And I don't think we should. We don't, we are not in any hurry here to sort of try to set a precedent of the first out in the market doing something. The important thing is that we, in the end, get the right price for our funding or our capital in there.
Therefore, it's good that the credit story is gaining momentum. And also, of course, if we high or low trigger makes a lot of difference, and it's very important for us that to distinguish us from other European banks in this capital aspect, since we have so much equity. So, and I also feel that we do if you can return 16.2% on your 18% core capital, we don't get any pushback from shareholders that they need to have the capital tomorrow morning, really. Because they have problems generating 16% return on equity on other investments.
So as long as we are very clear that we are not going to spend the money on any new business line or in any new geographies or so, I think this, the whole issue works. Time is with us, and we will be able to calibrate our liability structure in a more efficient way as we get more clarity. But, time is not against us, time is with us.
Okay, thanks.
Our next question comes from Mr. Tobias Kaj from Carnegie. Please go ahead.
Yes, thank you. I have a couple of questions regarding the Baltics. First of all, for how long period should we expect the repricing in the corporate segment to continue? And secondly, if it's some specific reason for the kind of large reversals in the third quarter. And thirdly, what or where do you think that normalized loan losses are in the Baltics?
Starting with the last one, I don't think we will guide on normalized loan losses. I think the experience I have from banking is that you have a hell of a lot of loan losses, and then you have nothing for 20 years. And from that perspective, try to take a mean and average out of that and say that's the normalized. I think it's basically almost an impossible exercise, so your guess is as good as mine. I do think the similarities between the Swedish crisis and the Baltics could be quite—they could be quite similar in that aspect. Sort of that you have a good period with low credit losses because you've been through such a very, very harsh stress of the whole asset, asset side, of things.
With regards to the NII of the corporate book, as I said, we are currently working with repricing. We will continue to do that. The effects of that will, of course, come in gradually, even during 2014. So it's not nothing that stops with our stopped activity.
And also the reason for the big reversals in the third quarter.
Reversal. That was a few client... Nothing on, on, nothing strange about that. That was sort of, what do you call, acquisition-related financing, and then suddenly they are sort of changed. So, nothing strange.
If I also may, I would like to ask a question regarding Ektornet, where your asset base came down or continued to come down in the quarter, but costs were more or less unchanged compared to the second quarter. Is it some specific reason for that? It has been a quite good correlation in the past.
You mean, are costs following asset, and they're not doing that? It's always a timeline before you can take out the costs of your divested assets. Then with regards to the question of the volumes, which I just answered, Magnus Gagner-Geeber just looked at me. Can you give me more color on the acquisitions thing there? Because that's wrong. It's what was the repayment things that we saw in the loan book?
The repayment we saw was on two specific corporate clients, and that was half of the volume, and the other half was FX-related. So that was the reduction.
Okay.
Okay, thank you.
Our next question comes from Miss Sofie Peterzens from JP Morgan. Please go ahead.
Yeah, hi, here is Sofie Peterzens from JP Morgan. Thanks for taking my question. Just going back to your treasury NII, I realize that you can't give too much detail, but did I understand correctly that this year, year to date, you have made a SEK 700 million result in treasury? And I think in the presentation somewhere you say, or in your report, you say that it should be zero over time. Is that correct? And secondly, could you just detail also what exactly is in the risk result? You just mentioned some spreads, basis swap, but could you give, like, exact details of all the different factors that should be taken into account?
And thirdly, when I look at your interest, the interest income, it was actually down, minus 2% quarter-on-quarter, minus, 13% year-on-year. And all the NII held was actually coming from your funding costs. But how should I view, like, the total net interest income growth over the next year? Should we expect it to be largely flat, or will the downward pressure continue? Thank you.
On the total NII, I think we talked about earlier, we talked about two headwinds, one being margins and mortgages, and the other one being the treasury result. We continue to see that as headwinds, but you could say from a slightly higher level as this quarter, as the funding improved funding position has surprised us positively. So that guidance remains basically. I don't think we have more flavor to give really for the components of the risk results. It is different things in there, but it's normal activity in the treasury department. Sorry, but I missed your third question.
But just going back to the risk results, so you also have the basis swap in the risk result, because one of your competitors has very large swings from the basis swap. So is this a factor that is kind of, you have just been lucky in a way that you have had a positive basis swap development in the past three quarters? Or is it something that will reverse to zero every time? Or is there anything you can give, kind of a little bit more flavor around how we should view it?
Yeah. You could say when we have a closed risk in the basis, but we have valuation effects, that will, it's not an open risk problem. It will flow out to the, in the sort of to the businesses. And that one is small. If we manage the basis swap, and we try to time the market, it will be part of the risk-taking activity. And you understand the borderline for things is very difficult to draw in this, in the reporting.
From basis swap, it's actually a risk result. It's not valuation effect.
Okay.
Are you fine with that?
Yeah, are you... I guess so. Okay. Yeah, sure. Thanks.
Our next question comes from Mr. Jan Wolter from Credit Suisse. Please go ahead.
Yes, good morning, Jan Wolter, Credit Suisse. A couple of questions. If we look at the mortgage market, I think you have earlier indicated that you wanted to get back to roughly 25% market share, and I know that you don't have any specific targets over time, but still, that's been the indication. I think you're there now. Is it fair to say that you have reached your ambition and will not become more aggressive on that side, Swedish mortgages? That's the first question. And the second one is, have you priced the Swedish mortgages, including a full countercyclical buffer or any part of that, please?
Yeah. Hi, Jan. If we look at our strategy, and we've been very clear on that, we wanted to stop losing clients in the upper segments, and as mortgages is one of the most critical relationship products, that was a concern of ours. With existing tactical implementation of that aspect, we have been able to stop the loss of clients, and in September, we actually saw a net inflow of clients, which was excellent news. I mean, we don't have a specific market share target. We want to operate on a relationship basis, and we want to sort of gain a broader share of the wallet with existing clients. And yes, month by month, we have improved our market position.
Year to date, market share is 12%, to give you a feel for the nine months. But of course, every month has been an improvement. We're not intending to act in an aggressive manner, because we want to protect our earning capacity as well. And on the second question, whether we have weighted in countercyclical changes in the mortgage prices, I hand over to you, Göran.
I think we talked about the capital target around 15%. That is what we currently have allocated out to the business areas. In that, I think we've taken height for the floor on risk-weighted asset that was introduced earlier on. Where if the capital target would be 16.5 or 17, that is something we need to sort of adjust by the end of the day. I still think it's a lot of uncertainty that that will happen. I think 15 is, we feel good with having that.
Thank you. And if I just could follow up and really try to get your view on this NII discussion that you've had on this call and the previous guidance and the current guidance. To the best of your knowledge, aren't you really saying that what you see is that the group NII is coming down next year compared to 2013? Is that not what you're seeing, given all the headwinds that you have, or is not that what investors should take away from this call?
I think we already said that last call. That was what we said last call, that the headwinds was becoming sort of stronger, compared to what we had earlier for a number of quarter, talked about, tailwinds in terms of funding and repricing and so forth. In this quarter, I would say, if you fine-tune the message here, I think what we're trying to convey is that there is still to be expected, some headwinds, but from a higher level and perhaps to a lesser magnitude than we thought a quarter ago.
Okay, many thanks for that clarification, Göran.
Our next question comes from Mr. Magnus Andersson from ABG. Please go ahead. Mr. Magnus Andersson from ABG, your line is open.
Yes. Thank you. Most questions have been answered already, but just if I may follow up on the Baltics. First of all, on the repricing here, if you are seeing any differences between the various countries? And secondly, on the competitive situation there, do you think that this repricing is something that goes for the whole market, i.e., that your largest competitors will or are following through? Thanks.
I mean, it's across the board, and I mean, there is, of course, a risk that we lose some new market share in corporate lending by driving repricing. It's too early to say where the rest of the market is coming in on this issue. But for us, it's also an important test of the stability and robustness of the local corporate sector in being able then to cope with the higher lending pricing, which is more correctly reflecting the underlying risk of this, these markets. So we see this as a net positive, and I cannot speculate in what others might do and not do on the data we have today.
Okay, but if anything, you're experiencing that you are in the forefront of corporate repricing?
I would argue that.
Yeah. If I just may follow up on the Baltics, another question on risk weights there. Do you think that we, during the coming years or so, will start to see lower risk weights in the Baltics coming through in the IRB models, given you're still improving asset quality?
The answer on that one is yes, and yes, we are talking to local politicians and regulator around the practicality of risk weights being a negative for the Baltics if they want to see more corporate credits.
I think we are, we have talked about, in investor meetings, that we feel that the whole Baltic franchise is very well placed. It's the number one bank in the three countries together. It has a good profitability and starting point, but it has the possibility to leverage the business with more volumes without adding, new capital or new cost to any significant degree, because the lending book has shrunk by 45%-50%. But you can't, of course, take out half of the cost base in this downturn. So, so, there is a sort of a minimum size that every one of the banks operating there needs to uphold in order to be a whole, a bank providing all the products.
But that one, the base we have today, we can cater for more business, and we don't think we will suck more capital in there. So the marginal profitability on growing here will be fantastic.
Yep. Okay, thank you very much.
Our next question comes from Mr. Per Grönberg from Danske Markets. Please go ahead.
Yes, good morning. It's Per from Danske. I only have one question left, related to the group treasury NII, but I'll probably pose it in a different way, looking at the net financial items, part. You have, again, this quarter, a quite significant negative item on your held-to-maturity value adjustment. I assume that is coming from group treasury. It looks like, if you look at the first three quarters of 2013, that your group treasury also, excluding the held-to-maturity part, is turning more chronically negative. Should that be seen in connection with the positive NII, and, should we expect, the group treasury to continue to contribute with negative impact on the net, net financial items line?
I think when we talk about the risk result, we talk about NII plus net gains and losses. So it's the total treasury result. So of course, there is traffic between NII and net gains and losses, which is very difficult to make any forecast around. And that has negatively sort of affected net gains and losses somewhat during this quarter and the prior one quarter, I think. And you can see that in the numbers, yes.
This would also imply that if the NII contribution comes down going forward, it would probably be fair to assume that the negative impact on net gains also goes down.
Over time, yes-
Yes.
But it might not be 100% synced timewise.
Okay. Any special items in this quarter since you have the SEK 234 million on the held-to-maturity portfolio?
Not really. I think it's primarily valuation changes in some of the sort of loan and funding books.
But isn't that exactly the idea with the held-to-maturity, that you shouldn't have these quarterly fluctuations?
No, but I mean, you will still have some fluctuations when you have sort of some of the accounting methods that we have. But over time, obviously, there shouldn't be any net impact on it.
Okay, thank you.
Our next question comes from Mr. Ronnie Rehn from KBW. Please go ahead.
Yeah, all my questions have been answered. Thank you.
Our next question comes from Mr. Ricardo Rovere from Mediobanca. Please go ahead.
Good morning to everybody. I actually have three questions. The first one is, if I understand correctly, you before you stated that the leverage ratio is, should be seen as a backstop mechanism. Now, if that is correct, what is the point from a regulator standpoint of setting kind of 15% capital requirement on risk-weighted assets, increasing the risk weight of mortgages to 15% and maybe going up a little bit more? Isn't this a way to indirectly prevent any depletion of the banking system equity and to curb the leverage, not of the banks, but of the overall country? So on what basis you think you say leverage is a backstop mechanism still? And second question, how long would it take for Swedbank to take the 4.35% leverage ratio that you-...
Disclose this quarter to kind of 5%. Would it take, would it take a lot of time? Is something that can be done easily or not?
The last one, of course, relates to what kind of definition you have for the leverage ratio. It's a lot of different definitions out there. So it's if we were to go up to 5, it would, of course, entail a sort of re-shrinking or building more capital. I don't think that's is a realistic way forward. When we on the first question, what we mean with backstop, at least we, we might have different interpretation what we mean with backstop. But from my perspective, it's sort of an information that you give to the financial market rather than a legal binding Pillar One requirement. Because you have so many different models in different countries that leads to different levels of leverage in the system, and you can regulate the different aspect.
I don't think that anyone in Sweden would like to have sort of a leverage ratio that puts the whole risk-based steering mechanism out of sync, out of play, so to say. That would be bad for the sort of steering of Swedish banks on the individual credits. So I don't think that will happen. It could, though, be sort of a constraint or an information thing that we need to have a feeling around compared to where other countries are, where the investor community thinks of it, and so forth.
To get back to the second question, reducing the assets or the exposure in general, on the basis of which is calculate, the leverage ratio is calculated, is something that can be done, let's say, easily, because from outside, it's not easy to calculate the leverage ratio on the Basel III. We don't have probably all the set of information that we would need. It's something that can be done, let's say, easily or not?
Of course, that would entail. I mean, we built capital during a number of years, so it takes time to build capital. Is it easy to dismantle the asset side? Can we securitize some part of the mortgage portfolio and put it outside of the bank? Of course, if the Swedish banks went together and said, we will, we will want to change the model in some way and, and, and sort of lift this asset part out of the balance sheet of the banks and have it securitized. I mean, it's doable over a 1- to 2-year period to sort of find a new way of doing these things. We have a lot of liquidity that takes a lot of, where we actually, we utilize our short-term programs, basically, and put the money on the central banks.
That's a zero game with which only worsens our leverage ratio. Is that the fruitful exercise, really? No. Why should we borrow short and give it to the central bank? So we can fine-calibrate things, but the big issue would be either to build capital substantially or to start changing the model on the mortgage market. And I don't think neither of them are in the cards.
Okay, thank you. Thanks.
Our next question comes from Christoffer from Barclays. Please, go ahead.
Yes, hi, this is Christoffer from Barclays. Just one follow-up question on your strategy for the Swedish mortgage market, where I understand that you're defending what you see as more wealthy clients. So what is the purpose of that? Would you expect, is it simply the credit quality that they contribute to your book, or do you expect to grow sort of non-interest income from these clients? And if so, could you just give us an update on any progress with that? And secondly, the question is on the scope for running down the portfolio in Ektornet. Could you just give a little bit more detail on your approach to that? Will that be sort of more portfolio sales in large chunks or a slower approach through 2014?
What are the market conditions that will allow you to do that more profitably with more scope for transactions above book value? Thank you.
We start with the first question. One need to bear in mind that back in 2009, 2010, the bank's financial status was less robust and the market growth within mortgage lending in Sweden was close to double-digit and had been for quite some time. That was not a sustainable development. So basically, we took a position of reducing risk, and the growth rate in the Swedish mortgage market has since halved. And at the same time, banks have restored their capital bases and been able to sort of prove that we have capital also for a stress scenario. In this context, we have sort of readdressed our strategy and focus on not losing customers, not taking that start that we had 5 years ago.
So basically, we're back to normal business conduct, and in that light, we should trade close to our normalized backbook market share position. That's basically what we have done in the last year. But step by step, we're reaching that. Ektornet, I think we are selling good. There is a good appetite for both small and larger pieces, actually, everywhere. We do have a tail of things that will take longer time to sell. It's also always so that the worst remains in the portfolio to some degree. I think we don't have a hidden loss in it. And we are at 2.7 now. I think we will gradually come down to maybe 1.5, and then it will take longer time.
We will, organizational-wise, incorporate the activity into FRNR and the risk organization. So from year-end, it will disappear as an external division in the external reporting because it will not be material any longer going forward.
Thank you. And who is buying, if I just finalize my questions with that?
Oh, I mean, it's all types of buyers, since we've been selling in many different countries. So I think it's a very broad-based increased risk appetite in the countries we operate and have things in.
Okay, thank you very much.
We have a follow-up question from Mr. Chintan Joshi from Nomura. Please go ahead.
Hi, good morning again. Just a quick follow-up. If I look at your release, you say that the average wholesale funding with long-term and short-term, the majority is 31 months. If you excluded short-term funding from that, so just, what would the maturity be for your long-term funding?
I think we actually have that in the fact book, Chintan, but I don't have the number on the top of my head.
Gregori thinks it's 36.
36. And you say that the-
Yeah.
Sorry?
You can verify the number some way in the facts.
Okay. And you say, you say also in the release that you're looking, your, the, your new issuances are around 50 months. So should I take it as, as that you will continue to, term out your funding, from 36 to 51, like you've done this quarter over time?
No, I think the way we work with the funding is that we issue at a certain maturity, and then we buy quite a lot back as well. So I think, you know, you might have temporary fluctuations from quarter to quarter. But if you look at the issuance, I mean, if we issue on average five-year paper, then the average maturity for the whole book should be two and a half years. But it's not two and a half years, since we actually buy back quite a lot in the short round, so we push it out.
Okay. So, so should I say that, kind of your... Let's say for covered bond funding, your average maturity should be, 36 months or a little bit more than that?
Yeah, around that number. 38 months is the current number for all long-term funding.
All long. Okay. And on capital, you've had positive rating migration again this quarter. If you price in your current economic expectations, say, for the next 12 months into your models, would you continue to get positive rating migrations?
I think we do expect positive rating migration in the Baltics. In Sweden, I think it's more doubtful since the, I mean, asset quality and rating is, we have very good, low PDs in general in the portfolio.
I find that a bit odd. If I look at loan growth in the Baltics in the past 2 years, it's come down by about 9%, whereas risk rates have come down by 10% more than that. Even if I back out, your total positive rating migration has been about SEK 50 billion in the last 8 quarters. I wouldn't get more than SEK 15 billion from the Baltics. So the balance is coming out of presumably Russia, Ukraine, but also from Sweden. Like, is that mix changing going forward?
Yes, it's mix changes, and also that we did some model change in Sweden relating to the size of the size definition, didn't we, a couple of quarters ago?
Uh-huh.
That made RWA releases as well.
Ah. Thank you. Have a good day.
Thanks.
Our last question comes from Mr. Borys Rzepczynski from ABG. Please go ahead.
Yes. Hi, everyone. Just two quick questions. Regarding the margin pressure that you talk about on the Swedish mortgages, that it's ten basis points now. Is it that the margins have come up quarter-over-quarter, or is it that the back book has declined? And also, I believe that you have the, some improving deposit margins in this quarter. Is that through repricing or position taking? Thanks.
Deposit margin is, is expansion of the margin slightly because we lower the interest rates towards clients.
Mm-hmm.
So it has nothing to do with any hedge or so. The back book is in the quarter stable. And the front book is running basically 10 basis points, roughly lower than that.
Okay, thank you very much.
Okay. Then, we thank you for a very active conference call, and look forward to meeting you in, on our roadshow or later.