Ladies and gentlemen, welcome to the Swedbank Interim Report, January to June 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 will be a question and answer session. Mr. Michael Wolf, please begin.
Good morning, and thanks for attending our result presentation. If we look at the second quarter, we saw continuous improvement in our home market economies. Globally, signals are more mixed. In the U.S. and Japan, things are looking slightly brighter, whilst in China, it's, we're seeing more challenges. In Europe, we seem to see some sort of stabilization, although from a low level. At the same time, signals from some central banks that the time when they will stop using quantitative easing is getting closer, which creates certain market volatilities. On the regulatory side, we have clarity on the risk weights for mortgages and more clarity around the recovery and resolution issue. Both came out within our expectations.
We're now awaiting the final wordings before the board of directors can firm up capital targets, but management's view is that the target will be more around the 15% level than earlier guided 30%-15%. Our business is developing in a very stable manner during the quarter, despite continuous weak credit demand. Our net interest income was also stable and supported by the repricing effects on lending to the corporate sector. We have seen a gradual improvement of our market position in the Swedish mortgage sector and reached 14% market share on new sales in May, and the trend was further strengthened in June. In Baltic Banking, a new start has been launched regarding repricing on lending in order to adjust to the new regulatory requirements. The domestic consumption growth in the three Baltic countries supported improved commission income.
One business area that I would like to highlight is LC&I. They continue to improve their market position step by step and have succeeded in enhancing their share of wallet on our customer base, and as a consequence, we see more volumes in the advisory area as well as in the payments area. Also, our operation in Norway has developed well since the merger with First Securities. The work to create a balance sheet with low risk has been confirmed during the quarter by Moody's upgrade of the bank, as well as the Central Bank's Financial Stability Report. This is, of course, important as we seek to create a competitive advantage through our funding cost. We're also publishing the 2013 stress test in this report, which confirms the same trends as the Central Bank's report.
We also have a ECOFIN decision on approving Latvia's entry into the Eurozone, which is also improving the overall risk situation of the bank. Going forward then, well, our focus is on creating an operational platform where simplicity is key to the future success, and that platform work continues according to plan. Some of the cornerstones in this transformation is the gradual transformation of our client responsibility for mass market customers from the regions to Channel and Concept, and that has started. Secondly, product complexity. More work needs to be done in this area. It's a very complex area, but simplicity drives also that notion. And the third strong trend that we see, which is continuously confirming itself, is the digitalization. Our mobile bank customers are adopting to this new channel very, very quickly.
In June, we launched a new service where customers can trade mutual funds, and already within 24 hours, 13% of all fund purchases were done through the mobile channel, so that is a very positive strength signal for us. Overall, customer activities are picking up, and we are prepared if the economy turns to the better, but we are also prepared for a continuous environment with low credit demand and low interest rates. With that, I would like to hand over to Mr. Bronner.
Thank you, Micke. First, I would like to just say that I think overall, the result in the quarter is underlying very stable and very much according to plan. We have a couple of one-off items that I will come back to in detail. I think we are also very happy with the fact that we get confirmation from Moody's and also continue to get confirmation from the Riksbank through the stability report, really, of the transformation of the bank. And we continue, as a result of stable result and high probability, really, to build capital. And in this particular quarter, we've been helped by the valuation of the pension liability, but we have a significant increase of capital in the quarter.
Now, turning to the financials more in detail, starting with our retail operation, it continues to be extremely low volatility business for us, and this quarter is no exception there. We have stable income lines, and we do also have stable cost lines, even though we have more traffic than can be visible from this particular picture. I think as Micke said, we in the business, we are getting more market share on the mortgage market, so we are regaining our back book position in that area. And to some degree, that is hurting our our front book margins, which are declined with 10-15 basis points during the quarter, the difference between the front book sales and and the back book margins.
And that will, of course, be a drag on NII going forward. Asset quality continues to be extremely good, and we do see positive PD migrations in the retail area during the quarter. Moving on to LC&I, Large Corporate division, I think the positive trend we've seen there for a number of quarter is continuing in this quarter, even though the net profitability is slightly weaker, it is impacted by internal cost charges and also by some one-offs. Underlying that, I think we see that we continue to improve our client share of the overall profits. The lending book is increasing in volumes and is also expanding in margins, which is very positive.
As Micke said, we do have, we have seen in the quarter higher activity in the corporate finance area, particularly in Norway, which is very positive. On the impairment side, we have decided to take SEK 56 million impairment charge relating to old IT systems. And the reason for that is really that we are in a position to change IT system, and we need to shorten the write-off period for some old systems, and therefore we have that small charge. Costs are generally well under control in this area as well. Moving on to the Baltics, I think this is, I'm not certain, actually, but I think it is the first quarter that we can change the slide. We have a problem flipping the slides here, so I have to talk to you instead.
The Baltics is basically showing a slightly improved profitability during the quarter, even though the lending book is flat. We have seen a lot of good customer activity, particularly in commission-related income, that is driving revenue. And we also have a slight uptick in NII relating to improved margins in the Baltics. We continue to see recoveries coming through with regards to the legacy portfolio according to plan. And Latvia, as you know, are sort of well on track now for introducing Euro at the year-end.
Going forward, I think the focus in the Baltics will continue to be to improve risk-adjusted returns on the unique part of the books that have been sort of in the lower rating segments, seeing to it that we actually get paid for the risk that we are carrying out there, and also to continue to work on efficiency. But overall, we feel that the business area is very well placed to reap benefits from an improved macroeconomic environment coming through in the Baltics eventually. Summarizing these financials for the group, we have a stable NII, even though we have a slight decline coming in treasury, as expected, which we guided for previously. We do see good commission income.
We have one-off effects coming through, not only in the impairments on intangible assets relating to IT and LC&I, but also intangible assets relating to the finance company, where we write down SEK 110 million. We do also write down an impairment with regards to Ektornet, SEK 200 million with repossessed assets, of which a significant portion is one big hotel in the U.S.. Other than those one-offs, we also see that the buybacks that we have done primarily on the government guarantee debt in the treasury area has created a one-off in net gains and losses, as well as other valuation effects in that area.
But overall, even though the sort of bottom line comes in weaker than the Q1, I think the quality of the result is continue to be good, since a large proportion of the deviation is actually relating to one-offs. Now, turning to capital, we were at 16.4 full Basel III CET1 ratio ending the first quarter. During this quarter, we have through profit generation and also the fact that the lending book and the business do not require any further capital, on the contrary, it releases a bit of capital. And together with the effects that we get on the pension liability, as I described, we are actually making our way all the way up to 17.2 CET1 ratio.
So as Micke said, we, with the new information we have around CRD IV and the new information around risk weight for mortgages in Sweden, we think an appropriate calibration of the capital target as we see it right now is around 15%. We continue to be on schedule for IRB Advanced, which will be a benefit on top of this for us going forward, but still wait for, particularly in the short term, more clarification during the second half of the year with regards to the resolution regime and that mechanism and how that will impact, the capital structure and the minimum levels that will be required for banks in general.
And then, of course, we follow with interest, discussion around corporate risk weights and leverage ratio, but most likely that will take some further time for us to clarify. but ending on a very, very strong capital note. With that, I hand over to Håkan.
Thank you. Well, the positive economic environment in our home markets has continued in the second quarter, and in combination with good asset quality and proactive risk management, the previous trends with low credit impairments and stable development has continued in this quarter. As Göran was mentioning, the asset quality in Sweden continued to show very good results. The positive economic environment continues also in the Baltic countries, and the decision to approve Latvia joining the euro will have additional positive effect on the Latvian economy. The demand for lending is picking up in all the countries, in particular in Estonia, but the trend is still fairly slow. Reporting net recoveries is slower compared to last year, but that is in line with our previously communicated expectations.
Impaired loans in the Baltic countries continue to decrease at almost the same pace as previous quarter in local currency. On group level, though, the decrease in this quarter is small due to an increase of impaired loans in LC&I and FX effects in the Baltic countries. Swedbank is for the third year reporting the result of the ICAAP in this quarter, which we think is a good and transparent overview of our risks in a stressed scenario. It shows that the bank is well capitalized, even including the future regulatory changes. The stress scenario that we have applied, and the outcome this year is further elaborated in the fact book. And as Micke was mentioning, the core equity tier one ratio is improving through the whole scenario period. If we add the management action, the core equity tier one ratio development would be even more strengthened.
Thank you, Håkan. With that, we open up for Q&A.
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. Omar Keenan from Nomura. Please go ahead.
Good morning. Thanks very much for taking the questions. I've just got two questions on net interest income, please. Firstly, just a discussion on mortgage margins, that it's currently 10-15 basis points below the current back book. I was wondering if you could give us a little bit more color as to what you expected happening to the average cost of funding? Because I assume when you're referring to 10-15 basis points, that's below the current average funding cost or measured against using the current average funding cost. So can you talk about whether you expect some mitigation of the headwinds that we're seeing on current price book pricing towards customers? Okay, thanks. And I just have a quick second question as well.
I think when we talk about 10-15 basis points of margin shrinkage in the mortgage market, we talk about it taking into account that we get some funding relief as well coming through in the internal FTP process as well. That, and you should also bear in mind that that's the repricing of the mortgage book is happening rather fast in since such a high degree is three months variable rates, while the funding book has an average maturity of what? 36 months, Jonas. So you have a little bit of mismatch there as well. Sorry, your second question was relating to?
Customer pricing going forward. I mean, it's very hard to gauge. It's a very competitive market, as you have seen. But we also have very firm regional heads that wants to protect their earnings capacity. So it's a balance act, but our focus is not to lose good affluent customers in this business area, and that focus remains.
Okay, that's great. Thanks very much.
Our next question comes from Mr. Alvaro Serrano from Morgan Stanley. Please go ahead.
Hi, thank you for taking my questions. Just a follow-up on the mortgages. You mentioned that you've taken back market share. How does that compare to the minimum 25% you've mentioned? That it would be you where you wanna be, or at least the minimum. And is there any further color you can give us on what the NII impact could be if the whole back book reprices, in SEK millions maybe, and how quickly that would happen? And also on the buybacks you've done in the quarter, and the debt buybacks, how could that compensate to some extent in terms of lower funding costs?
Very quickly on the corporate repricing and the obviously large corporates have done very well in this quarter in NII, but volumes haven't seemed to pick up, at least the loan growth didn't seem to be much stronger. Can you just mention how much there is more to go in there in repricing? Could we see further margin improvements in the second half of next year? Thank you.
Thanks for. I will start on market position. What we have tried to clear, communicate is that we do not want to lose customers in the affluent segments, due to the prevailing situation in the mortgage market. And we communicated that around March, April, and in May, we saw some positive signals of the activity in the branches, and market share in terms of front book market share raised to slightly north of 14% from prior levels of 8%-9%. And if we look at the volumes in June, that trend seems to continue. We don't have total market share numbers yet, but the volume picked up continuously in June. Our back book market share is 26%.
It's not like we are having a date when we want to be at a certain percentage point, but we want, of course, the difference between front and back book market shares to shrink. But most importantly, is not to lose customer and remain profitable.
Yeah, I mean, the financial effect of the 10-15 basis points is quite easy for you to calculate on, sort of going forward. That will be if the prevailing pricing picture remains, that will be the NII impact, going forward, times the book over the period of time that the duration is. Mitigating factors there, we did some buybacks of government guaranteed bonds in this quarter, NOK 100 million deficit. That will create NII of SEK 100 million going forward, you could say. Just a small mitigating factor, we don't view it really as that, it's too small to count, sort of as an action. We have, of course, tried to clear all our government guaranteed debt as soon as possible.
The corporates in the corporate book, in the corporate segment?
In the corporate book, I think we've become more and more relevant for clients, and I think corporate clients in general feel that our LC&I, the business area, is doing very well. So we feel quite good there. Of course, then I would say in a world where the banks becomes better capitalized, I think it's quite unrealistic as we reach our return on capital targets, to expect margins to continue to expand in that area. But I think we have a good position to actually start to see if the economy turns better, start to see volumes contributing as well.
Another factor to remember, I think, in the whole comparison with banks is, of course, also that Swedbank is the only one disclosing NSFR, and we are at 95%. You get some indication where other peers are in the stability report from the central bank. But to be at 95% is, of course, costing money. So apples to apples, that is also a parameter for us to calibrate as we get clarity where we want to be and where we need to be by the end of the day.
Great. Very clear. Thank you.
Our next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead.
Thank you. Just two questions, please. First of all, just coming back to NII, which seems to be the topic of the day. Just if you take the, what you said on mortgages, I mean, that should be something like SEK 750 million impact if the whole thing repriced by 10 basis points. Assuming that happens over a number of quarters, and then I think previously you've guided to the treasury results, should see a headwind of about SEK 100 million a quarter, and then clearly you have some positives from the buyback of the government guaranteed debt. But I still end up with a quarterly headwind that is now, you know, well in excess of SEK 200 million per quarter.
It seems tough to me to be able to offset that through volumes which remain pretty weak or through corporate repricing. I mean, is there anything I'm missing, or should we expect NII to be trending meaningfully lower in coming quarters? And then secondly, just to capital. I mean, you're, I think, very clear in that it's too early to communicate a full capital strategy, but you said you hope to have clarity by year-end on resolution, et cetera. Are you going to have to wait for clarity on where Europe and Sweden will come out in terms of leverage and bail-in before you can communicate? I mean, you allude to that could be something further into the future than just the end of this year.
Well, starting off with the NII then, I think, just to give you a little bit extra to think about is that, of course, that, you talked about the book being SEK 700 billion, and 10 basis points all over the book. But the book is mortgages, private mortgages is one part, there is agriculture, and there are different, things that is booked in, the mortgage company as well. So, so we are talking about, mortgages, for residential mortgages, sort of. So that's one, we don't feel that on the other part of the book, we have, basically no price pressure. So, will that come later on? Possibly, but it's too early to say.
You also need to think about that half of the book, if I simplify things, is repricing quickly, and the other half of the book is repricing much, much more slowly over a two-year period. So that you need to factor in as well. So a little bit more for you to make your sort of Excel spreadsheet there. But clearly, I think if I summarize on NII, the headwind, if we are worked with repricing and funding improvements and so forth, with a lot of tailwind, we are now facing a situation where they are building up the sort of headwinds in the pricing environment. That needs to find other mitigating factors. So that's a clear change in the picture, I think.
And I just want to then also add there that we have guided previously, that we have part of the NII coming in the treasury area is relating also to risk income by the shifts of interest rates that took place in the latter part of last year, in the second half of last year, that still will come through in lower NII in the treasury as well. So, that is also a headwind for us from an NII point of view. But on the other hand, you could say that volumes, corporate margins, the Baltics, and potentially, depending what you think of interest rates, and the positive margins, it could be mitigating factor, but you have to draw your own conclusions on the macro there, and where you think it will go.
Thanks, Göran. On capital, I mean, if you look at the total picture, NSFR at 95%, LCR at 129%, the leverage ratio at 4.45, 17.2, quarter one, more clarity than recently on CRD IV, the corporate risk weights and recovery and resolution regime, despite we want to see the final outcome. And then on top of that, you have IRB loans coming. I think the language we use is excess capital building, and that is a strong signal from us that we feel very comfortable with our capital position. And I don't have a crystal ball of what's gonna happen the next few months, but definitely more clarity will come.
Depending on credit demand and other things, the best guidance we can give is that the board will address this issue as already communicated in conjunction with the last quarter. That's where we are today. But a very strong position and conservative position in all important measures.
Sir, can you just cover that 4.45 leverage ratio? Is that a full Basel III leverage ratio, or is it just equity to assets?
Can we come back on that one?
Absolutely.
I need to clarify that.
No problems. Many thanks.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes. Good morning, everyone. A couple of questions, please, then from my side. Firstly, on costs. Obviously, we've been talking a fair amount about the NII headwinds, which you see picking up, and clearly, your ambitions for flat costs in 2013 was set at a time where, as you put it, Göran, I guess, there are as many tailwinds as there were headwinds. And clearly, as the years evolve and your metrics become more cautious, can I just get a flavor from you really as to what it would take for you to reconsider this flat cost target? Second question, please, then on NII and the euroization of Latvia.
Please, just a flavor of how that will shift your liquidity usage in lats and your use of deposits in local currencies, and whether we can expect any margins or NII improvements from that process. Thank you.
If I just start then with the clarification, it's on full Basel III. You find it in the fact book under Key Figures five years.
Costs, I think we have a slight uptick in cost in the second quarter. I think it's quite natural to see that considering the significant sort of cost reduction that took place in the prior year. I do not feel that we are anything else than on track for flat cost. So I feel, okay, we're more into the planning period, sort of for 2014, that we hope to give more flavor on going forward during the autumn. The last question was relating to the euro and the liquidity in the US. So what are you gonna do there?
Sorry, I missed that question.
Can you repeat the last question?
On the euroization of Latvia in 2014, how that would impact how you... The currencies that you keep your Latvian liquidity in, and whether you can then optimize your liquidity position by using euro-denominated deposits.
I don't think it's gonna be a big difference to the liquidity side at all, to be honest. It's gonna impact a little bit how we hedge certain positions, and it's gonna be easier to hedge positions there. But that's more a matter of sort of having a matched funding towards the loan book, but it's not a big liquidity issue for us.
Okay. Thank you.
Our next question comes from Mr. Masih Yazdi from SEB. Please go ahead.
Hi, this is Masih Yazdi from SEB. Just a couple of questions on Ektornet. You had somewhat larger write-downs this quarter compared right to earlier quarters. Can we expect that this is the sort of new level going forward, or should write-downs go back to sort of around SEK 100 million at the quarter going forward? And when do you think that the total of SEK 3 billion of assets in equity should be divested? Thank you.
In general, I would just overriding say that the wind down on the Ektornet is going quicker and faster and better than the sort of we expected, if you go back some time. In this quarter, we have one particular impairment relating to big ski resort hotel in Telluride, the U.S.. That one of the repossessed assets in Lehman that we are preparing for sale. In general, we had previously, we have booked the impairments that when we sell things, we get impairment on the impairment. But you should also remember that when we sell things with profit, which we do quite often as well, we actually book those up under other income. So you can't really take this other impairment line and make it as a credit loss line.
The true picture is in mixing the two together. Going forward, I don't think that we don't have any big assets like the one we had. I don't envisage that kind of write down going forward.
When it comes to divesting the whole portfolio, when do you think that would happen?
I think by the end of this year, we will be well advanced in closing down a number of countries. And we will be left with a tail in some of the Baltic countries because they will constitute residential smaller properties to some degree. And the value that we have in there will be significantly smaller. So coming back to the overriding statement, I think it's going much better, and it will also be a positive cost contributor, of course, since we in 2012 actually had SEK 600 million in cost. In this year, it will be a significantly lesser proportion, and in 2014, it will also contribute to cost control in the bank.
Great. Thanks very much.
Our next question comes from Mr. Andreas Håkansson from Exane . Please go ahead.
Yes. Hi, thank you. I mean, we've gone through most of the areas, but just to follow up on capital, perhaps. Micke, you said that 15 is where you believe you're going to end up now, and if we get full visibility on regulations and the board agrees and decide that 15 is the go-to number, given that you're at 17.2 today, and if you get full IRB approval, I guess you're about 20. What would be your recommendation to the board and how you're going to address that problem, so to say?
That is something we'll refer to in Q4, of course. I mean, I think we have all the optionalities at hand. We have all the approvals from the AGM to do what we need to do on that topic when the board comes to a firm conclusion on the matter.
If we get a firm conclusion on 15, is it anything else you need to wait for before you start to action on these decisions, or could you start quite quickly after that?
The only thing we know from the past is that, the material is a moving material, and, you can never rule out that you get other matters that you need to consider. But with the present visibility, we have outlined some of the key issues that needs to be clarified, being CRD IV in the Swedish version, the Recovery and Resolution Scheme, and then we're also lifting the issues around leverage ratio, which we think will become a factor going forward, from a regulatory risk aspect. And we're looking very fine on that line as well, but it's an issue that is increasing in importance in our view.
Okay, thank you.
Our next question comes from Ms. Sofie Peterzens from JP Morgan. Please go ahead.
Yeah, hi, here is Sofie Peterzens from JP Morgan. I had also a question on the capital target. So the 15%, could you just remind us how you get to the 15%? Does it include the higher mortgage risk grades, and does it include any other buffers, countercyclical buffers that you expect for Sweden or anything else? So if you could remind us on that. And then I was wondering how we should look at losses going forward, if I exclude the extraordinary losses, if they'll have extremely low level of group losses. Do you expect losses, or what's kind of a normalized run rate that we should assume for 2014 going forward? Thank you.
I think the logic behind 15 is 12, together with mortgage risk weights, together with some type of macro buffer for ourselves. And of course, the risk weights we know, the 12, we don't know exactly sort of what will be the ramifications of going through 12, and if that is, if that is something. So we don't really know precisely where we will put our own buffer in this structure. So but if we as long as we can interpret things today, it will be around this level, and we as always try to be rather more on the more on the conservative side on the interpretation with not being hit by something unexpected.
On the losses, credit impairments, as I mentioned, we have a stable environment, and we really don't see any changes in the trends that we have. Given the very low levels we have, we may, though, see some volatility in between the quarters, but that will not be material. What would you say is a kind of normalized run rate, 3 basis points of losses, five, 10?
We haven't communicated any normalized loss rates, and we don't do that this quarter as well. It's more trying to understand the trends and what may move upwards and downwards. What we see is continued very low credit impairments in Sweden. We will have write-backs in the Baltics, but they will be at a lower level compared to last year in the Baltic countries.
Okay, thank you very much.
Our next question comes from Mr. Peter Wallin from Handelsbanken. Please go ahead.
Yes, thank you. Good morning. Most shares covered already, but coming back to the Swedish mortgage market, I would like to know whether your margin guidance or margin guidance squeeze here is – how much of that is a consequence of, if you would say that that's the case, increased margin pressure in the Swedish market or competitive pressure in the Swedish market as of this spring, compared to maybe six months ago. At least in the Swedish media, that's been sort of like highlighting the case that list prices have been coming down pretty much as of recently. What's your view on that?
It's Göran here. I think it's a dynamic evolution happening. If you go back a year or even more, it's been quite clear that we have seen some competitors being much more aggressive on pricing. And we have felt over time, as we lose prioritized clients, we don't wanna trade with the front book that this has been so low. So that has been a prioritized area, as Micke has stated. It's very clear that we do not want to send a signal internally that it's on price that you compete primarily. But if you try to stop losing clients to a competitor who are significantly underpricing you, you have to do something on price as well. So but, that is the evolution, and we have...
Then in the last quarter, I think we have also seen other banks becoming more concerned about their market position, and that has led to a cumulative sort of price erosion. I think Swedbank has been definitely not a price leader in terms of bringing down the prices. That has not been, and will not, it will continue not to be our strategy going forward. But we do want to stop losing prioritized clients. That is very important for us.
To add on that, I mean, the shift in focus is just recent, so let's not take the first quarter as a big sort of status for what's gonna happen tomorrow. I mean, there is dynamic effects. We have regional heads that wants to preserve earnings. So it's too early to say, but I mean, the market is more competitive today than it was, and banks are more profitable than they were.
Yeah, okay. Thank you very much.
Our next question comes from Mr. Magnus Andersson from ABG. Please go ahead.
Yes, hi. I had a couple of questions on the Baltic banking division. First of all, you talk about an intensified focus on repricing. I'd just like to know whether that's a general trend in the markets, if your competitors there are following, and whether there are any significant differences between the three countries. Secondly, assuming that we should be at trough earnings currently in the Baltics, you were at the cost-income ratio below 40% before the crisis.
Just if you think you would be able to reach pre-crisis levels in terms of cost efficiency, again, in the Baltics, and secondly, whether it's the 50% group or target on allocated capital, you think you will reach there, or if the profitability, you think the profitability in the Baltics will deviate in any way from the group level? Thank you.
I think it's very difficult to say what the competitors are doing in the marketplace. I will refrain from doing that. The only thing I will say is that as we see how we have repriced the most capital-intensive part of the books with regards to increased capital demand, regulatory capital needed, we still have repricing to do in the Baltics. I think part of that was difficult to do in a period when the borrowers were extremely weak, but now I think some of that repricing continues. We need to see to it that we get the risk-adjusted return that is meeting sort of the hurdles that we want to see in the group overall.
In terms of differences between the countries, Lithuania is clearly having lower margins than the other countries and is more of a difficult area to reprice, but also has, of course, more to do. So, we try to reprice more there. Can we meet financial ROE targets and cost/income below 40% over time? Absolutely. That I'm absolutely convinced of. We have a Baltic franchise that has gone through a tremendous difficult period. Clearly, the market leader, we are the most profitable one, but we are-
we can cater for a lot of more lending volumes and business activity on the prevailing cost base. So the marginal, add-on from increased sort of activity is quite good. And we also have a very procyclical, capital situation, in the whole Basel II world, that really, in my opinion, is grossly exaggerating the capital needed for the Baltic banking. So even there, I do think with PD development and migrations over time, we will be able to add on marginal business with very little capital as well as cost, contribution. So of course, from a shareholder value point of view, that's very exciting, especially if you are number one in the market, and we believe in the market.
Yeah. If I just follow up there, on the repricing, is it primarily in the corporate segment, or are you also trying to reprice the mortgage segment, although it's in a worse shape? Secondly, on the infrastructure there, you cut down on your headcount, the number of branches, quite significantly since 2008. Should I read you as that you have the—with the current infrastructure, you would be able to absorb at least the growth for the coming two, three years?
If we look at the repricing, it's mainly on the corporate sector, but it's also done as you can, due to the limitations of, agreements with the, with privates. So it's more gradual on the private side. So the repricing is mainly on the corporate side. Infrastructure, I mean, what is very positive in the Baltics is that they have, due to the demographic situation and average income, had to be very efficient in the digital space, in order to be profitable and bring down cost to serve. So a lot of the things we hope to do in Sweden has already been executed in the Baltics. And therefore, I think we have a platform that is very scalable and not as dependent on branch network as the Swedish has been traditionally.
And, and finally, just could you remind us of how long it takes to reprice the corporate and mortgage loan books, roughly?
The corporate loan book is, you say, average between two to three years.
Oh. And the mortgage book still eight,nine years, or?
Probably right, yeah.
Yeah. Okay, thank you.
Our next question comes from Mr. Jacob Kruse from Autonomous Research. Please go ahead.
Hi, thank you. Just, just a couple of questions. Firstly, just on, on bail-in buffers of the discussion there, do you expect, this to be implemented, and do you expect that you can use the 20% of risk-weighted assets rather than the, eight percent of liabilities? And, and secondly on that, would you, would you look to take your senior debt, outside of that buffer and basically fill it with, subordinated debt and equity?
And then my, my other question was just the ECB stress test that is, that is planned to be run, do you have any indication on, on, on whether or not the Swedish regulators or Riksbank will run something in parallel level on that? Lastly, just on corporate margins in Sweden, if you could say anything about the development and outlook for those. Thank you.
If you look at the stress tests, firstly, what we do with the regulators who are also connected to the European level, whether they're gonna use these stress tests or not, we'll see, but it's well integrated into the European structure right now. So it's a joint decision paper that is being produced. So that's on that, and then I-
I think you, Jonas, if you can answer on the funding strategy there.
Sorry, Jacob, on the bail-in, your question, if I understood it right, was how do we see the calculation happening in the future?
Yeah.
It's more an open question on the capital structure, really, that we see coming.
I mean, the way we interpret it is that there will be a Swedish finish on this, calculated as 20% of our RWAs. And if you look at the deposit side, sort of uninsured corporate deposits will be included in the numerator there. And so on that metric, I mean, we're quite fine as things stand. And then the question and the mix that we will have on senior versus subordinated, once this is finalized, it's too early to say, I think.
But would you be okay with having your senior debt part of the bail-in buffer in principle?
I think it very much depends on how much total bail-inable capital we need to sort of fill up with. And it also... You have to remember, it also depends on how the Swedish implementation of CRD IV is happening. Because if you have sort of the current proposal from the Swedish FSA, then the Swedish safety buffer will be a minimum requirement. And if you have a minimum requirement of then 9.5+ capital conservation, then sort of the point of non-viability in Sweden will be so high that we won't really have the differentiation between different types of subordinated debt. And then it remains to be seen exactly how that will play into senior as well. I think there, there's still a few outstanding issues that we need clarity on.
Okay. Thank you.
Our next question comes from Ms. Claire Kane from ABG. Please go ahead.
Hi, it's Claire Kane from RBC. I just wanted to ask two questions, really, on the income outlook. The first three, just to clarify the guidance on NII going forward. Should we look at the mortgage base really as the SEK 577 billion going forward, so potentially around SEK 600 million headwind on an annualized basis? And then another 400, say, for the treasury NII going down, which would effectively take it to almost to zero, which was your original guidance.
And then if we look at a SEK 1 billion headwind pre any offset, is that the guidance you are giving? And then if you go then on to the fees and commissions, clearly there's been a pickup in activity this quarter. Do you think this is a good run rate going forward? But the outlook statement kinda saw some positive signs. Could we see a continued pickup in the trends there? Thank you.
On the NII, I do think we don't give a guidance on the actual NII. It's important to say, we try to describe the driving factors for us in there, rather than pinpointing and giving you a number, because there are so many variable parts in that equation, really. But we are highlighting that we have more headwind on mortgages. We have earlier communicated that some part of the NII in treasury is one- off related to shift in short-term interest rates that is coming to an end. These two are headwinds for us, and the tailwind that we have earlier seen coming through repricing and other things are sort of coming to an end.
So, other than that, I leave it to you really, to use your analytical skill in order to produce a projection for where it's going from here. But we don't want to be more precise because there are so many variable parts in there.
If you look at our strength, as a bank, being predominantly a retail bank with an excellent market position in the four countries, we are trying to help you by being more granular on data when it comes to cards business, the mutual fund business, the insurance business, the payment business. We feel we have a very strong position overall in these areas to benefit from an increased domestic demand situation. If the economies continue to tickle around, around, along in these terms, yes, we are benefiting. What is positive is LC&I's progress in that customer segment, where ancillary business is becoming greater share of the P&L, as we improve the penetration towards those customers. Here, the balance sheet has been one of our core strengths.
I mean, we have been able to fly the balance sheet both in Sweden and Norway, in difficult times where foreigners have disappeared. And with our balance sheet, there is great comfort for our customers that we'll be around for the longer term. So all in all, I think that market situation will continue to prevail, and being Nordic, being close to these customers, will give us more opportunities in the future.
Thank you very much.
Our next question comes from Mr. Ronit Ghose from Citi. Please go ahead.
Hi. Yeah, it's Ronit from Citi. I just had a question, a quick question on impaired loans and provisions. I know the numbers are low, and they're still going down, but can you give us some more color around LC&I ? For the last three quarters, we've seen a step-up in LCI impaired loans from SEK 246 to SEK 613 to SEK 1,167. Is this one particular sector or a small number of counterparties in a particular sector? Any color on that would be great. And secondly, and related, on your 31-60 days overdue or your loans past due, there's a pickup in both retail and Baltic banking. Is there any color on that as well, please?
If to start with, impaired loans in LC&I is primarily due to one client that is well-known, that has been on the watchlist, that now has turned into impaired. It's very well collateralized, so it doesn't really have that much of an impact on the credit impairment. It doesn't really boil down to a trend. It's more of a one-off. When it comes to loans past due, it's more of a volatility between the quarters. We don't really see that as a trend. On the contrary, we see continued improvements, both in the asset quality and in the underlying trends.
Thank you for that. Just back on the LCI, is it? Are you saying it's the same client both in Q1 and Q2?
No, the client I'm referring to from Q2 effect, that's a specific client in LCI, a different client from that didn't show up in Q1.
Okay, two different clients. Thank you.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Good morning to everybody. I have two, three questions on capital. Can you please confirm that 15% is the new core capital target? Because that is not yet clear to me. Yes or no? The second question I have is, yesterday, a competitor of yours stated, reiterated a 13% target. If a 15% is the new target, can you list precisely the reasons why all of a sudden, the 13%-15% target goes to 15%, for Swedbank?
And the third question I have is, is it fair to say that the capital, the way you run the bank from a capital perspective, is getting less-... Core Tier 1 and more and more dependent from the leverage ratio, because the feeling I have from outside is that risk weight mortgages go up, Pillar 1, Pillar 2, then we talk about corporate risk weights, then you talk about moving up the target. It's just a way to be more and more compliant with the leverage ratio. Is that a fair assumption? Thank you.
I mean, a bank is, as you know, a very complex animal, and you can't just have one measure or tool to steer a whole bank. I mean, it's all about the combination of LCR, NSFR, the leverage ratio, the capital situation, and that is dependent on the risk level in the entire bank. Just to be clear, 15% is not the goal target. What we have communicated from management's point of view was to guide where we think the target might land at the end of the day. So we guided earlier 13%-15%. Then we got clarity on the mortgage risk weights, and there was two options that for those risk weights.
One were to be included in total capital, but the Swedish regulator chose to include it in quarter one, and that's why we ended up in the higher part of that range. And Göran, earlier on, on the call, tried to guide you how we came to the 15, and that, that was the 12% minimum, and then you add, then the, the, the sort of, add-on for the, mortgage risk floor, which is approximately two, and then you have a buffer that we have for macro reasons. The 12, well, let's see what the Recovery and Resolution Regime does. Can we go through that, floor, because we don't have mind what the mitigating factors from the regulator will be, or do we want to stay away from that level?
That is totally dependent on the final wordings in the Recovery and Resolution Regime. There are a few open ones. It's a guidance and not a firm target.
Yes, can I just comment on the leverage ratio that you were sort of pointing or steering the bank on leverage ratio? I, I don't think we are steering the bank on leverage ratio, but I think we have also said that the current Basel system has many flaws. And we have all the way back until 2009, stated that what we think from a capital management point of view is, scenario-based stress tests are the way really to gauge your risks and see what kind of capital you need and what it does to your funding, really.
We have acknowledged that many risk weights in the current system are based on historical data, which is like driving a car and looking in the rear mirror in many aspects, like having zero risk weights on banking systems and so forth, assuming nil default rates. And also for Swedish banks, very relevant has been sort of the low mortgage risk weights, and also a very high degree of flexibility for banks to dictate themselves what kind of risk weights they have. From that perspective, leverage ratio plays a role, not as a primary regulatory toolbox, but as a complementary, a complementary ratio to show to investors what kind of leverage are we talking about in this business model.
We do feel from a transparency point of view, leverage ratio and some kind of backstop regulation has some play to role in the future, even though we are strong believers in risk-based pricing.
Okay. If I may, just one final question. Can you provide us a brief indication, sensitivity of the bank P&L to steepening of the yield curve? When I mean steepening, I mean flat short-term rates and rise in long-term rates.
I think we have in the fact book, we have a simulation, what happens for a parallel shift of the yield curve. We are significantly more, sort of prone to P&L effects in the short end than we are in the long end. The long end impact will mostly relate to valuation effects coming into the treasury book that will, over time, reverse itself. So, much less significance in stress on the both capital and the result, actually. On the capital side, we are even gaining on it since our pension liability is sort of decreasing in size.
Okay, thank you very much.
On the short end, you have it in the fact book.
Thanks.
Our next question comes from Mr. Pavlo Vasylinskyy from Nordea. Please go ahead.
Yes, hello, this is Pavlo from Nordea. Just two quick questions. One last shot on the NII, if I can. In Q1, you said that you would expect to lose some SEK 100 million from headwinds in treasury. First of all, given the rates, how they have changed, is the SEK 100 million per quarter still correct? And the second question is on how we should view risk-weighted assets going forward in the Baltic countries, given, I mean, much better, credit quality?
On the NII in treasury, I think we talked about losing SEK 100 million a quarter for three quarters. If I roughly the same guidance going forward, I think I would perhaps modify it to say in three quarters it would be between SEK 200 million and SEK 300 million. We have seen some... This quarter, we had a little bit less effect than expected, even though rates didn't change anything in the short term. RWA, are you looking for guidance there or what in the Baltics, what was your question, really?
I'm guessing that, given how the recent years we have improved credit quality, I mean, that should translate in lower risk-weighted assets. I'm not thinking about how the lending will grow. If, I mean, if we assume lending is flat and credit quality stays at these levels, how should we expect risk-weighted assets to move? How much can you gain there, so to say?
Starting with the risk weights, then, yes, due to the crisis, the risk weights are modeled higher currently. And as we continue improving the economies in the three countries, of course, the risk weights will come down. So everything else equal, risk-weighted assets will go down. What happens with the risk-weighted assets, of course, will depend on how the growth will be in the countries. We do see a growth currently, but it's fairly slow. Depending on at what pace that will pick up, it's difficult to say whether it will be a net increase of risk-weighted assets or whether it will decrease. So, I guess you have to make your own evaluation on how that will balance going forward.
Fair enough. Thank you.
The pure sort of PD migration coming from the models being pro-cyclical, as Göran alluded to earlier, that is a fairly slow-moving process, so-
Okay.
I think you need a couple of years before you see that sort of materializing in anything that is significant.
Okay. Thank you.
Our next question comes from Mr. Peter Kessiakoff from Carnegie. Please go ahead.
In the covered pool, the over-collateralization level has risen quite sharply from the Q1 reports to now almost 46%. Could you perhaps talk a bit about that? What's behind the increase there?
It's, we had around about SEK 12 billion CF that came into the pool that hasn't previously been included in the pool for more technical reasons than anything else. It had to do with how we mapped collateral, et cetera. And now we've made some system changes, so we can now include those in the pool.
Okay. And then do you think that, I mean, will this change your plans on the funding mix, going forward, covered versus senior and so on?
Not materially, no.
Okay. Thank you.
Our next question comes from Mr. Omar Keenan from Nomura. Please go ahead.
Hi. Sorry to ask another net interest income question, but just coming back to the topic of funding, because you've discussed quite a lot of the tailwinds, the headwinds that are coming through, but I just want to get a better understanding of how to think of perhaps some of the positive factors on NII coming through. I mean, if I look at the amount of covered bonds in krona, then it's about SEK 300 billion. So if I think that perhaps the front versus back book dynamic on covered bonds is about 40 basis points, then that's essentially about SEK 1.2 billion offsetting positive that will come through, you know, spread out over three years. I mean, have I thought about that incorrectly?
I mean, could you give us a, you know, a bit more color of what those trends are pointing to and what they're telling you? Thank you.
I think in general, sort of, it's filtering through to the clients much more rapidly and ongoing than you sort of see it as a fixed leg that matures or while it's a much more dynamic process between the repricing clients and actually the market rates. So I don't think you can draw that, those conclusions. I think we have... If I try to simplify things a little bit, we will have a bit of tailwind in terms of our relative funding spread, closing in on our peers in our front book funding compared to back book funding. That will give us sort of an uplift going forward that we will keep for shareholders, so to say.
And on top of that, as I said earlier, it cost us money to be at 95 in NSFR. We are eager to see where the regulation, the regulatory discussion will take us. That is also sort of a funding risk-related question to be solved, the, where we are actually, in a very positive territory, in a competitive, competitive sense, that can impact the NII going forward.
Okay. So I guess, could you, perhaps, you know, clarify what the back book covered bond funding spread is then? Then we can make our own kind of assumptions.
The back book covered is 81 basis points.
Great. Thank you very much.
There are no further questions on the telephone. Please go ahead, Mr. Michael Wolf.
Then I'm thanking all for being so active today, and I look forward to meeting you at the next quarter result presentation. Thank you.