Ladies and gentlemen, welcome to the Swedbank Interim Report, January to March 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 once again, thanks for attending this call. The economies in our home markets are relatively strong, and we did see some positive signals in the global economic development during the quarter or the outlook of that, despite the unrest that continued to take place in Southern Europe. Our forecast for 2013, with low credit demand and low interest rates, have so far come true. In light of the above, the results are fine, and NII remains stable despite headwinds on the deposit side. We continue to have good cost control and achieves, in my book, a strong 15.3% return on equity, at the same time as we're building and strengthening our capital base.
Our low-risk profile and strong capital base supports the continuous improvement of our funding cost, and we do expect that this will also reflect in our external credit ratings going forward. Our focus on our four home markets can be even more pronounced as we now have found an exit in Ukraine and resolved to discontinue our operations in Russia. The reorganization announced at year-end is a critical step in our long-term ambition to now focus on improving our market position. With our large customer base, it's key to meet all customer base on their needs with accessibility and service levels that provides comfort, but also leads to deeper and broader business exchange. Simplicity is a key word for us, and I'm convinced that reduced complexity and increased transparency is fundamental to achieve a higher customer satisfaction level.
The digital evolution has proven to help us and our clients to deal with both their daily, but also long-term needs in a faster, simpler, and more efficient way. During the last two years, our mobile bank has become the driver for many of our clients' daily banking needs. Like in other industries, there has been a transformation driven by customer behaviors from physical products sold in physical stores to digital products in digital stores. We see more and more that our clients solve their issues on the net and therefore more seldom visits our branch offices. They only turn up at the branch when they cannot solve their problems on the net or when they have a need to discuss a more complex nature.
Next step on this journey will be for us to provide our clients with even more information so that they are even better informed when making their decisions to transact. During the quarter, we launched the corporate mobile bank as well as the mobile bank for youngsters, and we are working hard to fill our digital channels with new functionality. Now, latest, OCR scanning into the mobile bank for payment services. This digital trend is an opportunity to serve the many transaction intensive clients that we have in a more efficient way, which in itself allows us to invest more in these channels. But it also frees up time and resources for our client executives to work on clients where our ability to support an improvement in their business are dependent on deep relationships.
In the last few years, the effort to improve our market position with large and mid-sized corporates have given us evidence that we can be relevant and that our working methods actually creates a deeper and broader business exchange. The great potential sits, of course, in the affluent and the SME segment, but we all know how competitive the market is in these areas, and here, patience and competence are key to get more business. If I should conclude, I would like to say that we have a strong focus in the bank on reducing complexity and the cost to serve or produce a unit. Given our large customer base, we strive to gain a competitive advantage by being the most efficient bank. Our growth focus is on being able to extend the business with our existing clients and step by step, attract new clients.
With that, I would like to hand over to Göran.
Thank you, Michael. Looking at our numbers, starting with our retail division, as usual, I would say we have a very stable result. The NII is a touch down. As mentioned, we have had sort of deposit margins coming down a little bit. On the other hand, we continue in the quarter to reprice part of the corporate book, which has been mitigating some of that. We continue to see a very good asset quality in that part of the business. And you could say that management is devoting more time towards the new organization that was implemented at year-end in order to get the steering of this business area more exact in the future.
Moving over to large corporates, I think the result is, if we compare with the fourth quarter and also with the first quarter last year, a touch weaker. I think we started off very strong in January, and then the crisis in Cyprus affected the risk appetite to some degree, and we saw slightly less activity. So our corporate finance fees are a little bit lower than they were in the last quarter, and also we continue to have structured challenges like many or many in the marketplace in the equities arena. Credit quality is very good, and I think we are very proud over the return numbers. We are generating a return on equity of almost 17% in this business area, which we think are quite good given the macroeconomic environment that we are operating within.
Moving on to our Baltic Banking division, I think the result is good in the context we are operating in also there. We are in krona terms with a slightly better result. We are executing on other income. We have a slightly smaller NII, but that is in krona terms. If we take it in euro terms, it's actually slightly higher, but still a fairly subdued credit growth in there. Going forward, I think our friends in the Baltics are devoting more time in order to improve their efficiencies. Summarizing this for the bank, we do get a very stable NII.
Part of the fact that we are coming in a little bit, or the reason for coming in a bit higher than expectation, I think, is that the NII in our treasury department has developed better than expected. Income in general are compared to the fourth quarter, a little bit slower, but that the main reason for that is that we booked a one-off income effect of SEK 300 million in the fourth quarter. If we exclude that, we are actually bang on. Cost control continue to be good. We are now reporting Ukraine and Russia as discontinued operations, and we think that cost will be flat, 2013 over 2012 for the remaining part of the bank, which in essence is that we are lowering our cost guidance a couple of hundred million SEK.
Asset quality overall feels very good in the bank. And like Micke said, I think we are extremely happy with our sort of key ratios, both on return on equity, of course, 15%, but also cost income ratio and the efficiency in the bank, and also capital. Reviewing capital a little bit more in detail, we have improved our full Basel III capital with 100 basis points during the quarter. Half of that is effect is just a sort of changed regulatory expectation on the effect of the CRD IV now being in the process of being implemented. That gives us a better capitalization or less of an impact. But also, IAS 19 and the profit generation, and also the decrease of risk-weighted asset is building our capital story.
Then, of course, we are continuing to sort of wait for regulatory clearance on this part, and also to get the final approval on our AIRB advanced . I think I'll stop there and hand over to Håkan.
Thank you, Göran. First quarter 2013 has been a good quarter with continued low credit impairments. The somewhat weakening trends in Sweden we saw the second half of 2012 has stabilized, but considering the uncertain environment on the European, on a global level, it is likely that we will see some volatility in the trends depending on what happens outside our home markets. The asset quality in Sweden continue to show good results with good resilience also in the sectors where we see some impact from the lower economic activity. Given the very low levels we are currently reporting, we may though have some volatility between the quarters. The Baltic countries continue to show positive economic environment. Demand for lending is picking up, but the trend is fairly slow.
We report net recoveries in the quarter, though at a slower pace compared to 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 continues to be on very low levels. And as has been mentioned, Ukraine and Russia from this quarter is reported under discontinued business. When it comes to impaired loans, it continues to decrease this quarter. Roughly three quarters of the reduction is due to Ukraine and Russia moving to the discontinued business, and the remaining part is a result of reducing the workout retail portfolio in the Baltic countries.
Okay, with that, we open for Q&As.
Ladies and gentlemen, if you'd like to ask a question, please press zero one on your telephone keypad. Our first question comes from Mr. Omar Keenan from Nomura. Please go ahead.
Good morning. Thanks very much for taking the questions. I just had two quick questions on net interest income. The first one, I was hoping you could perhaps elaborate a little bit as to any help that you got from the hedge in net interest income in the first quarter that we can perhaps expect not to be carried through to 2014. And then just a second question, which is kind of a wider sort of philosophical question on NII. With economic prospects in Sweden seeming to be improving and that it seems, you know, increasingly likely that, you know, policymakers will use, you know, risk weights again on mortgages as a macroprudential policy tool to control debt growth.
Just kind of thinking kind of qualitatively, what do you think the impact on your business and the market for mortgages will be if later on in the year we saw risk weights on household mortgage be raised again to 20 or 25%? Okay, thanks.
Hi there. On the NII question there, I think, the slightly better NII in treasury is explained by a couple of different aspects. One is that we are, since Stibor and interest rates has come down, during the quarter, we continue to benefit from that declining rates. That's one explanation. Another explanation is that we have some traffic between net gains and losses and NII in treasury, that explains it to some degree as well. And then also the third one is that we are sort of benefiting from, sort of our, our funding cost being structurally improved as well. That is actually, of a sort of a higher quality, that sort of part of the improvement.
Your question on risk-weighted assets, I think, I don't think it will mean a behavioral shift towards the clients, because I don't think bank has steered their mortgage business on risk weights or the capital utilization of the regulatory framework. And we have sort of a pricing that is richer than that has historically been indicated by the capital consumption. So I don't think it will impact the capitalizations, sort of optical numbers on capital, but it will not drive margins, if that was the question you were after.
I was wondering, could you potentially sort of quantify the moving parts in net interest income? So the change in treasury, so what was due to the hedge, and then what was due, you know, you expect, as you said, the better quality, you know, structurally improved improvement in funding cost. And I guess, you know, you said that you, you know, you don't steer your sort of your pricing based on the risk weights. But I mean, you must think that, you know, increasing the floor of risk weights to 20 or 25% will have, you know, some impact on the market in terms of margins. Okay, thanks.
Well, if we have 15 or 20, we don't think it will have an impact, so that's the short answer. Of course, it would go... If we would talk about risk weights of 35 or something, then it would be, but I think that's highly unlikely, so actually. The quantification there, I'm not going to give you exact numbers, but it's roughly the improvement towards what was expected and so forth. And the last quarter, I think it's a third in each of the three elements that I'm talking about, roughly speaking.
Okay, perfect. Thank you.
Our next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead.
Thank you. Just two questions. Just following up on the net interest income. I think last quarter, you were sort of guiding that the treasury net interest income should decline over the coming quarters. Is that something we still should expect? And I think historically, you said that, you know, the treasury should not be a profit center, so things should trend to zero. Over what time horizon do you see that happening? And then secondly, just on capital, I mean, you're. I know there are some parameter changes, but you now report a 16.4% Basel III Core Tier 1 versus a target range of 13%-15%. Presumably you'll continue to generate capital. When would you expect to communicate with the market with how that capital will be distributed or allocated?
Hey, Johan, and thanks for your questions. I'll take your last one, and then I hand over, I guess, to Göran for the others. I mean, of course, we have a very impressive capital base, and we need regulatory clarity before we can communicate on further actions. But it feels very strong in this economy to sit with that base, and it is an upside that we have. And let's await the final outcome of the CRD IV before we expect any announcement. Sorry, Göran.
No problem. Just to follow up on that, I mean, do you... what you're waiting for, is that to see how CRD IV will be implemented in Sweden? Is that what we should be waiting for?
I think we are waiting for CRD IV. We also have to wait for the resolution mechanism in order to understand the capital components above core equity before we have. So we need to have a better understanding how that will play out before we sort of calibrate our capital targets, so we know how the bail-in features will actually work in practicality, and what kind of trigger points are we talking about for our share bondholders and capital holders, sort of. So I think there is a there are a couple of features we need to know better.
But on the equity side, Göran, there are two specific components that we mentioned already last quarter. One is the more risk, risk weights, which have so far been communicated from the FSA as a core equity requirement. We don't know yet whether that will in fact be a core equity requirement or a total capital requirement. And the other component is what happens if you actually breach the 12% that the Swedish regulators are aiming for? That sort of the exact dynamics of that are still to be described, I think.
In terms of the NII, in treasury going forward, I think that, if we then assume that, short-term interest rates remain where we are, we will have a gradual drop-off of NII there as some of the sort of older positions are falling off. And I think we are talking about the quarterly effect for the next two or three quarters of SEK 100 million of NII, reduction in that.
That's SEK 100 million per quarter?
Per quarter.
Okay. Very clear. Thank you.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning, everyone. Nick Davey from UBS. I've got a few questions, if I can. The first is on group products. And really, I understand you talked a little bit about what you're aiming to achieve here. From a business perspective, I just hope you might elaborate a little bit more around what we should be looking for from an earnings perspective. Obviously, it seems quite seasonal in Q1. What should we be looking out for as far as group products begin to take grip from an operational standpoint? How should we be looking at earnings evolving going forward? That's the first question. Second question, please, just another comment on market shares, which we've touched on in previous quarters. Front book market shares in Swedish mortgages still look well below back book shares.
Please, any, any commentary you can give us around pricing or criteria characteristics in the current market would be helpful. Thank you. Third question, just briefly on the split of costs. I'm a little bit surprised with the split of costs between staff costs and the non-staff costs. If I, if I look versus your 2012 run rate, I think your, your number of FTEs is down 7%, your staff cost run rate's up 2%. And I would have thought maybe with some of the investments you're talking about making, that, that I would have seen a, a bit more growth in your non-staff costs and a bigger reduction in staff costs.
Just please, if you could elaborate if there are any funnies coming in and out of variable pay in Q1 or anything else we should be thinking about on the cost side. Then please, just a final follow-up on this NII and treasury number. You talk a bit in your report around credit and basis swaps coming through NII and treasury. If we can just exclude for a second all commentary around hedge impacts, could you in any way isolate the impact from basis swaps, either this quarter or as a cumulative impact over the course of the crisis? Is there some sort of big cumulative positive that will unwind over time? Thank you.
If I start with market position and, and those issues related, that you raised, I would say in a principal manner, it's, it's quite important that you have very sustainable earnings capacity to, to, to work in a competitive market like Sweden, especially when you see some of the old value chains being broken up. And I noted, the other week that one of our competitors, SBAB, got increased, return on equity targets, which is a good, indication that, with subpar returns, you can't compete sustainably. And, I think we are in a very, very strong position to focus on the market position issue. We don't want to use price to gain market position.
We want to serve our customers, have high accessibility, high service standards, and in the higher segments, in my book, in order to gain a deeper and broader business relationship, your knowledge about the customer's actual reality, their business models, and how you can help them enhance that, is what drives a sustainable sort of business relation. So with the reorganization, where the many customers will be served through the digital channels, and the digital channels having a PNL responsibility for those customers, we believe that we fundamentally can drive down cost to serve at the same time as we increase service level and accessibility. So that ought to become a win-win situation, which, of course, increases our ability in the branch office to focus on those competitive segments such as affluent and SME, where, as I said, patience and relationship over time will yield results.
So, in my book, we can now, after four rather challenging years, where the focus was on balance sheet, risk reduction, and earnings capacity, turn our entire focus to this market position issue. And I do feel that the preparedness to work hard is there. On product complexity, I mean, we reduced product scope range with 10% last year, and we continue to do the sort of 10% in the ordinary business. The entire organization is now doing quite a deep analysis, as this is one of the most complex projects ahead of us, where IT, basically all parts of the organization needs to be involved in order to see how we can make a larger reduction over time. And that is going ahead according to plan.
Apart from that, group products, I mean, is improving the sort of control of the different products areas such as saving, lendings, payments, and cards, where we have clear responsibility. We are now improving the steering model so that we can truly measure everything from A to Z. By the end of the day, I think that will drive a bigger PNL awareness in the organization.
Looking more number-wise of things, then, I think if you take your staff cost question there, I think in general, the staff that is leaving us is very much relating to Russia and Ukraine. And that is, on an overall basis, quite small cost reductions as such. In Sweden, we are not reducing staff. On the contrary, you could say that in certain areas, we are actually recruiting staff. And also we are, as you know, we're having a little bit extra cost accounting-wise from the variable pay programs. That could affect your numbers as well, depending on how you model it. On NII, or sort of the projections of thing, I think we're stating that the cost will be, for continued business will be flat, 2013 over 2012.
Income is always very difficult to gauge on. We continue to work with repricing, but it's a story that is sort of gradually coming to an end, of course, as banks are becoming more profitable and more well-capitalized. We are also starting to see that the new sales margins in the mortgage arena are slightly lower than back book margins. So there's a little bit of headwind on that aspect as well going forward. But then to a very high degree, it will be a macro call where income goes. On NII, you talked in the treasury there, I think your question was to what extent has basis swaps valuation affected the NII? And that was not any more prime driver of that NII income.
Okay. That's very clear. Thank you.
Our next question comes from Mr. Andreas Håkansson from Exane. Please go ahead.
Yes, hi. Just really a follow-up question on the capital that I wanted to ask you about. What's your best guess when you're going to have the full visibility, so you're able to communicate what you're going to do with all your excess capital? And then maybe just as a follow-up, you mentioned briefly that you expected you might have a positive rating change. Could you give us some timing on that? And what would be the potential impact, because you're already funding quite cheaply, of course. Thanks.
If I'll start with the last, then I think we are... We have good discussion with the rating institutes. It's very much backward looking, very compared to where the market trades. So I agree that it won't mean a lot, but on the margin, it has an impact over a longer period of time. I don't have anything more to say, really, when we can... We just see we are on the right track there, and we are getting traction among our debt investors, the people who lend us the money, really, about the long-term viability of Swedbank. So that feels good. Then eventually, it will turn up in rating as well. Absolutely. And then,
Sorry, Göran, sorry. Can you just, the divestment of Ukraine and Russia and all of that, have you, the rating agencies had any particular comments on that move?
I think, of course, on the margin, that's a good step, but they having been so small, it can't be a major trigger. But it, it's more the fact that it proves the point that we, we said we were going to sort of divest out of this, and now we've done it. So, so it's more proof in the pudding that we stick to our strategy rather than the exposure as such, I think.
Okay.
Then the best guess on capital, I think we have all been wishing for clarity there. On the resolution side, unless you have something differently cropping up in Europe, I think we can have some sort of better guidance in the second half of this year, maybe third, fourth quarter. And then for Swedbank specific, we have on the AIRB advanced, we perhaps are talking year-end or so, something around there. So we would take a quarter here and there.
Thank you.
Our next question comes from Mr. Per Grönborg from Danske Markets. Please go ahead.
Yes, good morning. The issues I had has been answered, so, nothing more from me.
Our next question comes from Mr. Geoff Dawes from Soc Gen. Please go ahead.
Hi, good morning, everyone. Geoff Dawes here from Soc Gen. One quick question from myself. You mentioned in the report that you want to mitigate against the prolonged low rate environment. We've already spoken about mortgage pricing coming off a little bit. We've spoken about the hedge. What other ways are there for you to actually mitigate against these low rates? And, as a follow-up to that, is it fair to say that net interest income in all the operating divisions is likely to be quite flat until we see rates go up, and therefore, the measures that you take are more to defend the current NII run rate rather than to actually increase the net interest income run rates? That's my only question. Thank you.
I mean, we continue to reprice on the corporate book, so that is one way to mitigate. And then, of course, to be diligent on the cost side. So, but I also believe that we should be able to regain some market position, which would overall help the absolute numbers of NII.
Okay, and then just on that gaining of market share, I mean, you've spoken about how the, you won't use pricing to gain market share, but your competitors are using pricing. So what is the process by which you're gonna get market share on the books?
Well, I mean, I think there is, of course, we have one of our peers who are much more aggressive on pricing. I think all Swedish bank, other Swedish peers are, and including ourselves, are trying to defend our own prioritized clients in that. And of course, that will impact pricing over time if that continues, because as we try to sort of secure that we don't lose our good clients on price, we will eventually be putting prices down a little bit. Absolutely. But we are not taking a sort of a step forward saying that we will match with a centralized pricing model from headquarters, so to say, the pricing that our aggressive peers is having.
That's something that our businessmanship out in the branch office needs to do, and that will eventually put pressure on pricing. Absolutely.
Okay, great. Understood. So prices are likely to come down, but by less than you see the peers coming down.
I think we have started to see the front book price, front book margins are sort of coming down 5-7 basis points in this quarter that we saw. How much of that will continue, it's very hard to say going forward. It depends on many circumstances, so I'm not gonna try to guess on that one.
That's fine. Very clear. Thank you very much.
You're welcome.
Our next question comes from Mr. Jan Wolter from Deutsche Bank. Please go ahead.
Yes. Hi, Jan Wolter here, Deutsche Bank. Two questions. First, Jan, to your, the Riksbank flag, Sweden is likely facing lower rates for longer. Have you thought about the any incremental negative effect from this that you're not able to mitigate, for example, lower yields, liquidity portfolio, deposit competition, et cetera? So that's the first question, please.
I don't think we... You can't really hedge. We're not in the sort of hedge fund business. So if we do sort of have a liquidity portfolio, and we gains, as you have seen in the past quarters, in treasury. But we are not. If there is a big shift in short-term interest rates in Sweden, that will filter through the P&L.
Okay, thank you. And the second question there, you indicated earlier on the call that you need clarity on regulation and bail-in before taking any further action on capital and give, give the market guidance. How does the board and management reason here, outside regulation, do you feel that there is enough capital for both dividends and buybacks or other types of capital repatriation, and to execute on the growth plans that, that you have in the home markets? Or is there a conflict between those two targets, please?
I mean, if you look at our growth ambitions, I think we have tried to be rather clear on that. We want to grow with the GDP development within our four home markets, and then, of course, try to grow and extend the business relationship on existing clients. And net, net, I would argue that our market share on lending is slightly higher than the ancillary business market share on the same client base, which means that we should be able to leverage off from the lending relationship we have in order to gain ancillary business. So I don't see right now that there is any major conflict between the issues you raised, i.e., our ability to both be very efficient on the capital side and still meet our growth expectations.
Okay, very clear. Many thanks.
Our next question comes from Mr. Pawel Wyszynski from Nordea. Please go ahead.
Yes, hello, Pawel here. Just two quick questions. I was wondering, on the cost side, you're saying that you're gonna cut costs a little bit more as you're keeping your cash guidance flat. Could you give us some flavor what, where would you cut these costs? And also, on the lower Basel III effect, if you could split maybe the CVA effect and the lower SME risk weight effect.
Yeah, on the cost, we're gonna take everything from Jonas. No, on the cost thing, I think it's more that, remember that the cost program started in the first quarter of 2012, so, we've been working on a downward slope, and therefore, sort of we are overshooting it a little bit, so I don't think it's any particular areas that I will pinpoint really there. The only thing with cost is that the first half, I think, will be lower than the second half. The second half, we will sort of... We have things we want to do, and they are a little bit backloaded in that sense. And on the, the impact on Basel III there, if I simplify very much, I would say the SME is half and the CVA is half.
But on the SME part there, part of that, we were expecting part of that, the impact coming already earlier, so a small part of that we had already guided for previously.
Okay, perfect. Thanks.
Our next question comes from Mr. Jacob Kruse from Autonomous. Please go ahead.
Hi, Jacob from Autonomous. Just, two questions. Firstly, on this whole mobile banking, cashless branches, et cetera. When this, I mean, I think more than half of your branches are already cashless, and you're saying that most of your transactions are becoming internet-based or mobile-based, it looks like. Should we start to see anything here on either staff levels or the number of branches or cost levels over time, and if you could say something about that? And just secondly, on the benefit from the SME treatment under CRD IV.
I have to say, my understanding a little bit, looking at some of the other European banks, have been that it's not so clear that, that this comes on top of the SME benefit that is already in place, in, in the current Basel II framework for companies with less than 50 million of turnover. How, confident are you that you're getting these, these SME benefits for your non-standard portfolios, or, or is this only on the standard book? Thank you.
Jacob, on the first question then, the digital evolution. I mean, one of the effects of what I tried to say is that going forward, your normal branch that is there for customers who can't solve their problems on the net or need to spontaneously run into a branch because they can't solve problems elsewhere, that's gonna be more pronounced. It's gonna be more service-like branches. Where the client executives then sit for affluent and SME customers could definitely be in a different place. So over time, that should lead to a more efficient branch network. We could actually have more branches at a lesser cost going time, going forward.
And the transformation of the manual cash handling have actually reached two-thirds of our branch offices, so we are well underway there to take away one of the big sort of stumbling blocks to transform the branch office fundamentally. But as you know, we are now splitting the customer base between the regions and the channel and concept. So this is, as I said before, a 3-5-year journey we're looking at.
On your... I, I don't, maybe I didn't catch your question, properly, but how certain are we of the impact on capital of this CRD IV there for the SME? I think, of course, that's our best, best guess of the implementation right now, coming through. It has some interlinkages really also with the effect that we get on AIRB advanced in that segment, of course, but it doesn't affect our guidance for AIRB a dvanced that we've given you previously, which is SEK 40 billion-SEK 50 billion in risk-weighted assets.
Okay. And, okay. Okay, that's fine. Thank you.
Our next question comes from Chintan Joshi from Nomura. Please go ahead.
Hi, good morning. So three questions, please. First on mortgage pricing, your comment around front book coming down 5-7 basis points. Can you tell us how do you look at that margin, as in what funding cost do you take in that? Is it just covered bond pricing, or do you also take into account other sources of funding?
Actual back book funding cost is sort of the base we compare it to...
So if deposit pricing and senior pricing is, well, you don't have a lot of senior, but if deposit pricing is coming down, then, then that should help defend the margin? Or do you still think including the, the front book deposit repricing margins could still be down a little bit?
We base the internal cost of funding that we measure margins against on wholesale funding only.
That is front book?
It's back book.
Okay.
Actual back book.
So, that means there is a potential for some defense of that margin from funding costs coming down?
On the margin, yes.
Okay. Second question was on SME, again, NII. You highlight in your text that you are able to offset deposit margin compression with SME, with commercial repricing. But if I look at your LCI division, then I really don't see NII going up. It's actually down 2% quarter-on-quarter, whereas volumes is a little bit up. So where am, where do I catch this commercial repricing, which I think was about SEK 100 million, but I can't spot it in which division I should be looking?
It's part of it is coming through in the retail corporate book. And then with regards to LC&I, the underlying NII is actually improving because we have a little bit of one-off traffic in that NII in the fourth quarter, and also we have a little bit of negative small traffic in there. So it, the lending book in LC&I is actually developing very, very nicely.
Could I get that, what was the headwind in Q4? Just to understand how the improvements are progressing.
I think in the Q4, it was a bit inflated because we did a move of, we changed between business areas, a few clients, and then you got sort of accumulated NII for the year. That would improve the NII. If you see between third and fourth quarter in LCI, you have a big jump there. It's bigger than sort of the projected timeline for the improvement.
Okay, understood. And then, on capital, you had now a positive migration for a number of quarters. I mean, if I make the assumption that GDP growth is in the 1-2% range, unemployment will remain stable, should we continue to expect more positive migration?
I think it's difficult to have to project that in the Swedish operation because the quality and the ratings are quite good as they are, so I wouldn't sort of stick my head out there. And we haven't really seen a massive downgrades in, in rating during the crisis either. Yeah, I definitely think we are sort of set for a longer journey in terms of positive rating migration in the Baltics. Remember that we have almost 100% risk weights in the Baltics. We are tying up SEK 25 billion of equity there to sustain our operations, and that is very procyclical in its element. I think the the true risk would cater for a lot less capital in that operation, really.
Thanks. And finally, SEK 40 billion-SEK 50 billion on the corporate risk weights. Any timeline on when we might see that?
No, I mean, the quality of the report to the FSA was perceived to be good, and now their normal iteration starts, and they are in control of the timeline. So we're gonna do our best to serve their questions as they now look at the test results that we're gonna run with them during the next period of time.
Any ballpark range, like 6-18 months, or even, I mean, what's the industry experience like for them to get through this stuff?
I mean, we have seen quite lengthy processes in the past, but my feeling was that the quality of our application was above standard, and, and that should help time-wise, hopefully. But it's in their hands. Maybe Göran wants to add something.
No, I mean, in the end, it's very difficult for us since it's not in our hands. So, we can just say that we feel we have a good application, and we hope to get it processed.
Thank you.
Our next question comes from Ms. Sophie Peterson from JP Morgan. Please go ahead.
Yeah, hi, here is Sophie Peterson from JP Morgan. Two very quick question. First of all, you still had some Baltic recoveries. I think they were around SEK 17 million. How should we view the Baltic losses going forward? When will the recoveries disappear? And then my second question is around your kind of internet banking. With everything moving more online, are you concerned that it will become even more price competitive in Sweden in terms of mortgages, as it will be easier for the customers to compare prices among the different banks? Thank you.
If I start with the last one, then Håkan takes your first question. Yes, competition will increase, but so will also, we will be able to mitigate, some of that and hopefully most of that by the cost to serve coming down, straight through processing becoming more common for. And I do feel that we have a very strong position in the digital environment, and that the acceptance levels among our unique customer base is very strong to the new technology. So, so far, so good.
You're not concerned that some of these customers are quite price conscious, price sensitive? In your view, the customers that they are more buying into your mobile banking or your products that you offer online.
I think every customer, I mean, if you ask a customer why they change banks, the least offensive answer is to say price, because then they don't have to make anyone embarrassed. So price have a tendency to become slightly overrated, of course. I think the whole experience matters, where price is one important component. But fundamentally, we want to drive digital revolution because cost to serve will come down, and therefore, we can also provide some of that benefit to the customer. So I guess, that's part of the game, to become more and more efficient, and by that, becoming more and more competitive. So, in our book, we with our enormous customer base, we ought to have a competitive advantage here. I don't see us being victims of this trend, rather beneficiaries.
On Baltic banking asset quality, we guided last quarter that, we, we feel we still have good asset quality, but naturally, the recoveries will gradually come down, going forward, and, and that is what we're seeing this year. So, continue good quality with recoveries, but slower pace compared to last year. The major driver that impacts, the levels is the real estate prices in the three countries, since most of the workout portfolio remaining is real estate-based.
How should we view normalized, loss base for Swedbank going forward?
That's a very good question. We haven't really commented on where we expect the exact levels to be. What we have communicated is we do see that we have very low levels in Sweden. We don't see any signs of changing trends in the Swedish environment currently, and for yet some time to come, I think we're conservatively provided in Baltic Banking, meaning that we will have recoveries but at a slower pace.
Fantastic. Thank you very much.
Our next question comes from Mr. Carlo Dig randi from HSBC. Please go ahead.
Yes, good morning. Before you just spoke about repricing in the corporate segment. So I was wondering if you do plan if to extend this repricing, not just to the loan base, but also to whatever it is, the fees and commissions. What I notice is that the growth is probably not so strong, and probably there could well be the possibility to reprice to some extent in order to reinforce the revenue line going forward, unless am I missing something there? Thank you very much.
There is no specific plans to reprice the fee structure as we talk. But, I mean, what we want to do is extend the business scope with our existing client base, because at the end of the day, our market share in the SME segment is slightly higher on the lending side compared to ancillary business. When it comes to the potential RWA that sits with us becoming or having a deeper and broader business exchange with this customer base.
Thank you.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning again, everyone. Just a couple of quick follow-up questions, if I can. First, can I just invite you, please, to make a comment on the dividend for this year? If you could just please very quickly clarify for us exactly on what net profit number you'll be at least proposing the 75% payout. We understand there's some negative numbers coming through discontinued in Q2. Should we view it as a payout on continued operations or on continued plus the discontinued underlying numbers from Q1, Q2? Please, just some clarification there. And then a second follow-up question. I don't know if there's anything more you can say on the risk-weighted asset number, because this SEK 40-50 billion of mitigation as a guidance level has been, I think, outstanding for a few quarters.
My understanding was that this was an overall RWA reduction target that you had. It now seems to me that it's just the AIRB approval, what that's worth. So any comments you could make on the overall trajectory of your risk-weighted assets, AIRB and other mitigations would be helpful. Thank you.
On the dividend there, I think you should take the part of the thing that will go over the P&L statement through other comprehensive income, which will not affect the dividend, but the SEK 390 million that you see as a loss in this quarter will affect the dividend.
The 1.9 in Q2 will not?
Yes, it will not. Exactly. That's the working assumption. On risk-weighted asset there, I don't think we have so much more to say other than that we are constantly working in making the bank more capital efficient. And I can agree that we sounded like parrots in SEK 40 billion-SEK 50 billion for quite some time, but it's also been a journey where we've been gradually more successful than what we've been able to think in the beginning as we explore more things to do, so to say. So we still have the AIRB advanced. Then, of course, we are. It's becoming more and more difficult to be more the longer period it goes in the other type of activities that we are doing.
Okay. So for now, 40-50, that's just the AIRB approval in isolation and everything else we-
Yeah, call it including other things else, but the magnitude of those will be smaller.
Okay, understood. Thank you.
There are no further questions on the telephone.
I take the opportunity to thank everyone for a very active Q&A session, and look forward-