Ladies and gentlemen, welcome to the interim report, January to June 2012 conference call. Today, I'm pleased to present Mr. Michael Wolf, President and CEO. For the first part of this call, participants will be in listen-only mode, and afterwards there'll be a question and answer session. Mr. Michael Wolf, please begin.
Thanks, and good morning. If we look at the second quarter, we-- it's been more effects due to the debt crisis in the real economy. We see macro indicators showing, lower economic activity, and confidence indicators are turning slightly more negative. In the Baltics, we are still experiencing a structured rebound with, from their crisis, and the economic activity is quite good. Our position remains strong, and we have created buffers to handle a significant more stressed economy, which is confirmed by the financial stability report from the Swedish Riksbank, but also from our own stress tests, which are made public in this report. I feel that the importance of transparency in this area is great in order to regain trust in the banking sector.
Another area where openness has had positive effects are in Swedish mortgage market, where we follow the model for reporting margins set by the Central Bank and the SFSA. Our strategy to focus on risk-adjusted profitability rather than volume remains. Despite unchanged credit standards from our side and lower market volumes in general, credit expansion declining, we have, during the quarter, seen an increased inflow of credit, credits, both in the corporate and the private segment. Our market share in the Swedish mortgage market on new lending is therefore increasing month by month, and we reached 19.2% in May. Our efforts on becoming more capital efficient continues to yield positive results. We increased quarter one to 16.6%, and in light of this, 13.5% return on equity is a step in the right direction.
It is, of course, unsatisfactory not to have received clarity yet on the exact new details on the capital rules from the regulator. But looking at our quarter one of 16.6%, it corresponds to approximately 14% in the new Basel III environment. And this means that we do not only manage to meet the new regulatory minimum of 12% in 2015, but we also have the buffers for our own stress tests. Our organization has delivered on the planned cost reduction target, which is set at SEK 1 billion for the full year of 2012. We have also, during the period, achieved a new pension agreement for all new employees, which is valid as of 1 January 2013. It is a defined contribution plan, which over time will reduce our pension risk.
The effort to make our product offering more efficient has started. During the years, we have always increased the number of offered products and IT applications, and this trend has now been broken in this quarter, and we have reduced the number of products during the quarter, and we mean that we should continue to be able to do that also in the future. One of our focus areas for 2012 has been to improve customer satisfaction. In the Baltics, good results in this area has been achieved, and the Swedish retail area is working diligently on increasing our service levels and thereby customer satisfaction.
During the period, we have launched several new services on the mobile banking area, aiming to make it, make life easier for our customers in handling their daily transaction needs, but also to support the move from manual cash handling to digital payments. We have over 900,000 mobile users, and we got 85,000 new clients on the mobile channel in June, and that is quite promising. If we summarize, the report is quite stable, with good progress in key areas despite an uncertain environment. With that, I would like to hand over to Göran.
Okay. Thank you, Micke. As Micke said, the macro has been a little bit more challenging than in the first quarter. That has created some headwinds for us and all banks, really, and that's visible sort of on deposit margins due to lower interest rates. It is also visible on asset management fees, and it's visible primarily also on the capital markets activities and the client-related incomes we see there. We have also been affected. I would say that we continue to have difficulties in exiting Ukraine at lowest possible cost due to the European banking crisis.
So that's a bit of a macro-driven headwind, but I think, the positive part is that on all the underlying work streams that we have actually in the bank being repricing and returning our margins back to the, the, the pre-regulatory regime shift, that is doing fine, in all business areas. I think volume development is good as well, and it's encouraging to see that the Baltics is stabilizing. I also think it's very good to see that the cost program is running according to plan. And lastly, we are continuing, as we have done for the last couple of years, really, to work with capital efficiency, and it continues to build capital, which is, very good. If I start to break this down on the business areas quickly, starting with retail, it's extremely stable.
The quarterly deviations are hardly visible. They are able to mitigate the falling deposit margins with higher repricing income. That's very good. Asset quality continues to be very good, and we have increases in other commissions that almost mitigate sort of the asset management related, the commission drop that we have seen. So overall, as usual, an extremely stable quarterly result in the retail division. Turning then to the Baltic.
Here, I think it's actually the story is quite good, that we have a tough macro, but even though I would say that the Baltic countries are continuing to recover, and even though we have headwind in the NII here as a result of the EURIBOR, we are able to have, we are seeing that the business activity really is actually picking up in some areas in the, in the economy, and that's visible in other income lines. Also, we are mitigating the drop in NII with costs. That is very good. And it's very encouraging to see that for the first time since the financial crisis started, really, the lending book in this quarter did not fall in euro terms.
I think we have wanted to see that happening in this quarter, and that's, given the macro, I think it's a sign of strength that is very good. We continue to have recoveries, and Håkan will come back and talk more about that later. The last business area to look at is Large Corporates and Institutions, and here, I think the picture is more mixed. We have one part of the business areas being the loan portfolio relating to the large corporates, which are continued to reprice. We see an increased NII. We are very happy with the work with capital efficiency in that portfolio, and the return numbers are actually improving. We also feel that we become more and more relevant with the clients, so that feels very good.
The other part is the more capital market-intensive trading area that in this quarter has a much tougher quarter compared to the first one. We then must remember that the first quarter was an extremely good quarter for us in this area. So looking over the two quarters, it looks decent. But in this quarter, we've been affected by the macro development in this area. The strategy there is continuing to work with bundling that kind of client activity harder to the capital-intensive loan portfolio. So the strategy remains the same, but cost will, of course, be a focus area. Then turning to the cost, I think we are well on track on the cost program.
Stripping out variable cost component, anything else that we have said, we are actually at, almost dead on half a billion in savings in year-on-year comparisons, which is, feels good that we, we'll, execute on this one. It's also good to see that, the whole organization are contributing in this area. Looking ahead there a little bit for 2013, I think, we are occupied with a sort of planning process on how to view costs going forward. One thing I think we can say is that we are not planning for, higher absolute cost next year. It will be flat or lower, but we do have investment needs in certain areas that we also need to cater for.
It's good to see that we are able to take out costs in order to also to invest on areas that we need to invest in. Moving on to capital, we have a release, or we have a reduction of risk-weighted asset with SEK 9 billion in the quarter, even though we had a volume increase of seven and half almost . And we have a PD migration of SEK 11 billion. Six and a half, seven billion of that is relating to a calibration of model on the SME sector, that we have guided for before, that we can now grade our SME exposure higher than investment grade if they are, and that's good in order not to be too conservative.
We are also seeing underlying positive rating migration in both the Swedish and the Baltics books, which are good. We have a number of minor effects that contribute to the SEK 9 billion of reduction as well. We will continue to focus on this area going forward, and Håkan will come back a little bit on that later. Funding is perhaps an area that has been extremely uneventful. We have continued to fund long term. We've done SEK 45 billion- SEK 41 billion in the quarter. If we add on what we did in the first quarter, you could say that we are almost SEK 100 billion down of plan, the funding plan of SEK 120 billion. We are very well progressed, and...
The access has been very good, and it's really nothing new here other than that, like everyone else, we are waiting for clarifications for sort of on the regulatory landscape going forward in this area. Lastly, just to summarize, I think the underlying quality is good on the result. Actually, I think it is really good to see that organization are improving on the areas that we want to improve. We are also, of course, helped by that we get lower funding costs relating to government guaranteed debt maturing that has contributed in the treasury NII with a little bit less than SEK 50 million.
The treasury NII has also been higher by roughly a little bit less than SEK 70 million by the fact that we have allocated out to the business areas a higher cost level for liquidity. While the remaining SEK 50 million of improvement in NII in the treasury is one-off, you could say. Just to summarize, I think very strong capital position, but perhaps most important, a decent return number with 13.5% return on equity on such a high capital position in this macro environment, I think is okay. With that, Mr. Berg.
Thank you, Göran. Starting with the asset quality, this quarter has developed similar to previous quarter. Sweden continued to show low impairments, and in general, we still see no negative trends in the asset quality. The Baltic operation continued to show write-backs, and this quarter, mostly in Latvia. The quality of the credit portfolios continues to improve. In Ukraine, where we last quarter indicated increased impairments from exiting the retail portfolio, we have impairments of SEK 325 million this quarter, primarily due to sales of parts of the retail portfolio. We believe we have provided for the remaining exit cost, but depending on the market condition, it may be some additional losses from the exits of the remaining portfolio.
In summary, we expect the current trends to continue, and so far, we can't see that the somewhat weaker economic trends will have any material negative impact on the asset quality this year. We expect the Baltic operation to continue to show write-backs, and all in all, we believe second half of 2012 to be similar or slightly better than first half year. We are also publishing the ICAAP results in this report. And when considering what scenario to use back in December 2011, the outlook was pretty gloomy. So we ended up with an extremely pessimistic scenario, with a deep recession and a late and slow recovery. The regular regulatory requirement is to have an unlikely but possible scenario within a 25-year period.
Our feeling is that our scenario may be a much more severe scenario than that. And even in this scenario, the results show that Swedbank is very resilient to shocks in the economy. With heavily falling revenues and credit losses much higher than we've seen in the previous crisis, we have a scenario impact on quarter one of only 165 basis points. The low point, including the regulatory impact, but without the management intervention, is 10.9, according to the ICAAP report. Considering the ongoing work to increase capital efficiency, we estimate to be well above the regulatory hurdles, even without the management interventions all through the scenario period. This quarter, Swedish FSA has approved an update in model for the SMEs, which so far has given a reduction of the risk-weighted assets of SEK 6.5 billion.
The update was a part of the ongoing project to improve accuracy when calculating capital for our corporate portfolios. Another important step in this work is to apply for the advanced IRB, where we expect to get approval during 2013. This is an important work since we do believe that our current risk weight is not properly reflecting the risks we have in the portfolio. This slide shows the distribution of the SME portfolio in retail of SEK 228 billion. As you can see, SEK 90 billion is lending in Swedbank Mortgage with a very low risk. SEK 25 billion is leasing within Swedbank Finance, and the remaining SEK 113 billion is distributed to the different sectors you can see in the table, all of them with high collateralization.
As indicated previously, we expect to work to improve capital efficiency within the corporate segment to decrease risk-weighted assets in total in the range of SEK 40 billion-SEK 50 billion.
Thank you, Håkan. So let's open up for Q&A. Please.
... Ladies and gentlemen, if you have a question for the speaker, please press zero one. Our first question comes from Mr. Omar Keenan from Nomura. Please go ahead.
Hi, good morning. Thanks very much for taking the questions. Just firstly, I just wanted to ask on the lending margins, and one of your peers sounded a little bit cautious on the outlook for loan margin repricing. So I just wanted to hear your thoughts as to how far that can sort of continue into the future. And if we think about, so perhaps if you get a rate cut later on in the year, how confident are you that you can continue to offset deposit margin pressure with lending margin increases? For example, if you know, if rates fall, do you think mortgage rates will follow after that? They're already quite low in the historical context.
And then, just secondly, a question on your corporate portfolio moving on to Advanced IRB. What kind of loss given default improvement are you expecting, just out of interest? And any updates on the timing of that? Thank you very much.
On the margin side, I don't think we will. We can't really guide you on the impact of lower interest rates. That will be more your judgment call on what where interest rates are going. I think on the repricing and sort of restoring the margin to sort of pre-regulation change levels, I think there are further to go. We think that partly you could say that on the mortgage side, even if we have reached a decent level now, it needs to continue to filter through with the PNL statement, as we have a number of longer-dated contracts coming through. On the corporate book, I actually think that the feeling I get is that the work with repricing corporate book in all banks is actually increasing.
So, I think also that that takes longer time to do, since many of these exposure are more contractual of nature, that you really can't reprice them as you come to maturities. So that is something that will continue for the remainder of this year and also well into next year. And I can't really see that margins are not declining at this in time, since most banks are active in this area, especially the more corporate orientated banks and focusing more on profitability, actually, which is very good. On the IRB, I think Håkan gave an answer earlier, but he will comment here.
I can't really give you sort of an exact answer on LGDs, but the, the LGDs, of course, is, is depending on the collateralization in the different parts of our, our corporate portfolios, and that's why we showed a part of our corporate portfolio on the collateralization of that one. So it will vary, but looking to where we are in the different portfolios, it will improve. And, and what we're guiding is rather on the total amount or risk-weighted assets.
Okay. Thank you very much.
Our next question comes from Mr. Peter Grabe from Handelsbanken. Please go ahead.
Thank you. Yeah, I have two questions. Firstly, regarding deposits, it's been quite volatile in the past quarters. I was just wondering what the reason is for deposits going up so much in Q1 and down so much in Q2. It's down 7% quarter-on-quarter. The second question relates again to capital. In terms of the SEB modeling, my impression was that the impact would be greater. Now, SEK 6.5 billion. Is that a figure that will increase going forward? Should we see more of the positive development in the coming quarters, or is this it? Also, I'm wondering if you can give some sort of ballpark figure as to where you believe the positive impact of the IRB model eventually will end up.
With regards to deposit, I think some of the institutional and corporate deposits out of our new New York branch is very volatile in nature. It goes up and down quite significantly, or with big swings. The underlying deposits in retail and also the Baltic banking are very stable, and in the Baltic banking, it's actually a continued growth element. We actually have a loan to deposit level of the Baltic operation of 115, which is bordering on the low side, of course. So, deposit-wise, we are feeling that there is more intense competition on the deposit side in Sweden, but that's expected on the term deposit side. That is part of the game, I think.
On the SMEs and the risk weights, we got the approval beginning of June, so this is still work in progress, the 6.5 that we're showing in this quarter. We haven't been splitting explicitly the different parts of the capital efficiency project, but the two major parts is the SME updating model and the IRB, advanced IRB. And the 6.5... Just to be clear on that, the 6.5 is a part of the 40-50 estimate that we have on the total project. Where again, the two major parts is the advanced IRB, the SME updated model, but there is, there are also other small parts that will include that.
Okay, thank you.
Thanks.
Our next question goes to Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning, everyone. Nick Davey from UBS. Three questions, please, from my side, mostly on your guidance. The first, please, on costs. If I look at your underlying cost progression this quarter relative to last, it seems like you've moved from around SEK 4.1 billion quarter in Q1 to SEK 3.9 billion. So it's a pretty healthy Q-on-Q progression there. I just wanted to hear if you'd be happy for us to think about that kind of momentum going into the second half, or if there are other underlying cost increases that we should expect coming through in H2. The second, please, if I could, just come back to this risk-weighted asset guidance, please, the SEK 40 billion-SEK 50 billion risk-weighted asset reductions from your various mitigation efforts.
Could you please just confirm for us that's on stated risk-weighted assets under Basel II versus the number that you're at currently, and that's your current just from the mitigation, so no guidance on growth. And then thirdly, and finally, please, on the Ukraine. You've talked a little bit about some potential losses coming through in the second half from the completion of the sales. I wondered if you could please just expand on that a little bit and maybe just reference the stock of impaired loans, which seems to be flat on the quarter, despite the just a billion and a half of loans that you've sold. So maybe just if you could expand a bit about what kind of trends you're seeing on the corporate book. Thank you.
Let's try to take these. If I start with the middle question, no, I start with the cost there. Yes, there is a quarterly declining cost. I don't think our guidance is SEK 1 billion. You, and we stand by our guidance. The, the new thing that we are saying is that for 2013, we don't think cost will go up, so don't expect a rebound in costs. But we are in the planning process and, in, in order to see sort of and understand what, investment needs are going forward, and what further cost actions we can do, of course.
Because there will be more. There will be areas that we want to continue to reduce costs in, relating to, for example, taking out products and so forth, that Micke has talked very much about. And there will be areas that we want to invest in. I mean, we have a lot of IT platforms, and we have mobile banking and so forth. So it's just about changing your resources, really. But from your perspective, the guidance is SEK 1 billion, and the cost will not go up next year. That is the working assumptions that we are dealing with today. Ukraine is, we did sell. We have sold sort of a healthy portfolio that has not been impaired.
Because the macro is so weak, especially other European banks, which are the potential buyers in Ukraine, we have been forced to sell at a discount. So you could say it's a cost of exiting Ukraine that we are taking. We now have a very small exposure left in Ukraine, and much of it is actually a healthy corporate portfolio as well, but we will continue to reduce the Ukraine. You must bear in mind that three years ago, we had SEK 20 billion in Ukraine, and now we have SEK 2.5 billion. So net. So the... So it all in all, it's going according to plan, I would say. The second question was relating to RWA. Håkan, you can take that.
That was a question whether this was Basel II, yes, and whether that was excluding any volume growth, yes.
Okay, that's very clear. If I could just ask one brief follow-up, if that's okay. If I then look at the impact of that risk-weighted asset reductions, SEK 50 billion or so, that would leave you at a pro forma quarter one of around 18.5. And if I flush through some Basel III IAS and mortgage risk weights, perhaps around 15.5. So I suppose we return to the question around capital and capital targets. Perhaps you could comment a little bit about your expectations of the go-to core Tier one and what you would then see as excess capital. Thank you.
I mean, your reflections are correct there on the calculations. And we think that we don't really know how much the Basel III and the new regulatory change will be exact, and we're waiting for that, but it will be in the range between 2.5 and 300 basis points in regulatory impact. So we are at our targets already now, at 16.6, more or less, for what's being communicated for the target for 2015, which is, of course, very good to be there. I know, but the target we have communicated on the...
Based on the information we have, we think that our calibration of the target will be somewhere in the range of 13.5-14.5, and we haven't really received anything new information there to change that. But we, since there's still uncertainties, as Micke said, going forward.
I mean, as we have communicated, neither is good when the bank is undercapitalized, nor is good when it's overcapitalized.
... And we, we don't want the capitalization to be a burden for the business efficiency. So at present, we have now built the buffers. Remind yourself that we moved from a 9.5% level to 16.6% in three years time. So we've done a significant risk reduction and, and we've done a good job to ensure that we are never, ever gonna be close to any government intervention going forward. But from this point and onwards, we do really want to see some clarity from the regulator, and hopefully they will be able to achieve that during the autumn, and then we can come back and be more firm on, on, on, on this issue.
Okay, very clear. Thank you.
Our next question comes from Masih Yazdi from Credit Suisse. Please go ahead. Go ahead.
Hi, this is Masih Yazdi from Credit Suisse. Two questions for you. Just following up on the SMEs, just asking the question a different way. How large share of the whole SME book did you manage to re-rate during June? And so how much is left of that to do in the coming quarters? And the second question is on Swedish mortgages. You seem pretty eager to go back to your market share of 26%, also for new sales. Would you aim at doing this, even it would mean that you would see falling margins for new businesses, or does that this target or this aim include seeing margins being flat for new businesses?
Should I start with the SME? I'm sorry to say, I can't give you any exact numbers on what part, but again, the total guidance on the project we have given, and I think we stay on that information. With regards to our eagerness on the market share in the mortgages, I must say that I don't recognize myself in your description. I think we have put down sort of our pricing and lending criteria, and we haven't changed anything. But of course, we are very happy to see that both we and the other players are gaining market share, since one of our peers have had the market between 40%-50% for a long period of time, and that market share is now being reduced as they are changing behavior.
And we are gaining back our natural market share, and so are other peers, so it's happening all around in the system. The last part of your question I didn't really get.
Is that market share, again, being reached without any pressure on margins of the new sales?
Margins are extremely stable, as I said, on the new sales margins, sort of, have established themselves on a new level. So we are happy with that.
Okay, thank you.
Our next question comes from Mr. Johan Ekblom from Bank of America. Johan, please go ahead.
Thank you. Just two questions related to asset quality, please. Just coming back to Ukraine first. I mean, you said there might be some further losses relating to the disposal. I guess the net SEK 2.5 billion is the upper bound of that. But can you give us some more guidance on, you know, whether we should expect a similar run rate to what we saw this quarter in the near term, or whether it's something dramatically different? And then just also coming back to the write-downs you took in Ektornet in the quarter. You mentioned in the text that the disposal process is likely to lead to some further write-downs. So I guess this is a recurring event.
Can you give us some guidance as to, you know, how much more we should expect to see? And maybe also some color on where the write-downs, or where had you not taken enough provisions previously enough for, for these repossessed properties?
On the Ukraine part, you should not see sort of the two first quarter as a run rate. It will be lower than that. I think it's more an effect that we have sort of a plan, and we try to be ahead of our plan in sort of from a financial point of view on the execution of the plan going forward, as we have a clear objective in Ukraine. With regards to Ektornet, I think the reason for us, or to start with the SEK 120 million in impairments that we book in this quarter, is relating to sale in Norway, and also, I would say, revaluation of a property in Finland. Overall, the picture in the Baltics actually looks better.
We are selling better, and we are getting better prices. And in the Baltics, we do have an overvalue in Ektornet, and that continues to be there. While the market for the things that we have in the Nordic area is softer, and we have stated all along that we have a sort of a cash flow deficit in Ektornet, so time is against us, since we have low levels of high vacancies and little income in many of the properties. So there, there's always a sort of a trade-off between time and and potential write-off when you sell things. And in Sweden and the Nordic area, the market is becoming softer, and that's why we really are seeing these impairments.
Overall, I would say the general overvalue that we have in Ektornet in general are roughly the same, but we are increasing, we do want, since it's costing us a bit to run the Ektornet, and it has also a huge impact on the cost line. We do want to reduce Ektornet, and here we will have a little bit of a trade-off between sort of taking what kind of either profit we are getting or impairment we are getting when we are selling against sort of the running of it. You must also remember that we are booking profits as well under other income when we are selling things.
Yeah, we have taken over so many properties here, and some of them are sort of with a deficit, and some of them are with a huge overvalue for us. What I'm guiding for is to say that the sum of that is positive, and that is definitely the case. But you will see the impairments of that coming on the impairment line, while the profit, when we are selling with profit, it will come just as an income under other income. So you can't really just look at the impairment number and say your provisioning level was wrong. That is completely the wrong conclusion.
But, but I'm correct in stating that this quarter it would still have been, you know, the net is still negative. I think that we said that the profit realized was SEK 56 million or something.
Absolutely.
Yeah.
This quarter, that is a complete correction, and the reason for that is that the Nordic property market is softer.
Excellent. Thank you very much.
Our next question comes from Mr. Geoff Dawes from Société Générale. Please go ahead.
Hi, good morning. Geoff Dawes here from Société Générale. Two quick questions from myself, both on net interest income and both related. First of all, you mentioned deposit margin pressure. Can you just break that down into the mix between short rates going lower and competition in the deposit market? Some of your peers have commented that there has been quite tight competition. If that is the case, perhaps you could give us an idea of where that's coming from and in what kind of products. The second question is, you seem to be guiding for a relatively flat second half of the year in net interest income terms. What can break you above that, above that relatively flat run rate?
Is it purely down to rates, or do you think there's some mortgage margin expansion that will, that will come through if short rates decline? Thank you.
I don't think we are guiding sort of for a, for a flat NII for the second half. That's your interpretation of where short-term interest rates are going. I think we are guiding for activities in the bank are all geared for improving NII from a repricing point of view. Then in the end, we can't, we don't really know where, in the end, the short-term interest rates are going, and that is a judgment call for you from an analytical point of view.
Yeah.
We are not really saying, putting our foot down on what we think short-term interest rates are going. On deposit margins, I don't have a breakup on sort of price competition versus interest rate effects. I can, in general, say I think there are a number, and we talked about that earlier, there are a number of niche players in the deposit market that previously perhaps were attracting some of their funding through the wholesale funding market, and that have now become more reliant upon the deposit market for funding purposes. That, of course, affects the competition for term deposits. It does not... We are for, and we have always felt that competition, and the margins on that part of the deposit base has always been very tough.
We are a retail bank predominantly with a lot of transaction accounts and deposits tied into transaction accounts. There, these niche players are not operating in that product bundling area. They are operating sort of on the more price-sensitive deposit base, more corporate related. So we feel that what's happening, what's been driven from a regulatory perspective is quite natural. We as sort of with a huge back book on deposits, will never be a price leader on that, but it will be important for us, of course, to keep key clients. So we take it from a client perspective, but we don't see that being sort of negatively, massively negatively hitting our NII. We don't have that feeling.
Okay, great. That's very clear. Thank you.
Okay.
Our next question comes from Chintan Joshi from Nomura. Please go ahead.
Hi, good morning. Two questions from me. Firstly, you are giving quite a constructive message on capital, so I just want to make sure of any risk factors here. Of the risk weights. In the past, you've given us some kind of loose guidance that you will be able to offset half the impact of the mortgage risk weights. But clearly, the numbers we are talking about here could get you to offset pretty much most of the impact from the risk weights.
I just want to make sure that there isn't, kind of, there aren't, other uncertainties that, that should take us away from what you were saying before, into, with, and we, we should consider these new numbers now. The second question was, on the last slide, that you've done the ICAAP, stress test. I just wanted to check with you, the 10 and 9% that you've shown as the core Tier one, does the FSA hold you to some kind of minimum under the ICAAP, and are you able to reveal that? Thank you.
On the last question the new regulation states act of 2013 of 10% capital and as of 2015, we need to have 12. Then there is a conservation buffer between 12 and 10, where if you go into that buffer, the regulator could have opinions on dividends and other related matters to ensure that the bank builds buffers and don't put themselves in a difficult situation. So what we're saying is that the low point in the stress scenario, without any management intervention, without any capital efficiency measures, would be 10.9.
But if you assume that we will get some capital relief due to the Advanced IRB, and if you assume that this team around the table would take some actions if that scenario were to materialize, we would never go below the 12%, which is the regulatory minimum minimum, which would mean in practice that we are, we are operating without any interference from the SFSA. And on the guidance, we have-
I think on the guidance, Chintan, it's we talked. I think we have talked vaguely about 40- 50 earlier on as a mitigating factor. Now we have started to release some, so you could say, yes, we are raising our guidance somewhat, but not, not. If we should take the effect we got from a peer who sort of had LGD effects on real estate portfolios that we saw in the week here, of course, the that was surprisingly high numbers. I would say, and we are not guiding towards that, rather trying to understand how they reach that number.
It's Chintan. Just if I can follow up. So, does the 1.7% uplift on Core Tier 1, roughly, is what I calculate, will come in from these corporate portfolios. I just want to see if there is any other risk factor out here which could take away some of this benefit, or, from what I'm hearing, you're actually thinking that there could be some more benefit than the 1.7%, the SEK 40-50 billion that you have highlighted, if we think about what peers have done.
No, I think we are saying SEK 40 billion-SEK 50 billion. IRB advanced is one part of that. We are working with... I mean, in general, capital efficiency has been a theme for three years, and it will continue to be a theme to work with capital as sort of a main contributor for profitability, and it has many aspects to it. IRB advanced is an important one, but there are many, many other things that incorporates in that strategy.
Thank you very much.
40-50 is the overall guidance.
Thank you.
Our next question comes from Mr. Andreas Håkansson from Exane. Please go ahead.
Yes, hi, thank you. One follow-up and then one question. If we start with the follow-up, on NII, could you just tell us, in the Baltics, is there anything left over from the ECB rate cut that's gonna be seen in margins going forward? Next question, on costs, I'm looking at page 18 in your presentation. I look at the underlying cost target of 16.1 for 2012. Just to make it clear, what we need to add to that, is that the full year variable pay, which was 397 in the first half, so if we analyze that, for example, and then whatever is done by Ektornet or... Because when you talked to her before, you didn't mention Ektornet, so just to make it clear what we should be looking at. Thank you.
On the last question, the 16 point, what you should take away for measuring down the underlying cost is variable pay to staff and, compensations that we do to the savings banks relating to sales that they are doing. These are the two components. The sort of yearly changes you see between there is, strip that out, and then you get the underlying cost development. And the 16.1 is roughly SEK 1 billion from 2011, and that's the target and the communicated goal for this year.
But just to clarify that, what should we expect in compensation to savings banks for this year? Is that something unique or?
It's been slightly up, but no massive money. I think, with the kind of, sort of general economic activity, we are seeing not any big changes. But on a yearly basis, perhaps slightly up on, sort of with the GDP or something like that.
Fair enough. And Ektornet, the increase there, is that included now in the underlying, or is that-
Ektornet has been included in the guidance, and so far this year, Ektornet is costing more money in the first six months for us than they did in 2011. So we are actually taking out more than the SEK 500 million to put money into Ektornet. Going forward, of course, Ektornet is something that we want to run down. But on the other hand, we need to do investment in some, in other areas as well. So the goal that you, the goal post for you, I think, is SEK 1 billion, and then we come back on 2013 later on. But the guidance we're giving for 2013 so far is, we will not go back in cost.
Yeah. Thanks.
NII in Baltic.
In the Baltics, you were talking about, I think, the latest EURIBOR reduction you saw in the quarter, in the second quarter, will have some minor negative effect coming into Q3 on the NII.
Okay. Thank you.
Our next question come from Ms. Sofie Peterzéns from JP Morgan. Please go ahead.
Yeah, thanks very much for taking my question. I guess most of them have already been asked, but very quickly on your capital, You're sticking to your 50% dividend payout target, or are you looking to revise that given your very strong capital position? And my second question is around funding. How much covered bond potential do you have or unused covered bond potential do you have? And going forward, do you expect to do more senior issues than covered bond issues? Thank you.
We're not changing our dividend policy, and earlier on, on the Q&A session, we talked about capital in general. So I reiterate what I said earlier on, on capital in general, and dividend policy remains at 50% on net profits.
When it comes to the funding strategy, I mean, as you've probably noticed in our numbers, we've tweaked it slightly in the last two-three quarters to do a little bit more senior. I think what we've said there is that we want to establish ourselves in euros and dollars with senior programs. We've done that now for euros, and we're currently working on setting up a dollar program. Hopefully, that will be done sometime after this summer. So you will see a little bit more senior being issued by us in the next few quarters, but it's not a huge shift. Our sort of current funding mix is fairly relevant also for the future, I think.
Thank you very much.
I remind you that if you'd like to ask a question, please press star one on your telephone keypad. We have a question from Miss Claire Kane from RBC. Please go ahead.
Hi, good morning, and apologies in advance if this has already been asked. But can you talk us through your outlook for growth over the second half of this year and into 2013? Your peers have very much commented that corporate credit demand is low, and just to see where you're positioning yourself in the market there. And then, finally, can you talk us through on funding, how far pre-funded you are now, and what your view is for the funding markets into the second half, if you think funding markets will become more stressed or less stressed going forward? Thank you.
Well, if I take the competitive position, I would say that I feel pretty confident that our competitive situation is improving, and we see signs in this quarter of increased volumes on the credit side, despite that we are acting with the same credit policy, same credit standards as we have done for a prolonged time or a prolonged period. We have a very strong balance sheet, so as long as we get risk-adjusted price correctly, we will be keen to do more business. So in my book, our relative position is improving step by step.
On the funding side, I think the whole concept of pre-funding obviously relates to how much liquidity reserves you want to hold. What we're planning for, and we've pretty much executed on our full year plan already. What we're planning for and the way we want to run the liquidity reserves is that we're keeping a pre-funding level, which is clearly in excess of 12 months, and sort of rolling that ahead continuously. In terms of outlook for the funding markets, I mean, it's very difficult to say. It's been a volatile environment for the last few years, and I wouldn't expect that to stop at this point. So we're sort of... We feel that we've been bracing up for pretty volatile times also going forward.
Okay, thank you. Could I just maybe have a follow-up? Would you say your expectations for current demand and, and growth in your credit book have come down since the start of this year?
I think what we are saying is that the credit expansion in the total market is declining, on the back of people's uncertainty about the future, but our relative position looks good and strong.
Okay, thank you very much.
Our next question comes from Mr. Paweł Wiśniewski. Please go ahead from Nordea.
Yes, hello, Paweł Wiśniewski here from Nordea. I was just hoping if you could maybe give us a split on the NII Q on Q, how much was coming from lower rates, lending margins and volumes. Is it possible?
I don't have it at hand, so I'm not gonna start jumping into numbers here, but we can probably create it. Let's think about how we do that, and if we give that through IR in some way. We will have to come back on it.
All right. Thank you.
There are no further questions on the telephone.
I would just like to end by thanking everyone for participating at this call, and look forward to hearing from you in the future. All the best.