Ladies and gentlemen, welcome to the Swedbank Interim Report, January to March 2012 Conference Call. I am 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 Q&A session. Mr. Michael Wolf, please begin.
Good morning, and thanks for attending the quarterly result presentation. The market sentiment during the Q1 was strong, but risk appetite became more subdued as Spain once again got on the radar screen. Our being compliant with the new capital regulation allows a focus and full attention on enhancing customer relations and improving operational efficiency. Since the year, we have used the tool Net Promoter Score in Estonia and the other Baltic countries to monitor customer satisfaction. This has enabled us to adapt our services and how to improve our approach to client meetings. The results of these are that our bank in Estonia has improved the customer satisfaction level, both in internal and external services, in the surveys, and we're now introducing this process in the Swedish retail organization.
Another key initiative is to reduce complexity in the group by reducing the number of active products. At present, we have more than 1,100 products available in the organization. If you're a good retail client, you have tops eight, nine products in your portfolio, so there is room for reducing complexity in the product area. We have throughout the quarter seen very healthy customer activity across the board. LCI is off to a good start of the year, supported by the increased risk appetite, but also due to increased activity level, both in corporate finance and debt capital markets area. Repricing efforts in the corporate lending area has been successful. A positive effect of lending being repriced is that our clients have also turned to the corporate bond market for funding. Here we have benefited from this due to our strong issues and distribution capacity.
We have issued some 30 corporate bonds in Norway and Sweden during the quarter. The corporate segment in retail is also more active. If we look at repricing of mortgage loans, they have stabilized during the quarter, but we saw a gradual improvement of our volumes throughout the quarter, even if they are lower than Q4, there was a positive trend in the quarter. Our lower funding cost is coming to our customers' benefit. We have had a strong position in the Baltic region with a healthy balance sheet. The market for new lending is still subdued, even if we see some positive signs of higher demand in Estonia.
However, commission income is up 5% versus the same period last year, supporting the fact that our economic activity in this region is increasing, and that is, of course, positive. As repricing takes place on the lending side, we see increased competition on the saving side across our markets. Our ambition on cost is on the right track, and I'm especially pleased with the fact that retail operates with a cost-income ratio of 0.46 in the quarter and the Baltic banking operation with 0.43. The cost, the underlying cost reduction is SEK 185 million in the quarter, and we stand with our guidance to reduce cost with SEK 1 billion in this year. We increased our Q1 to 15.9 due to good earnings.
Capital efficiency is still high on the agenda, and our focus is, of course, on credit portfolio management, but more importantly, risk-adjusted returns to ensure that we incentivize the organization to improve asset quality and to drive repricing. We are also working with our models, and we have an application in for IRB Advanced. We expect, and we do welcome more clarity from the Swedish regulator around the upcoming regulation changes, and we expect them to come during the summer. With that, I would like to hand over to Göran.
Thank you, Michael. First of all, I would like just to say that the result sort of is affected by two things. One is, of course, the improved macro environment and the risk appetite, which I think we are capitalizing on very nicely, especially in our large corporate division. But also, I think that we are actually improving the underlying profitability of the bank structurally in a way that we have intended to do. So that work is also moving ahead quite nicely. I will start off by going through the three main business areas and starting with retail. I think it's evident from the numbers that the repricing is continuing to happen.
It is predominantly sort of in the mortgage market and the SSE segment, the smaller corporate segment are easier to reprice because you can do that quicker. We still have work to do from a repricing point of view on the mid-corp sector and the SME sector, and that is something that the organization are working with. We have seen, as Michael mentioned, more increased and intensified competition on the deposit side as the regulatory framework makes retail deposits more attractive. And we, I think we can expect to see that competitive landscape sort of gradually become tougher. But also, we've been somewhat affected by the lowering of the repo rates.
Costs, as usual, I would say, in retail are very well contained and in control, so the ongoing productivity work is continuing there, and the credit quality in the quarter is extremely good. All in all, the return on equity and the cost income ratios are looking very nicely here. And I just want to point to the fact also that in this reporting, we have allocated 14% core equity out to the business areas in order to adjust ourselves to the new capital regime coming. Then turning to large corporates and institutions, there has been, they have been affected greatly, sort of, from the improved macro environment, and it's, of course, very difficult to know for how long that will persist and what the volatility will be.
But I think, another very interesting feature is, of course, that we are really doing the repricing of the large corporate segment, which is coming through in their NII on the large corporates. Otherwise, they have a very strong net gains and losses and commission income that is relating to a good corporate finance activity in Norway, especially. It's also relating to a very, very active debt origination transaction that has taken place during the corporate, as our clients has turned to the debt market when the market environment has improved, and that has generated very healthy profits for us. But also very good income generation in foreign exchange and fixed income.
Overall, we are very happy with sort of the, the ambition to increase the client content of the trading income, and that is actually happening, and that's very good to see. And lastly, I would like to point that, on the cost income perspective, they are working on the cost, and we can see that coming through in the quarter. So they have higher, variable pay, variable pay, and if you take that out to the equation, you can start to see the, the cost program, that they are running, biting into the numbers. Lastly, I would like to just mention a few words about the Baltics. Here, I think the environment is a bit, tougher for us from a P&L point of view.
We have been seeing more pressure on NII due to falling Euribor rates and credit spreads, but also the deleveraging and the shrinkage of the volume book sort of is taking its toll a bit on the NII. The comparison with the Q4 is, though, that we have a higher NII, but that is actually contributing just for the fact that they have a higher capital to deal with. So underlying a bit of pressure there. The good part of the story is that we see good activity in other income lines on the fee generating part, insurance sales has been very good, and we are also able to mitigate sort of this falling income with the costs.
So the overall impact on the P&L statement is not dramatic, and the business pipeline is actually looking quite healthy. So it's more about when do these countries get the confidence to grow faster? If we summarize this, or before that, let's just a few words on the cost. The target was to cut costs, as Mickey said, with SEK 1 billion. We quarter-on-quarter comparison with last year gives that we are SEK 100 million lower, but much, then we have 85 of that is actually, of the increase is relating to actually more variable pay to staff and compensation that we do to savings banks that are income related. If you exclude those costs, the underlying cost reduction is actually SEK 185 million on a quarter-by-quarter comparison.
That gives us confidence in that we will deliver the SEK 1 billion, since it takes time to take out costs, and we are seeing such a good effect already in Q1 is very encouraging. The biggest reductions so far are coming in staff costs, but also consultancy costs, as we are making it more difficult to use consultancy within the organization. In the coming quarters, I would expect us to continue to see staff cost reductions and a little bit more on the IT spend side as well. Summarizing this, on a group level then, I think we have a very strong NII development. We are up to SEK 240 million, quarter on quarter, even though we had one-offs in the Q4. That is driven by repricing.
We have a bit of a negative impact on the cost margins, especially in the Baltics, as I said. And of course, then we are gaining SEK 110 million, roughly around the lowering of the funding cost for the state guarantee part falling off. Cost is on track, as I mentioned. And lastly, the net gains and losses, but also small, a part of the growth in the commission income is really relating to higher client activity within our LC&I area. And lastly, being sort of on the numbers, I would say that with 15.9% Q1, we feel very comfortable about our capital position. And of course, we're very happy to see that we can generate 14% return on equity.
On that capital size and we now closer to the target where we want to be on a cost income level. Lastly, just a few words on funding. The market has improved. We have continued to be conservative, even though we have a much lower funding needs of long-term funding now than we did a year ago. We have actually already in the Q1 sort of fulfilled half of the year's intended long-term funding. So that feels good. We have tilted the funding a little bit more towards senior. The reason for that is that we want to continue to build a little bit more liquidity resource.
We also want to create a little bit more space in the covered pool in order to meet stressed scenarios, but also to meet a more pronounced discussion around structural subordination and encumbrance of asset sides. So we have shifted the mix slightly towards senior. Otherwise, I think with regards to liquidity and funding, we are sort of in line where we want to be from a risk perspective, and we are more or less sort of waiting for the general direction and the fine-tuning of it with regards to what the regulators will say. So we can finalize and fine-tune the capital targets, the liquidity portfolio, and so forth. But in essence, we are there on the broad scale, as we stated earlier.
With that, I think I hand over to Mr. Berg.
Thank you, Göran. Asset quality continued to be strong in Q1. In Sweden, impairments are still very low, and I think we, for quite some time, have said that from these levels, they can only go up. But we don't, we still don't really see any signs of a changing trend when it comes to the credit quality in Sweden. All three Baltic countries had write backs this quarter, but at a lower pace compared to 2011. In Ukraine, due to increased risks and potential losses when exiting the retail segment, we have made a collective provision of SEK 200 million. Altogether, this gives credit impairments in Q1 amounting to SEK 172 million. Impaired loans are continuing to decrease. Impaired loans increased by SEK 2.6 billion to SEK 22.2 billion.
Out of the current portfolio of impaired loans, approximately 80% is related to the crisis workout portfolio in the Baltic countries, Russia, and Ukraine. So looking to the remaining part, the Baltic countries also are coming to quite healthy levels when it comes to impaired loans and the loan book looking forward. Overall, we don't see any clear negative signs from the market turbulence in our credit portfolio. Risk-weighted assets, there are minor changes in this quarter. The effects from decreased exposures in Russia and Ukraine, and positive migrations in the corporate portfolios are canceled out, mainly by increased exposures in retail and LC&I business areas, and a model update in Baltic Banking. Total market risk risk-weighted assets has increased by SEK 3 billion, and this is mainly due to higher volumes in secured mortgage paper and larger portion of unrated bonds.
There is a continued focus on getting correct risk weights in the different portfolios. Looking at 2011, the main focus were on correcting risk weights in LC&I. In 2012, there are increased efforts, both in retail and Baltic Banking, and in addition to the previously reported projects in SME and IRB Advanced, in order to get more correct risk weights, in the, primarily in the corporate portfolios in retail and in Baltic Banking.
Thank you, Håkan. Then to sum up, I feel that we have a very balanced position, which gives us a competitive advantage. Our focus will remain on sustainable growth. We will work with three levers, right price for a risk, cost control to give room for investments, and capital efficiency. With that, I would like to hand over for Q&A.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question comes from Mr. Mark Keenan from Nomura. Please go ahead.
Hi, good morning. Just a question first on, please, the retail net interest income, and a particularly strong quarter. Just thinking about the front book margin development, which looks to be more flat now. So it was quite good to see quite a lot of positive impact coming through. Can you give us an idea of where the front versus the back book is? So we know or have a better idea of how much back book repricing is yet to happen, particularly on the mortgage book. And then just a second question, your discussion on increasing the mix of senior unsecured funding. What do you think is sort of a more desirable mix of covered bonds and. Thank you.
On the front versus back there, I would say, I mean, half of the book, as you know, is on the three-month variable, and from that, it's no different really from back now. That is sort of coming through immediately. The other half of the book, the other part of the book, is on an average maturity of two years, I think, and you can model there yourself what kind of tailwind we will get from that book going forward. We haven't really communicated that in detail, so I'm not gonna do that now.
But if you think about it with an average maturity, and then you go back and see really where prices have gone and margins, so forth, you get a fair grip that we have some tailwind to come through there as well, if prices remains on these levels. So that's on the mortgage side. On the senior part, I will let Jonas elaborate more on that one. But I can just say that, I mean, we will, we will tilt it on the margin towards more, but we do have a sort of a balance sheet that is structurally in such a shape that our sort of need for doing senior funding is less. So it will be more regulatory driven, and over time, it will be more of a function of where the corporate credit growth will go.
But Jonas,
I think at this point, there's still a number of uncertain outstanding issues for us. One is where the resolution and bail-in regimes go. Another one is obviously how regulators view structured subordination from a deposit guarantee scheme perspective. And, you know, with that uncertainty, what we've said is we want to be prepared for pretty much any event. So I think the change in the last few months for us or last few quarters is more that that we want to clearly be established with curves in euros and dollars for senior, and then we will be able to tap whatever volume we will need going forward. But it's too early to give any volumes. But as Göran mentioned, at this point, there's a slight tweak.
Okay, thanks very much. That's fair there.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning, everyone. Thanks for taking the time. Nick Davey from UBS. Three quick questions, if I can. First, on the market share of new business on mortgages, you still seem to be below where you are on the back book. Could you please just flesh out a little bit what's driving that? Do you? Are you making any observations about the risk embedded in what's currently being written in the market? The second question, please, on the residual or remaining government guaranteed funding left outstanding, which as you show in your appendix goes all the way through till 2014. Have there been any discussions about trying to prefinance that or renegotiate the terms of that government guaranteed funding?
Because I suppose it suits most stakeholders if those agreements could be negotiated early. And then thirdly, and finally, you seem quite positive on margins on small, mid, and large corporates. Could you talk us through a little bit about what's driving that? Is that, do you think the legacy inefficiencies, capital inefficiency at Swedbank that needs to be better priced, or are you making an observation more about the broader market? Thank you.
Hi, Nick. Market share, not any changes. After two months, when we have data, we are on 11% for January and February. So, but volumes then picked up slightly in March versus the first two months, indicating that there is a positive trend. We have not changed our credit standards whatsoever, so, apparently someone else is maybe doing that, and we should, with our franchise, have a larger market share, over time, so have the right price on, on risk. So, that, that is, what we see on that side. On the state guarantee, I mean, we're not doing anything active. If someone calls up to Jonas and wants to, to pre-settle, we will, listen to that, but we're not actively, exploring that route.
And the third area, repricing on the different corporate segments. I mean, the repricing has mainly been in the large corporate segment with significant repricing, and, and that, as I alluded to, has made the whole market more rational. So we see very positive signs of people wanting to go out in the corporate bond space. And we have really enjoyed a strong flow of deals in that area. And traditionally, we were strong in the municipality space and the real estate space, but now we're doing also industrials and, and other sectors. So with our distribution capacity and our agency capacity, we're benefiting from that trend. We have also seen repricing in the lower corporate segments, where administrative rates has had a positive effect.
The difficult segment is the sort of SME segment, and I would assume that once all banks have to apply the new capital regime into their businessmanship, you will start to see further repricing taking place there. What is then also an effect of the new regulation is that you see more competition on deposits, so margins are shrinking there, and that's also quite natural with the new capital regime that should happen. So I think there is a reasonably rational banking market out there, and at the end of the day, I think the regulation
are there to ensure a more robust banking sector, that will also spill over to a more robust general sentiment of leverage and pricing of risk. I think that is beneficial for society. We don't want to end up where our peers in Southern Europe are right now.
That's three very clear answers. Thank you.
Our next question comes from Mr. Masih Yazdi from Credit Suisse. Please go ahead.
Yes, good morning, everyone. I have two questions for you. The first one is on Swedish on-demand deposits. I can see that they've been falling, in a falling trend now for a few quarters. I think it's another fall of SEK 6 billion this quarter. Is this due to flows going into savings accounts, or is it just a lower customer base, or are you losing market shares in this area? And do you think that this trend should continue going forward? The second question is on your efforts to get more correct risk weights. Does this mean that risk weights should be falling in all aspects, or do you think that more correct risk weights should also, could also lead to higher risk weights in some areas, please? Thanks.
With regards to the deposits there, I think the predominant trend is that the client is becoming more better at his cash management, so to speak, both as an effect of the repo rate that actually has gone up, but also the effect that you are seeing higher price competition on the saving deposits. So the difference between demand and saving has been bigger, and therefore, you've seen the trend shifting out. On the margin, I would say we have probably lost a few billion SEK there. And the reason for that, I would say, is that we see that the competitors are more competitive on this point, on the margin. But it is nothing that worries us at this point in time.
But we should just make it expected, sort of more price pressure on this one. The second question was with regards to risk weights. I leave that to Håkan.
Thank you. On the corporate, looking at both retail and Baltic banking, we believe to have too high risk weights considering the risk we are carrying in the portfolios. That will change both by working sort of on a segment and portfolio base, but also working with the different model updates that we have mentioned before. We have currently the SME model update in FSA for approval, and we are working with the IRB Advanced to send that in during this year. At the same time, we have discussed the risk weights on mortgages, where we think they are too low, and we are expecting the FSA to come out with a more clear message on that this year. So mortgages will rather increase our risk weights.
What we have mentioned before is that on balance, this too will balance out, of course, depending on where we will end up on the mortgage risk weights. But I think we have provided some numbers and doing some comparisons.
Okay, thank you very much.
Our next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead.
Thank you. Just two questions, please. First, just coming back to the Net Interest Income, I think some questions before about the strong trends in retail. But if I look at it, it's basically you have a big positive in retail, you have a big positive in the Group Functions, and then some negative quarter-on-quarter trend in large corporates. Focusing on the retail and on the Group Functions side, I guess part of that is related to the state guarantee fees. And then is all of the rest basically related to margin developments, and as such, should be sustainable? Or are there any other sort of one-off or temporary effects that we need to take into account there?
Then just secondly, coming back to capital, I mean, you're generating 20 to 25 basis points after accruing for dividend each quarter, have one of the highest capital ratios. How should we think about your capitalization? You said you've allocated 14% core capital to the divisions. Is that what we should think of as the group target, and anything in excess of that is excess and over time should be paid out to shareholders?
Okay. With regards to the NII there, you are missing one point. You said that large corporates were roughly flat or a little bit down sequential on NII. That's not really the case. You need to divide large corporate into the loan book and also the capital markets activity that has an NII. And we actually give that breakup in the appendix on a couple of slides, and we have a very positive trend, and have had so for a number of quarters of the NII on the large corporate, the loan book that resides with large corporates. That is contributing, underlying, of course, to everything. And where of the NII in the capital markets is much more volatile, and it's been fairly flat over the quarters here, I would say.
In Treasury, though, you could say, of course, there's been a small, some small positive effect due to the shrinking credit spreads and loosen tail effects, sort of, in the treasury arena that I would summarize to sort of contributing positively in the NII in the magnitude of SEK 50 million or something that you shouldn't sort of extrapolate for the future, since it depends on the market, volatility and where we are on the calendar year, really. So that is the, if you call it one-off effect, if you're looking for anything in there.
On capital, your question, I mean, I think we stated in the last quarter that we, as we see it, with the new capital proposition on the table from the Swedish SFSA, we do see that our capital target for the group should be in the neighborhood of 13.5 to 14.5, depending on the details. And so, and 14 is in the middle of that, and that is really, we haven't changed that. We're more waiting and seeing what will be the detailed outcome of that. But, if we listen to our regulator, that is how we conclude on that subject. Then, as you know, we are awaiting the final outcome, and I think actually we hopefully will get some more clarity around summertime in this issue.
Okay, thank you.
Our next question comes from Mr. Andreas Håkansson from Exane. Please go ahead.
Yes, hi. I really just have two follow-up questions. One is, just now you mentioned the 13.5 to 14.5, you believe that that's the right level. Can you tell us, is that your view that that should apply to all the Swedish banks, or is that specific for you? Second question was on, Michael said something about improved momentum towards the end of Q1 in terms of mortgages. Was that in terms of volumes or margins or both? Thanks.
If I answer the first question, our capital regime is based on the regulatory minimums, plus our risk tolerance limit, which is a result of our ICAAP, which is also a public thing that you can follow. So it's our balance sheet and what we need in terms of risk tolerance capacity for a very negative scenario. That drives our 13.5 to 14.5. What other banks carry on their books, they need to express. In terms of the mortgage, I mean, the total volume was lower than the Q4, but what we saw was a gradual improvement of the volume numbers in the quarter. Margins have stabilized, and that's true throughout the more on new lending throughout the quarter, so there is no specific changes during the quarter.
Our overall funding costs have come down, which has lowered the total rate for the customer. So we see a good correlation with improved markets to lower overall rates for our customers.
If I just can add there on the capital issue, that, I mean, that's our assessment, and in the end, we base sort of our capitalization on our own belief on the stress test, and then you have to adjust to regulatory. I can't see any reason why the regulator would distinguish between the banks. And I must say, I can't see that Swedbank should have a riskier asset side than any of our peers either. So I can't really see that we should differentiate ourselves in from a competitive context. On the contrary, actually, I must say that I think that this result, 14% return on equity, is the best risk-adjusted result that Swedbank has ever produced.
Excellent. Thanks very much.
Our next question comes from Mr. Jeff Dawes from Sucden. Please go ahead.
Hi, good morning. It's Jeff Dawes here from Sucden. Thank you very much for the call. Two quick questions from me. The first one on the large corporate division, the current ROE on your allocated equity to that division is 19%. You talk about some pretty strong trends there. Are those enough to get you up towards the target level, and what would that target level be? I'd assume mid-twenties, but I'll, I'll let you go through that. The second question would be on the net interest income line again. If I look at the breakdown that you give in the Fact book, it seems a lot of the quarter-on-quarter swing came from the derivatives net interest income line. Can you just talk a little bit about the dynamics of that and where that sits within the divisional accounting, just to reconcile the two?
Thank you very much.
Okay. I'll try to answer the first question. I would say that structurally in LCI, we are seeing more and more client content into the P&L, which is very, very positive. But we need to be reminded that we had six months prior to this quarter that was very subdued. So the quarter had an important positive impact of long overdue activity. So let's see what is in the following quarters, but I think there is a certain level of catch up into the P&L numbers here, and that's why it's still very important for LCI to work on their cost base. There should be some volatility due to market sentiment, and we need to have a cost base that also can stand lower activity going forward.
As you all know, I mean, the level of uncertainty in Europe is high, and you will have positive momentums during the year, and you will have negative momentums in the year, and that will also reflect into the customer activity on this side. But so far so good, and what is positive is the high level of client content in the P&L.
With regards to the NII, you are catching me off guard. I can't give a proper sort of count on sort of where between the products. It is definitely not in a business area. It's rather in the treasury, where you, of course, have many swaps going against the funding and so forth. So but I need to come back on that one after having looked through the numbers.
I mean, the type of hedging we do is just straightforward swap hedging, and depending on where interest rate levels are, you will see an underlying interest rate mismatch on the cash bond side being mitigated by swaps. So it's all dependent on where interest rate how interest rates behave. On a full basis, we don't really take interest rate risk of any magnitude.
Yeah, I was gonna say, just to simplify the question, whether hedging was the major component of that swing
Absolutely.
which we would expect to fall out. Yep, okay. That's clear. Thank you.
Our next question come from Ms. Claire Kane from RBS, please.
Hi, good morning, everyone. Quick question on the change in funding mix. So we've had quite an uplift from the roll-off of state funding, and I just wondered if you could give us an indication of the dynamic going forward from your, you know, increase in mix of senior. So how much more expensive it is, and where you think funding costs overall will go from here? And then also on your fee and trading income, I guess Q1 was particularly strong. And if you could just talk us through how sustainable you think that is, going forward, and what we should look out for a kind of normal run rate. Thanks.
If I start with the funding mix there. I mean, if we start with the government guarantee in Q2 versus Q1, we will have another sort of SEK 50 million or so in improvement on the NII coming from that, and they will remain flat for a few quarters. On the senior side, if you look at the maturity structure, if we start there, we've stated that we have 35 months on average for the full wholesale funding versus 42 on the covered bond side. But if you strip out the short-term programs, which is really more of a cash management tool for us, we're actually at 42 on the senior side as well. And I don't really expect that to change.
So if you look at the spread difference currently, I mean, it's obviously very volatile, but we're talking some 30 to 40 basis points difference in funding costs between senior and covered currently. But I actually, frankly, don't think that the magnitude of increased senior funding will be large enough to make a real difference on the total NII. It's gonna be marginal.
On the fee question you had there, it's the major part of the improvement is corporate coming from corporate finance related fees. They were virtually non-existent in the Q4. So of course, some part of that growth we've seen quarter-over-quarter is sustainable and should be expected to remain. But there is, as we know in this segment, a high degree of volatility.
Okay, thank you.
Our next question comes from Mr. Jan Wolter from Deutsche Bank. Please go ahead.
Yes, good morning. Jan Wolter, Deutsche Bank. A couple of questions. First, on the cost side, after restatement, it seems like the base we should look at is SEK 17.5 billion, when you say that you want to cut the 2011 level by SEK 1 billion. Just could confirm that that is the right way to think? And secondly, on costs, it seems like then the run rate in the Q1 is roughly SEK 16.8 billion, excluding variable salaries. And if that's the case, then should we then expect costs falling from the Q1 level going forward? And if so, have the actions to ensure that those been taken already? Second question is on the mortgage side.
Are you happy where you are now in terms of your market share of new origination, or do you aim to go back to the 20% to 25% market share in the near future? Thank you.
If I take the last question first, I mean, we have four million household clients with the bank. Over time, subject to the prices correctly on risk, yes, we should have around that level over time. For us, sustainable growth is more important than market share. It's also very important for us that our customers have a robust balance sheet to mitigate whatever uncertainty might spill over into the Swedish economy. I feel that we are well positioned at the time being, and over time, once things normalize, I think we will also come back on market share due to our franchise strength.
Jan, on cost there, I could say that all actions are taken, but as you know, with regards to cost, it never stops. So we will continue to review costs forever. But I mean, we feel that we've taken the action necessary. The underlying cost will continue to go down, but you also have quarter on quarter volatility in your cost base that you need to sort of take into consideration as well. The target that you should be looking at, you're talking about 17.5. I will say that, strip out all variable pay and all compensation to the savings banks. You find those numbers in the fact book, and the target that we are aiming for is 16.1.
Okay, and the 16.1, that's, as you say, excluding variable comp. Are you also saying that's excluding the variable compensation to the savings banks now?
Yes. Okay, since we have restated and added the compensation to the savings bank as a cost line, you need to strip that out. Prior to this quarterly report, compensation to the savings banks was accrued for as a negative provision, provision fee, sorry.
Thank you. And if I may, one follow, quick follow-up. You mentioned that you, there's a risk you will be downgraded to P1 on your short debt. And I know you have outstanding $70 billion or so of U.S. CPs and CDs. Do you have any contingency plan in place to replace those, that funding? Or don't you see that as necessary at this point?
In essence, I think, the impact of the short programs shrinking is very limited, since all the short programs has expanded very aggressively with Nordic banks for the last year. And the money we only put with central banks, so it's just a way of expressing that the financial system in the broader scale is not functioning. So if we lose that sort of funding, it does not really matter, really, how we run and operate the funding thing. Then I would say that we have already now noticed and witnessed sort of that the U.S. programs who are more rating sensitive are sort of diminishing in light of Moody's rating action. But overall, we continue to see sort of good utilization of the short-term programs.
In the end, if we will be downgraded, which we are strongly opposing, since we really can't agree to Moody's not giving us any credit for our financial strength journey. It's not about the asset, it's about on the margin, it will cost us a little bit more on the funding side.
I think it's also important to know that, I mean, the short-term programs, if you look at the split of our liquidity reserves, we have more money with central bank deposits than we have in our short-term programs. And it's not cash that we need. And let's see what the outcome is from Moody's, and then we decide exactly how to handle it. It's not an issue from liquidity.
Okay, very clear. Thank you.
Our next question comes from Mr. Henrik Christiansson from Citigroup. Please go ahead.
Good morning, Henrik Christiansson from Citigroup. Two questions, please. First on asset quality. You continue to report write-backs in the Baltic division, and given that you increased your coverage ratio to 56% and also show a decline in loans trends, does that go for further write-backs as we go through the year? And if so, where would your best guess be? Second, on NII and the roll-off of the government-guaranteed funding, since the benefit was captured in treasury for now, do you intend to distribute this benefit to the divisions, or is that outside of the price range? Thanks.
Just coming to you. The last question first, then. We have not distributed the cost for the state guarantee throughout the last years, and therefore they are not getting the benefits either of that falling off. So it's been on the group.
Okay.
Yeah, on the asset quality, we guided in Q4 that we still expect some increase in impairments in Sweden, but we think we are well provided outside Sweden. Looking to what is happening in Q1, we haven't really changed the full year perspective, meaning that there will be continued write backs in the Baltic countries, but that will be partly balanced off by an increased risk in Ukraine. So we haven't really changed our guidance compared to Q4. There is still a lot of uncertainty out there, but at the best of our knowledge on what we see currently, that's where we are.
Thank you.
Our next question comes from Mr. Chintan Joshi from Nomura. Please go ahead.
Good morning. Three follow-ups from me. First, on the corporate margins, could you elaborate a little bit on the size of the book on which you've already worked on repricing and the size of the book where you're hoping to reprice further? And also, if you could give us some idea of how much increase in margins have you seen when you have been able to reprice? Second question is, I think, Michael, you said that there was some element of catch up from subdued activity in this quarter. If you could help us scale that, and which line items should we be thinking about when we try and figure out what that catch-up element was? And, yeah, that's it.
If I take the catch up, I mean, you find it, the NGL, relating to market activity. And then I guess that quite a lot of corporates saw an opportunity to issue bonds in the quarter. We might not see the same, number of, or the high, same high level of activity. So, I mean, it's hard to gauge. I think everyone realized that the last six months of 2011 was extremely subdued, and then came ECB with their liquidity actions, and that increased risk appetite fundamentally to the positive. And then we had a more subdued ending of the quarter. So, I mean, I think we just need to get used to these swings, and, companies will be opportunistic and, and take advantage of improved risk appetite.
On your margin question, Chintan, there, I think we've been transparent a little bit on the mortgage side, sort of half of the book is in Sweden, short three months. It's been repriced. The other half is average two years, as I said, then you can recalculate a little bit there, actually from where what you can expect in tailwind. On the corporate side, you have the large corporate book, which you can see, sort of how the repricing trend has been. It's very good. I think they have done a good job there. You can't extrapolate that sort of, since much of the repricing that you're actually coming through now was actually done prior to the crisis last year. There are long lead times in this.
The one area that we are not so perhaps transparent around is the corporate book in retail, what we can expect around that one. And I do think we want to keep that one to our chest a little bit more, since it's also around how we intend to work with our clients in a competitive environment. So we don't really want to give away what our strategies are in different segments.
Fair enough. Could you just remind us how big that book is in the SME?
Sorry?
Could you just remind us how big that book is in the SME?
I think it's a ctually, I think it's a quite strong misconception that the retail has a corporate book that we in our fact book define as a corporate book of SEK 300 billion. To say that that is an SME book is wrong, because it's a lot of the agricultural lending, it's a lot of housing association, including, which is in essence, residential mortgages, more or less in there. We are actually planning to give a little bit more granularity of that portfolio in later this year in order to drive more understanding of the asset side. But the whole book that on retail is SEK 300 billion, but I wouldn't call it SME.
Thank you.
Our next question comes from Mr. Fridtjof Berents from Arctic Securities. Please, go ahead.
Yes, thank you. The gains and losses at fair value was strong during the quarter, and you mentioned due to better trading results within the LC&I. Could you elaborate a little more if it's customer driven, liquidity driven, and also looking at the liquidity portfolio, do you have any split if this is booked mark to market or hold to maturity in that respect?
On the liquidity portfolio, everything is mark to market. In there, you both Treasuries and NGL have been positively impacted by mark to market and, on the, the liquidity portfolio, the holdings there. But on the other hand, the, the contraction of basis swap spreads has, sort of reduced, P&L. We have also had one of, as we are stating in the, in the report of, -SEK 250 million coming into NGL, in treasury, which is, pretty much flat for the month, I think, for the quarter, NGL in treasury. If you take sort of the, the very high NGL in, in large corporates, I think the main point you're trying to drive over there is that it's a higher client context than it used to be.
It's been a lot of business activity there in terms of originating debt transactions for clients. It's also very healthy profitability in the underlying foreign exchange and fixed income in there as well. And then, of course, there's a positive impact that you hold some sort of a trading portfolios that you gain when the sort of the credit spreads contract, you get some NGL profit in there as well on that part. But what we are happy about is that the client context is very high, and the... We have seen a lot higher client activity. Clients have been on the sideline for two quarters in the second half of last year, and now in the first half or Q1 this year, they become very active.
I can also add, just to give you a feeling for the risk that market's taking, that operation. I mean, the total value at risk in the entire trading operation is less than EUR 2 million.
Okay, thank you. So, might just follow up. So, DCM transaction, will that be booked through the fee and commission income, through, for instance, corporate finance and so on, or will that be booked through the NGL, when you mentioned that capital markets activity originating?
In general, debt market, debt capital markets activities are, generally speaking, if it's not a fee, booked in NGL. What you see on the commission income is fees relating, fees relating to lending, corporate finance, or debt advisory could be booked in commission income.
Okay, thank you.
There are no further questions on the telephone.
Okay, thank you for being so active with Q&A. Let's meet later in on the road show, and if not, next quarter. Thank you.