Gentlemen, welcome to the Swedbank Interim Report, January to September 2011. 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.
Thank you, and good morning, and thanks for attending our third quarter result presentation. Despite significant uncertainties, we report stable results in the quarter. We have not seen any effects of the turmoil in the real economy yet, but in the capital markets related businesses, and in asset management, the turmoil has affected the income to quite some extent. As a result of the worsening situation in Europe and the debate around our share buyback program, we resolved to take a pause in this program a week before the silent period in the quarter. We have, despite the fact of having done share buybacks in the third quarter, been able to grow our Core Tier 1 ratio to 15.1% from 14.8% in last quarter. We are also in a solid position, funding and liquidity wise.
The combination of higher regulatory demands on banks, capital and liquidity, and the economic uncertainty drives the cost in banking. On top of that, we have a high interest rate sensitivity. Hence, we're focusing our efforts to ensure that we continue to protect our earnings capacity going forward. This is done in three areas. Starting with revenues, we are focusing a lot on relationship enhancing business activities. In the mid and large corporate sector, we have a selective customer strategy and a repricing strategy, which has resulted in deepened relationships and increased business volumes. In retail, 500,000 clients have signed up to our loyalty programs, and we remain cautious in the mortgage segment as we have done for the last two and a half years. The activity level in the Baltic market is increasing, which we have benefited from.
I'm also pleased that our customer focus has been recognized in a study by TNS in Estonia, where we are perceived to be the most customer-friendly large company in the country. Costs are flat year-over-year, despite the one-off charge relating to Ukraine and the cost increase due to e-tornet that we did not plan for. Our effort in retail to rotate resources from transaction handling to relationship activities are going according to plan.
During September, we recorded record levels of customer meetings in retail. In LSI, we have started the process to adjust our cost base investment bank in equities to reflect the declining activity level in this area. We are taking measures to enhance our cost focus, and we want cost to be down 2012 over 2011. Capital efficiency and our focus on risk-adjusted returns have yielded good effects.
We have still more room for improvement, which Håkan will talk more about in his presentation. The balance sheet recession in Europe will have significant effect on the real economy for a longer period of time. It will have also affect future growth rate and returns. It's, it will therefore be most likely also that it affects people's savings patterns.
I foresee more deposits and more amortization. Already back in 2009, we resolved to build our capital with the aim to ensure access to the funding market in turbulent times. We have also reduced risk-weighted assets in the bank with more than 25% of the same period. This has assured us a strong ability to meet these turbulent times and still have resources to support our customers.
With that, I would like to hand over to Göran, who will guide you through the results.
Okay, as Micke was saying initially there, I think we have been affected sort of by the financial turmoil in the capital markets area and also in Robur. But otherwise, I actually think that the quarter shows quite increased activity and a very solid asset quality. So we don't see any effect, sort of effects on the business really so far on the major part of the book.
Turning to retail then, being sort of the biggest business area, representing almost 60% of the result, I think the quarter continued to see an improvement in the NII. Most of that is driven by a slightly increase in the private mortgage margins. We have seen a slight decline on margins in deposits, while the corporate lending margins are basically flat during the quarter.
We continue to see good asset quality, also good cost control, and the business area in general are continuing to work with what they call T2R, which stands for transaction to relation. A program that is really trying to increase the customer focus and also the efficiency and productivity within the business area. L ooking ahead, I think, as you all are aware of, there, there is a quite high degree of interest rate sensitivity to the NII going forward. Then, looking more at large corporate and institution, we can see here that we have been more affected by the turbulent market conditions.
Predominantly within sort of capital markets related incomes, we've been affected in the fixed income trading, also the equity trading, and also the generation of corporate finance fees has been lower than a normal quarter. A s you can see from the numbers here, the result is actually a loss in the capital markets area of the cost, which the management are currently addressing. I think there are though, a couple of good points as well. I think the overall, the client activity in the capital markets area has been actually high. So the activity and all the turnover, and also profitability driven by clients has been good, within fixed income, and FX, and that's promising. Also, I think with regards to the lending portfolio, we are continuing to see the repricing kicking in, in the NII.
We have also in the quarter actually seen an increase in volumes with almost SEK 5 billion, which is, of course, good to see. Then the last business area I will go through a little bit is the Baltic Banking, which is very stable. We continue to have almost the same operating income. The deleveraging and the shrinkage of the loan portfolio did continue in the quarter, even though I would say at a slower pace. Also we see some signs of actually a better pipeline. We continue to have recoveries according to plans, which is good to see, and we also have a positive rating migration taking place in the book.
Overall, the activity, apart from the loan activity, has been increasing during the quarter, both in terms of the number of deposit clients being taken in, but also, for example, in payment transactions. So I think in general, that we are looking at the Baltic with a little bit of encouragement, and of course, we don't know to what the visibility for the general macro development going forward. Summarizing this, for on the group result, the NII continue to trend upwards, which is positive. Positive factors there, as I mentioned, is the private mortgage side on retail, but also the repricing of the lending book in LC&I. While we have a sort of pressure from deposits, and to some degree, the capital markets area has been a drag on the NII as well.
Treasury has contributed slightly more towards the NII in the quarter than what a normal quarter would constitute of. Commission income, I think we have all expected to see slower fees coming from corporate finance and also Robur, but it's actually been mitigated by a higher activity on the sort of transaction side.
So payments fees coupled with lending fees made commission income actually in the quarter increase slightly. Lastly, on the income side, I can just see that we are a bit slower this quarter on net gains and losses. Primarily, that is relating to the LC&I and the trading side, but we also have some revaluation effect in the treasury area negatively affecting the net gains and losses for the quarter.
Cost-wise, I think as Micke said, we are actually on track. I think we are delivering the actually underlying cost decreases. We have, in this quarter, taking one-off cost increases in relating to the closing of the retail in Ukraine, but also we have seen continuation of the cost increases in the Tonet. But stripping out for that, I think the various programs and initiatives that is ongoing, it's actually starting to yield effect on the cost base, which is encouraging to see. L astly, I just want to highlight that we have seen a deposit growth basically in all business areas. Whether it's LC&I, retail or large, Baltic Banking, they have all grown their deposit gathering, which is good in this environment.
Now, turning to funding, briefly before I let Håkan comment, the risk side. I think the quarter has been good for us from a funding perspective, considering how turbulent the market has been. So we have actually issued more in the third quarter than we did in the second quarter, and also compared to the same quarter last year, we are issuing more. W e have seen a good demand for our covered papers in all three markets that we really operate in.
We were out last week of August, issuing in dollars. We were out first week in September, issuing in the euro area, and we have continued to issue in the sort of domestic Swedish market, which is very good to see.
Our short-term papers has also rendered much more demand as a consequence, I would say, of the financial crisis that we see in Europe. Nordic banks in general have received more attention and more funding in the short-term programs. Dollar-wise, we continue to have a quite small asset book in dollar terms, and we have covered that from a cash flow perspective more than a year at current state. So we feel very confident on the dollar side. So the quarter has been good from a funding perspective. Looking ahead, or looking a bit ahead, but also perhaps a little bit in the mirror, I think, we can now see that the whole transformation of the liability side of the bank is actually coming to an end.
With this page number 10, you can see the, what the average issuance has been in, predominantly covered bonds for us in the neighborhood of SEK 65-70 billion a quarter, for the 7 last quarters. We have really been very active in, meeting maturities, substituting government, debt that is maturing, substituting Riksbank repos that we had, as a result of financial crisis in 2008, but also in building, long-term liquidity reserve.
It's been a very active, and huge, funding program. We are now, at the same time, we have prolonged the maturity structure of this funding quite significantly, and we are currently at 42 months in average, maturity on the covered side.
Looking ahead then, we still have a number of maturities in the government guaranteed on the government guaranteed debt in December, March, and April. T hose maturities are basically already pre-funded, as we show you on the liquidity side. But the main point I think I want to make with this picture is really that as of from now then, when we have pre-funded those maturities, we will move into completely different pace of issuance, since we have substituted a lot of funding sources with longer-dated covered bonds. So going from a quarterly average issuance of SEK 65 billion-SEK 70 billion, we will now issue around SEK 30 billion on a quarterly basis.
Then turning to liquidity, since it's been a very central theme, of course, in light of the, of the current crisis in Europe, I think it's important to understand what drives your liquidity needs in order to compare different liquidity levels. O f course, the overall thing driving your need for liquidity is how your maturity structure looks. So, if you have a lot of outstanding short-term programs, your need for liquidity is, of course, a lot larger than, than it is if you don't have a lot of short-dated programs. We can just conclude that our short-term program has increased during this period, but at the same point, we have substantially increased the amount of money we place with the central banks.
So we don't really use our short-term programs for funding the asset side of the balance sheet. It's really a tool for managing cash between different maturities. Then the other point in terms of your liquidity is, of course, not only your short-term programs, it's to what degree you have your sort of longer-dated funding is maturing short-term.
Here we can see that Swedbank has a rather, rather big maturity structure in the coming 12 months, primarily as a result of the sort of government guarantee program coming into maturities. O f course, we're glad to see that we have now sort of pre-funded that to a very large extent, and that feels good.
A s a result, also, you can say when we now do amortize these, these, that kind of debt, the liquidity reserve will shrink as a consequence of that. Y ou will come back to the, to the real essence of the, of the liquidity reserve, is really what kind of a safety do you need, in order to withstand, sort of a complete standstill in terms of access to funding? I think we are, of course, very, very... We feel very happy with the fact that sort of we have prolonged the covered bond financing to such a degree, and also that we run, rather limited short-term programs.
But we will continue to maintain the liquidity reserve at almost the same level, even if we will shrink it somewhat, we will continue to be very conservative in light of the very uncertain situation in Europe. So leaving funding and liquidity, I would just perhaps with a last picture on capital. I think Micke has mentioned capital and the reason for the buyback stop. I think there's still a bit of uncertainty to what extent the regulatory regime will take us on the need for quarter one. We don't really know how the different buffers will interact with each other, to what degree we can sort of where do we want, need, or where do we have to put our high cap buffer really in terms of capital?
So we need to still wait and see a bit in order to communicate, I think, further on, on capital targets, but we are of course very happy to so have 15.1 Core Tier 1 ratio being among the highest in Europe. Håkan will elaborate more on that, on risk weights, but, we acknowledge that there will be increased risk weights on mortgages, but that in the same breath, we continue to, to rationalize capital usage and our corporate portfolio like we've done in this quarter. L astly, from a Basel III perspective, the impact today is roughly 100 basis points. That is a little bit higher than what we have earlier communicated, and the main reason for that is actually the shrinkage of our risk-weighted asset base, that brings the impact a little bit higher.
Then we have some smaller changes as the regulation seems to come into effect a little bit different than expected. Otherwise, we are giving here the LCR and also the MSR, the future regulatory requirements, more for information purposes. With that, I hand over to Håkan.
Thank you, Johan. So far, we haven't seen any impact on the credit quality from the turbulence. On the contrary, we have positive trends from the previous quarter continuing in this quarter. Impaired loans continue to decrease. We have a positive rating migration with more than twice the amount of upgrades to better risk classes compared to downgrades. Loan-to-value is improving in the Baltic countries, and that is primarily due to positive development in real estate prices. At the same time, there are signs that the economy is slowing down. After a long time of rising prices in Sweden, the house prices for the last 12 months are flat or slightly declining. Even if we have an increased lending in Sweden this quarter, we feel our customers are getting more cautious. Recoveries this quarter is SEK 441 million.
The Baltic operations in all three countries are mainly contributing to that number. In Ukraine, we have further scrutinized the mortgage portfolio, and we are adding an impairment of approximately SEK 100 million this quarter. Since we have recoveries in the corporate portfolio, we still net have a recovery in Ukraine of roughly SEK 60 million. In Swedish retail, we have an impairment of SEK 106 million this quarter, compared to SEK 5 million last quarter.
These are still very low levels, and we can't really see any trend in this change. There are a few corporate clients from different segments that were already identified as risk loans that are contributing to this quarter credit impairments. In connection with the Quarter Two report, we estimated that the recovery of the last two quarters will be between Q1 and Q2.
So far, we don't see any reason to change that forecast for Quarter Four. Considering the turbulent times, it's now even more important to have close contacts with our customers. We are continuously doing portfolio and individual client reviews.
We work proactively in order to, as early as possible, be able to identify and take actions together with the clients before possible problems emerge. We have previously commented on two portfolios where we have higher risks, and that is mortgage in Ukraine and in Latvia. We are further scrutinizing these portfolios to better understand the possible outcome of a more stressed scenario, but we are also taking actions to reduce the risks in those portfolios. Our largest portfolio is the Swedish mortgage portfolio.
We have this quarter renewed the stress test of the portfolio, and we can conclude that even in a very pessimistic scenario, the risks are quite limited. Looking at the last slide in my presentation on the covered bond pool, that also confirms the resilience of the LTV structure. We also continue to work on the risk-weighted assets. We have a continuous work on the order to secure that we apply correct risk weights in our portfolio.
That can, for example, be securing that correct collateral is registered in our systems, or that our counterparty risk classes are timely updated. This quarter, the biggest impact comes from adjusting the definition of corporate size according to industry standard and to better align with FSA regulatory framework. When scrutinizing the definitions of our model, it appears that we have been too conservative in our interpretation.
In addition to that, we're working on two projects that will need FSA approval before implementation. We aim to change our models for SMEs next year to better differentiate the risk in the portfolio. We will also apply to use the advanced IRB for primarily our Swedish corporate portfolio.
At the same time, as Johan mentioned, there are discussions that risk weight for mortgages in Sweden are too low. Even if that is due to historically very low credit impairments, even in the Swedish financial crisis, the credit impairments on the mortgage portfolio was quite limited. But we agree that risk weights are too low. Internally, we have compensated for that by allocating more capital within our ICAP. Exactly how the change of risk weights would impact on us is too early to say, depending on what model is chosen.
One model that is discussed is to introduce contract floors. J ust to give a flavor, if you would introduce a floor of roughly 10%, that would increase the risk-weighted assets approximately to the same amount that we hope to gain from the two projects I mentioned before. So to summarize, overall, we have a low risk in the credit portfolio. We also have a strong position when it comes to capital and liquidity. So as a new CRO, I'm satisfied to conclude that we have a very good starting position, even if the economy will be more turbulent going forward.
Thank you, Håkan, and then we open up for Q&A.
Ladies and gentlemen, if you have a question for the speakers, please press zero-one on your telephone keypad, and you enter a queue. After you're announced, please ask a question. Our first question comes from Mr. Chintan Joshi from Nomura. Please go ahead. Our next question comes from Mr. Johan Ekblom, Bank of America. Please go ahead.
Thank you. Just two questions for me. First, on net interest income, it was quite clearly quite a positive result this quarter. I guess there are two comments you made in the presentation. Number one is the positive impact of lower government guarantee cost, and the second, I think you commented, was a higher yield on the liquidity portfolio. Can you just talk about how we should think about those two going forward?
I mean, what's the guarantee cost that should fall out in the December, March, and April maturities? Also, how sustainable do you think the yield on your liquidity portfolio is? S econdly, if you can just comment a bit more around the cost-cutting potential. You're guiding for falling costs, excluding variable pay and ex-tunet. Should we expect a similar level of headcount reduction as we've seen in the last couple of quarters? Or, what's gonna be the main driver of this, and can you quantify it at all?
Hi, Johan, and thanks for the questions. I take the last question first. I mean, we have executed the last couple of years significant reductions, especially in the Central and Eastern European part of the bank. We were more than 22,000 people back in 2008, and we're slightly south of 17,000 today. We will continue to ensure efficiency in the organization, and we have taken out quite a bit of staff, as I said. Of course, with lower economical activity also in Sweden, you should expect headcount to come down in Sweden as well as on group staff functions. But we'll guide more, as we normally do in the fourth quarter result presentation on the specifics.
But this is an ambition level that we have, bearing in mind that we have as our base in our lower economic activity, going forward. On your NII comments, I can only say that the Q3, from a sort of liquidity portfolio point of view, is rather representative.
So we don't expect any real impact there. With regards to your question around government guaranteed, I think you were sort of alluding to what kind of uplift we are getting on the NII as a result of the maturities. I think we talked about around 100 basis points on that one, for the maturing debt.
I mean, this particular quarter was SEK 12 million compared to Q2, I think.
Excellent. Thank you very much.
Our next question comes from Mr. Dave Johnston from Macquarie. Please go ahead, sir.
Thanks. I just wanted to ask a quick question on the large corporate financial institutions, NII, within large corporates and institutions. You've had a quarter-on-quarter that seems to be a significant, a significant increase, which you referenced earlier in the presentation. Do you think that's a sustainable level, or is there anything, is there anything buoying that up this quarter that it might drop back down a little next quarter?
No, I think that's sustainable. Of course, you can't see the increase in the pace you've seen there. But I think we have done a good job in actually being more capital efficient in that area. So it's both an effect, sort of, of rationalizing your capital base, but also improving the pricing on the remaining part of the portfolio. So I, I think that has been quite an achievement on the LC&I part. But I wouldn't... You can't draw a line out there.
Yeah. No, no, no. Okay. Yeah, no, I wouldn't. Okay. Thank you.
Our next question comes from Mr. Andreas Håkansson from Exane. Please go ahead.
Yes. Hi, it's Andreas Håkansson from Exane BNP Paribas. I had a question for Jörgen. I read this morning from one of the local news agencies that you're saying that volume growth won't really drive NII going forward. Could you tell us a little bit about your outlook in each of the divisions on NII? Because you have the volume impact mostly seen on the retail side, and then you have some more volatile impacts on some of the other divisions. But could you tell us what you're expecting for the next 12 months, if you can?
I think, yeah, to have a good picture what happens the next year, you need a little bit of a crystal ball. But, if I try to understand ... give you a flavor where we are. I think the comment was we are really relating to that we have corporate credit demand, and the Baltics has been rather sluggish in the past, in for Swedbank.
A s we see the mortgage market sort of cooling off, credit demand in that area is also coming down. So I think in general, we haven't really built our modeling around large sort of volume increases for driving our CNL going forward. I think that has become even more valid in the last quarter as a result of course of the financial crisis taking place, that it becomes more questionable and the visibility.
From an NII perspective, in retail, of course, we hope to see a continuation of the repricing of the mortgage part of the business as capital and liquidity buffers are increasing. W e have seen a good repricing taking place there. So that's an encouraging sort of tailwind that we have there. Well, and on the other hand, we are meeting more competition on the deposit side, and there, of course, we will be more sort of affected if you see a cap in the short-term interest rates. I'm not gonna give you more... You can model the interest rate caps yourself, really, and then rather than me trying to predict where interest rates are going.
Okay, fine. Thanks. Our next question comes from Ms. Claire Kane from Wells Fargo Canada. Please go ahead.
Hi there. Yeah, I have a couple of questions on NII as well. I was quite surprised the strong pickup in the yields on the loan book, 17 basis points quarter-on-quarter. I know you mentioned the mortgage book, and I was just wondering, are there any other areas you're expecting that repricing to continue? O n the funding costs, they've been quite stable quarter-on-quarter. J ust wondering, do you think that the impact of the funding transformation has been seen, or could we expect a kind of higher averaging to fall through? J ust on your covered bond funding strategy, do you have a kind of maximum level of funding from covered bonds that you'd be comfortable with? Thank you.
If we start with the NII part there, and then Jonas can comment on the funding strategy. I think the NII improvement, I think actually, as a consequence, of course, of the increased capital and liquidity demands being put on all banks, it's fair to assume that margins will tend to widen both on the corporate loan side, but also on the private mortgage and consumer credits, actually. And then we will see how the margin development takes place, sort of, from a funding perspective, being either deposits.
I think Swedbank should have a good chance to lower our funding costs as we are through sort of the substitution of the balance sheet. We should also be recognized from a funding perspective for sort of reducing the funding and liquidity risk. Jonas, if you can comment on the plan.
Yeah. I mean, if you look at our current covered bonds outstandings, roughly a third of the balance sheet size of the group. We have so far not seen that as an issue. We have so far not had any pushback from either credit investors nor regulators. I think the structural subordination issue really comes into play should we get a bail-in legislation which alters the ranking between senior bondholders and deposit holders.
That's when really the whole structural subordination topic becomes interesting. In that scenario, we have been quite clear on saying that we, even if we would take some efforts currently, still we more or less have a choice whether to have some funding outstanding or not, and that is a relative strength.
But obviously, that would be altering the pricing of senior quite significantly.
Okay, thank you.
Our next question comes from Mr. Ronnie Ryan from KBW. Please go ahead.
Good morning, gentlemen. A few questions from my end as well. On the interest rate sensitivity, you said, like, you know, kind of guess yourself where rates are going, but could you give us the sort of the 100 basis point sensitivity, please? Second, on the capital side, you make a quite strong case that you feel yourself still kind of overcapitalized. Share buybacks are off the agenda. What, what about dividends? Is that potentially an area where we could see an upside surprise? L astly, on the Baltics, just want to check how the auctions are going and sort of in which markets you, you can sell the, the properties that you foreclose to third parties and why you still keep them mainly on your balance sheet. Thank you.
I mean, we have clearly articulated the dividend policy and, supported by the AGM, that stands. Regarding NII sensitivity, the 100 basis points movement corresponds to SEK 1.5 billion, roughly, depending on—there's many moving parts. You, you—if it's everything else equal, SEK 1.5 billion, approximately.
Mm-hmm.
And then, Jonas, on the- Estonia, I think there are very big differences between the countries there. We continue, you could say Estonia and Lithuania—we are at the end of taking in things, and we are in Estonia, we are selling things, and we could, I think we could basically sell the portfolio if we wanted to. In Latvia, things are different. There we continue to taking in primarily granular assets in the mortgage relating to mortgage lending, but also we have some things that are sort of in the insolvency processes. So, on the corporate side, that will clear up during this year and early part of next year.
But the area is like Håkan were mentioning, the granular mortgage assets coming in from Latvia and, to some degree, are the sort of risk areas from that part where we don't see any big positive change really in the marketplace.
Clear. Understood. Thanks a lot.
Yes.
The next question comes from Mr. Chintan Joshi from Nomura. Please go ahead.
Hi, sorry I dropped off earlier. Chintan Joshi from Nomura. I have a few questions. Firstly, on deposit margins, noticed some pressure in this quarter. I'm just wondering what this is driven by. Your other peer that reported actually flagged improvement in deposit margins, so just want to get some clarity here. Second question, on mortgage, on mortgages.
There's a trend of continued repricing in Swedish mortgages. I just wonder where your ROEs for the mortgage divisions are currently on a Basel III basis. It's not clear from looking at the divisional reporting that you do because the allocated capital tends to be different. I'm just wondering, in a Basel III world, if you kind of give us a rough idea of where current ROEs are.
T he third question, again, a continuation. Where are front book mortgage margins versus back book for Swedbank? F inally, on the risk weights in mortgages, you mentioned floors as being one of the ways to introduce higher risk weights. I wonder how you see that strategically, because arguably some of your risk weights, your risk weighting is better than some of your peers, and if a floor is introduced, that's probably negative for you relative to your peers. Shouldn't you argue for something else, like buffers instead of floors? Thank you.
That was many questions at the same time, Chintan, but we try to take them one by one. Deposit margins, I think they, I mean, we see an increased behavior from people moving from transaction accounts with higher margins into sort of interest-bearing account, savings accounts, and they are quite active in doing that. So households are becoming more cash management sensitive. The, with regards to the, sort of a Basel III return on equity, of the mortgage business, we, I mean, we, we follow the retail business as such.
You can say that if you look at the—we don't sort of strip out the private mortgage as such, but, of course, from a rule perspective, in the Basel II world, it's extremely profitable, and it will remain being very profitable and being a very core product in order to hook the clients. So that's the rule on the private mortgages. Then we've said that the current Basel II is not sort of currently reflecting the real picture.
So we, like Håkan was stating, we have allocated more capital to the retail division than the other banks would have, according to sort of ICAP, but also on top of the ICAP, we have made an extra capital injection in that division of SEK 6 billion in order to get the right steering compared to risk, really. Your question about floors, I think is, your comment is very valid. Of course, floors where, if you have 90% or more of your portfolio concentrated in the risk weight area between 5% and 6%, then you introduce a 10% floor, your whole ranking of your client disappears overnight. So the model is useless in order to rank your clients and steer on that type of. So that would be a negative effect.
And I think what really is required in the mortgage market is a more a model that that ranks and differentiate much more clearly between higher and lower LTVs from a price perspective. But I, I don't think, I think there is the change risk weight, the mortgages is something that will come later part of 2012 or something, and I, I, I will envisage that we will have more discussion and ongoing thoughts on this and how, how it will be best done with together with the regulators. But I, I think it's quite fair to say that the whole industry is not objecting to it in any sense. It's more how we can do it in order to get a a better risk-adjusted steering on the business, really.
Front book versus back book margins?
Front book margin is new sales margins or better. Let's leave it there.
Okay. Thank you.
The next question comes from Mr. Peter Graebisch from Handelsbanken. Please go ahead.
Yeah. Thank you. Two questions. Firstly, corporate loan growth outlook. You're expressing a fairly optimistic near-term view in terms of the corporate loan growth, both on the SME side and on the large corporate side. If you can give some more flavor as to when you expect a significant slowdown to come, given what you see on the macro picture? S econd question, just regarding the liquidity buffer. You're increasing it quite a lot in terms of euro-denominated liquidity buffers. If you can also elaborate a bit about your reasoning here.
If you take the loan growth there, Peter, I don't think we were sort of trying to be very optimistic on the outlook for loan growth. I think on the contrary, we've been stating prior to this quarter that we are sort of, it's a rather subdued environment in terms of loan growth.
What we're saying is that this quarter has been fairly, has been okay. So it's, it's been a good loan growth in this quarter. We, we, I mean, expect loan growth to continue to be subdued, considering sort of backdrop of the economic environment. Then with regards to the currency distribution of the liquidity reserve, Jonas, if you can comment on that.
I mean, that is mainly to plan for coming maturities. So if we have a lot of maturities in FX, then we try to hold more liquidity in FX. So you will see that fluctuate over time a bit.
Okay, thank you very much.
Our next question comes from Mr. Jan-Erik Geland from DNB. Please go ahead.
Jan-Erik Geland from DNB in Oslo. I have some questions on the NII as well. The first one is, the LC&I margin. You talk about an improved margin both from the SME and the large corporate sector. Could you give us some hints about the, front book versus the back book, on those as well? Secondly, how, the deposit margin is increasing or decreasing with these changes in behavior from the household sector will be very interesting to hear about as well. T hirdly, on the NII, if you could elaborate a little bit on your funding cost, this quarter versus previous quarter, and going forward, not just about the state, guarantee fees, which be lower, but generally on your issuing of covered bonds. What have you seen in the quarter?
How has the margin pick up been, and how is the recent basis swaps changes in the euro versus Swedish krona developing in your view? Finally, on the covered bond pool, if you could elaborate on this page 19 in your slide package, where you have this over-collateralization put in versus the loan to value average of 57% and a potential drop in the marketplace on houses. That would be nice. Thank you.
Okay. Let's start, it was the margin, the front versus back book on the corporate sector.
Yes.
I think, if you go, if you take prior to August, I would say that sort of the front book has been, or margin has been declining for some time, and we were coming in. But at the same time, we had a lot of back book repricing to do. But I think we were starting to get to a point where actually new margins and back book were meeting each other. So really, the NII improvement that you see in the large corporate side, in this result is sort of the history of the repricing rather. Now, I would say, considering what's happening in the marketplace and the closeness of funding and, and, sort of capital and liquidity issues, I think it's the visibility on the corporate sector is poorer.
But I would suspect, actually, the margin sort of come up a bit again. On the deposit side, I think we were just stating here that we felt that we had a slight pressure on NII as a result of this changed behavior on the deposit side. It was not of any significant magnitude in terms of driving lower NII, but the big issue there is, of course, what happens to short-term interest rates. Then I think I leave the you had a funding question there, Jonas, you-
Looking in the quarter, we raised SEK 60 billion of term funding, so there's not much change to previous quarter. T hat also goes for the distribution between the various markets. We've done issuance both in Sweden and the US and in euros. What we can see in this particular quarter, though, is timing has been quite important for the pricing. So when we issued, for instance, our dollar covered bond, we were, I think, the first bank to issue for quite a few weeks.
O bviously, we came out at a certain level, and then, markets deteriorated a bit, and, a few other banks that issued only 2-3 weeks after us paid up 10-15 basis points, which is not to say that we are necessarily better credit, but more has to do with the timing. So overall, I would say that the cost for funding issuance, if we just look at a typical five-year covered bond in this quarter, have been somewhere between 95 and 100 basis points, I would say, for us. The relative cost, to our competition has remained at around 4 or 5 basis points in that part of the curve, I would say.
Going forward, what do you expect? What do you see in the market now in Q4 on the 95-100 basis points level?
I mean, I don't think it's up to us to give outlooks for funding pricing. It's like giving an outlook for the share price. So, I'll leave that to you.
Okay, thank you. T he final one on the covered bond pool, please.
If you come to the covered bond picture there on page 19, it illustrates really. We are currently operating at the end of this quarter at an OC of 24.5, and it really gives the sensitiveness of the OC to house price declines. Y ou can see there that we have quite, since we have a good structure in the pool, I would say it's quite insensitive on the first 10, 15 percentage points decline of house prices. I t increases in correlation, of course. Y ou would hit sort of an OC at zero, somewhere between 35%-40% price decline.
It's more for you to model, sort of, the OC requirement and the funding aspects and that kind of funding source, as a result of what you think of the house prices. Hmm. But what about the questions Sven and I often get is how much more mortgages could you really put into the pool very quickly versus what you already have done, and what kind of loan to value those assets have in terms of getting this over-collateralization versus the loan to value levels?
I mean, we have some, as Jonas said, we have some further assets that we could put into the pool, and they are working on to do so as well. They are not currently excluded because of LTV requirements not being sort of similar to what we otherwise have in the pool. They are currently not in there because there are certain sort of purely administrative aspects. We have a covered bond system that chooses certain assets from the balance sheet, and that system is simplifying quite greatly the structure of the asset and collateral. S o we're just developing that system a little bit to be a little bit more granular. So there's no sort of quality difference of the assets that are on their way into the pool.
In terms of size, we have already included some SEK 20 -SEK 25 billion in the last year or so, and I would expect roughly as much to come in within the next year.
Okay, thank you very much. I would also say that if there were to be slightly more significant house price drops, you will see changed pattern among customers when it comes to amortization. So there is a lot of moving targets here.
But then obviously, I mean, ultimately, this is a liquidity issue, and this is also partly why we hold liquidity reserves. S hould we at some point need, even though looking at the graph seems fairly unlikely, but should we at some point need further collateral, that's obviously what we have, you know, why the liquidity reserves are there for as well, so.
Perfect. Thank you.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning, everyone. Nick Davey from UBS. Just three remaining questions, if I may. The first, on the net stable funding ratio, which you now helpfully supply 92%. Could you please talk a little bit around that number? It sounds like your strategy for upcoming maturities as government guaranteed is just to let, or for the large part, let liquidity reserves roll off.
So could you talk us through the impacts from that process on the NSFR, and again, how you expect to bridge the gap from around 90% towards 100%, and over what time horizon? The second, please, on management change within LC&I and First Securities. You had a release out yesterday. You talk about adapting the organization to changing market conditions.
If you could maybe just, flesh that out a little bit as well. T hirdly, and finally, just on, market shares, it looks to me like your, your front book market share in, domestic, mortgage lending is still well below your back book share. You've talked about the market repricing up. You've talked about lending standards belatedly, coming towards, standards that you've had for a few years now. So could you please just talk us through, what's happening on the front book and why your market share on the front book is still below your back book? Thank you.
Hi, Nick. Let's start with the LC&I question. Well, quite simply, the activity within the investment banking and equity areas has been subdued, and we are adjusting our structure to that. A lso, Magnus Geeber is the new CEO of that business area, and he wants to put his flavor to his management team. So that is the backdrop to those announcements of yesterday.
On the NSFR, I think we can say that I mean, we give you the measure just to say where we are. We don't have a short-term intention to bring that above 100% until we have a clearer regulatory picture what will happen really with the NSFR. We feel very confident that we have prolonged sort of the covered maturity up to 42 months on average.
So really, we don't see at this point in time that we need to push us above 100 here before we have more clear signals. Right. What was the last question? Ah, that was where back book versus front book on the mortgage side. I think in general, I think we introduced somewhat tougher lending criteria by the end of last year. I would say that we continue to run lower market share than our back book, and but I think the competitive environment is actually adapting slowly towards our lending standard, actually. And most of our competitor has adapted where there is one particular competitor that is gaining a very large proportion of the market currently.
The standard that has been most difficult for us to push has been that we introduce really amortization about 75%, and that has been sort of, from a cultural point of view, really difficult to get clients to accept that one. But, we have continued to hold on to that one since we really believe in it.
Okay, thank you.
Our next question comes from Mr. Mashi Jazidi from Credit Suisse. Please go ahead.
Yes, hi. Three questions for you. The first one is on your corporate lending growth. It was about SEK 6 billion during the quarter, where about SEK 4 billion was in shipping. Can you just comment on that, given the uncertainty in that market segment, why you've chosen to increase that lending? A lso, I guess two questions to Håkan, given it's his first press conference. The first one on LTV in Latvia is about 158%. Could you just give me a number there for the unsecured part? How much, how well provisioned you are for that part, and also on the positive rating migrations in your IB model.
You were saying during the heat of the financial crisis, that you're using portfolio PDs, and therefore, that migration shouldn't impact the risk-weighted assets, but now you're having positive migrations there each quarter. Can you comment on that, please? Have you changed your models?
With regards to the volumes there, I think part of the shipping growth is actually on a currency translation effect. So I think the volume growth in shipping has been SEK 2 billion or something. On the risk-weighted, the model has not changed. We have not done anything to the model. The release of the risk-weighted asset in this quarter is relating to sort of a definition of what constitutes a large corporate.
That has been enable us to be, enable us to risk-weight certain part of the corporate as SME corporates, rather than the large corporates, since we've been overly conservative in putting a large number of primarily property-related corporates in the too harsh risk category, really.
That's sort of the reason of the SEK 8 billion in the quarter. But otherwise, we haven't done anything relating to the PDs.
No, correct. The talking on the LTV in Latvia, I mean, we have an unsecured part that is actually slightly decreasing also in Latvia this quarter. Whether we are sufficiently provided when it comes to provisions, well, we are, of course, continuously looking into that. T he current opinion is we are sufficiently provided when it comes to provisions. Obviously, this will very much depend on real estate prices going forward. We have a large intake of assets that Jonas was mentioning, and depending on prices going up or going down, that will have an impact.
Okay, thank you. Can you give me a number on the provisioning there for the unsecured part?
On Latvia?
Yep.
Yeah, do you have that in, on the top of that? I'm looking at-
Yeah, let's come back with that, but we can give you the, we can give you that, later when we have it at hand, the exact number.
Okay, thanks.
There are no further questions from the telephone. Please go ahead, speakers.
I thank you for so actively putting questions to us, and look forward to seeing you around in the next few days or at the next quarterly result presentation.