Skandinaviska Enskilda Banken AB (publ) (SEBA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the SEB Q2 2021 Results Conference Call. [Operator Instructions] I must advise you, this conference being recorded today. And I would now like to hand the conference over to your speaker today, Johan Torgeby. Please go ahead, sir.

Thank you very much and good morning, everyone, to a 30-degree, very sunny, unusually hot Stockholm. If I start on Page 2, just reflecting a bit about -- around the financial markets in the second quarter, it's been, broadly speaking, very supportive strong financial markets for the type of banking that we conduct. Equity markets have continued to perform very well, to say the least, and we've seen new all-time highs on all the broader indices that we use as a leading indicator for our AUM business and the general sentiment in the financial market, as well as a continuation, albeit, gradual for investment-grade credit spread and a quite noticeable continuation of credit spread tightening within high yields. Interest rates have been moving around a bit. So after this initial change in ever falling ticking up a bit, we have had marginally falling interest rates during the quarter. Page #3, we highlight just this quarter's performance in SEB. The first one is that we generate a 14.7% return on equity on a very well-capitalized bank with a management buffer of 860 basis points. One highlight in the positive sense during this quarter was the strong net commission income, primarily driven by Investment Banking. And within Investment Banking, we had exceptional activity within Equity Capital Markets. We also had a contribution in the short run from payments coming from cards. And thirdly, we had a very strong, robust asset quality development, where we now have seen the recovery in the economy where the clients of SEB have increased their activity. And what we feared earlier this year is not happening as we see it today. We have a very low credit loss level for Q2, which means that we now estimate to end up below our previously guided normalized level of 8 to 10 basis points. On Page 4, we have the development of our credit portfolio. And as a reminder, this is the exposure, not the lending. And if you look at the corporate lending, we can clearly see the expected, call it, pause that we've been talking about for 2 or 3 quarters following the elevated levels that we experienced at the outset of the pandemic when many of the large corporates, in particular, asked and demanded much more credit in order to have security for a rainy day. On the margin, this has held up better. So we're actually FX-adjusted 2% higher than we were last year, which was this elevated level, which is very similar in the broad perspective to what we would have expected, but on the margin, a bit better. We're actually writing the same amount of new lending today as we did a year ago, a bit more. However, we've seen a clear acceleration in the mortgage market, mainly driven by an ever-appreciating and an acceleration in the appreciation of house prices. The last average price note I have is 18% increase year-on-year, and I believe that to be one of the highest in Europe and a clear outlier, clearly driving an increased demand for mortgages. And we've seen a clear acceleration also in SEB with a 9% year-on-year increase. Nothing to report on the other lesser areas. I would also say that as far as we can tell, we believe to have gained some market share, both within mortgages, but in particular, within the corporate space. It looks to be a little bit better than the data we can look at in Sweden. On the next page, I thought I'd just highlight the exceptional performance and activity levels in the capital markets within equities. And we can just conclude that this is a broader phenomenon where the equity capital markets in the Nordic countries overall have seen a very strong development, both in the number of companies that goes to the market and the number of deals that is done, both secondary and primary, as well as the volume. SEB is broadly in line with this market development. And we have, in the second quarter, recorded 2x the highest ECM revenue as we've ever seen. So it's twice as high as the previous all-time high on Equity Capital Markets. Next page is a continuation of a slide we had in the last quarter to talk about this long-term opportunity, which is really now coming -- to become a short-term opportunity of sustainable finance. And we've updated the issuance of sustainable-linked financing in the different categories, and we can see that the second quarter has maintained twice the pace of last year, and we end up more or less at the same number for the first half this year as the full year number last year. So if this continues annualized, this would then be estimated to be close to a doubling. More or less, the same goes for the Nordics. We maintain a strong position, and this is one of the areas, thanks to our energy bets and previous history within sustainable finance, that we really try to excel at. And I just thought this would be a big interesting data point when it comes to the market opportunity. One year ago, 16% of all the debt financings that we did was in a sustainability-linked format. That is a covenant package that somehow the issuer is linking to some type of relevant metric in order to perform from a sustainability perspective. This year-to-date, we have 40% of all the debt transactions that we do has now that type of connection. This is clearly here to stay, and as we've talked about for a long time, it's a great opportunity for banks to play a positive role in the transition and help the markets and it's clients for transitional finance and sustainability acceleration. On the next page, we have some more concrete product launches and what we've done in the last 90 days. First, we have launched a sustainability-linked supply chain financing, and this is really a huge product in terms of the volumes in the world for supply chain financing. And it allows a company to put criteria in for their suppliers and the supply chain that they will get incentives or disincentives, depending on how they act and behave themselves when it comes to sustainability. We've also launched a retail green savings account. So a deposit where the deposit earmarked in these deposit savings go for some type of energy-efficient housing within the bank, so we have a commitment to what we all lend that money to. We've also launched our ninth Microfinance Fund. This is predominantly targeted to emerging markets to help people of lesser means to start businesses and entrepreneurship in the microfinance space. We've also launched a web interface for sustainable metrics within private banking. And this is a tool where you can specify and you can see, in any given portfolio equity and in the future, funds, what type of footprint does this equity portfolio have and make sure that it is in line with the client's own preferences on what one invests in. We've also now had the first exit from our incubator in Norway, which is a sustainable entrepreneurship, clean tech, fintech -- sorry, clean tech, green tech entrepreneurship, where we, without any particular charge, allow companies to come into SEB and use all our resources in order to create a stronger momentum for their business. And this has been a very interesting journey for us, as we are now complementing our fintech with clean tech and green tech as entrepreneurship is now, I would say, exploding within this area. And it's important for financial institutions, such as SEB, to assist these companies, both in the financing, but also in the advisory, using the network we have available for their benefit. And lastly, it has now been announced the 28 banks, of which SEB is one, who has been named primary dealers for the EU NextGeneration program, which, if you remember correctly, it's an EUR 800 billion green financing bond program, and we will be one of those primary dealers to take part in that. With that little short update on recent events in the quarter, I hand over to Masih, our CFO, to go through the financial results.

Thank you, Johan. So let's move to Page #9 and dig into the Q2 numbers. As you can see, compared to the previous quarter, income is marginally up, but it's marginally down compared to Q2 2020. The composition of income is -- has clearly changed, whereas both in Q1 and Q2 last year, the net financial income line was a bit larger, whereas in this quarter, we see an improving trend in net interest income and net fee and commission income. Expenses are well managed, just slightly up compared to last quarter and the previous year. We can see that the cost/income ratio in the quarter is at 0.42. The capital has improved to 21.1%. And as Johan mentioned before, the return on equity is 14.7% in the quarter. If we move to the next slide, Slide #10 and look at the year-to-date numbers. Income is up 12%, whereas expenses are up 1%. And here, one should have in mind that looking at the income in the fixed currencies or looking at the FX effect, we can see that income has had a negative effect of about SEK 500 million compared to the first half of last year, whereas we had a positive effect on the cost line. So costs are about SEK 200 million lower because of FX moves. Nevertheless, with strong income growth and largely unchanged expenses, we can see that profit before credit losses were up 22%. And with much lower expected credit losses this year, the profit is up 80% year-to-date. Summarizing the first 2 quarters, we can see that return on equity is at 14.2%. Moving to Slide #11 and the net interest income development, it's plus 6% so far this year compared to last year. That is mainly driven by volume growth, mainly within mortgages and corporate lending within the Corporate and Private Customers divisions. We also see tailwinds from funding costs first half of this year compared to first half of last year. If you look at the quarter-on-quarter development, net interest income is up around 3% or around SEK 170 million. This can be explained by mainly 3 factors, contributing about SEK 50 million each, that is from lower funding costs, from volume growth and the fact that we had one extra day in Q2 compared to Q1. And the remaining SEK 25 million is coming from lower regulatory fees. We also note that the markets-related net interest income is still at the elevated level that we had in Q1, which is about SEK 100 million higher than the long-term average. You can also see in the numbers that there are some swings between treasury and the divisions, whereas last year, when credit spreads were higher, treasury was paying more for deposits to the divisions. And now when credit spreads have come down, that compensation for deposits have come down. And therefore, you can see an improved net interest income within treasury and the corresponding negative effect within divisions. Obviously, this has no impact on the group's net interest income. If we move on to the next slide, Slide #12, we can see a 12% increase of net fee and commission income year-to-date. That is mainly coming from Asset Management, from the Investment Banking business and the Life business, and this is partly offset by lower lending fees so far this year and markets-related fees. Quarter-on-quarter, fees are up 11% or around SEK 500 million. About 60% of this or SEK 300 million is coming from the Investment Banking business. And we have about SEK 100 million each from higher card fees and from higher Asset Management fees. On the card side, we can see that when it comes to the income from private cards, that is now slightly above the pre-pandemic levels, whereas on the corporate card side, we've seen a small improvement from the low levels we had during the height of the pandemic. But there is still a lot of improvement needed to go back to the pre-pandemic levels. On Asset Management, we have lower performance fees this quarter compared to the last quarter. And if you look at the base commissions, those are up 8% quarter-on-quarter. On Investment Banking, obviously, we've had a very good quarter. We think that the pipeline still looks good for the second half of the year. It might be more tilted towards M&A for the second half versus what we've seen in the first half, which has been more tilted towards Equity Capital Markets and IPOs. I think it's also encouraging to see that the net inflows in the bank has improved to SEK 25 billion in the quarter, fairly well spread across the different businesses, so Asset Management sales to institutional clients within Private Banking and also within the C&PC division to private customers. And we can see an improvement when it comes to advising on savings when we advise on mortgages. And that the monthly savings are going up fairly rapidly compared to the levels we saw a year ago. If we move on to the next slide, net financial income, up 42% year-to-date, very much due to the negative numbers we reported in Q1 last year at the height of the pandemic. Quarter-on-quarter, there are some movements, NFI is down, and that is mainly due to the underlying business within fixed income, currencies and commodities, which has had a better level in the last few quarters. And now due to lower volatility, we can see a negative effect quarter-on-quarter of around SEK 300 million. At the same time, the NFI within treasury is lower than it was a quarter ago. We also, obviously, on this slide, have some valuation effects comparing to Q1, but the contribution from the strategic shares as well as the XVA effects are, combined, about SEK 500 million less than it was in Q1. At the same time, we have reported the valuation gain on Tink, given the sale and the exposure we've had there, of about SEK 500 million. So that is compensating for the negative Q-on-Q effects from the strategic shares and the XVA effect. Next, Slide 14, operating leverage. So far this year, with income up around SEK 1 billion per quarter and with expenses largely flat, we can see that the pre-provision or pre-credit losses income is up around $1 billion per quarter. Let's see how the year ends. Moving to Slide 15 and the capital development. We've had a very good contribution from the net profits in the bank during the quarter, 86 basis points or 43 basis points after 50% accrued dividend. We've also seen a more normalized level of market risk, risk exposure amounts, which has added 36 basis points to the capital base and then some tailwinds from FX. And altogether, we can see that the management buffer has moved from 780 basis points to 860 basis points compared to the current minimum requirements of 12.5%. One should note here that from Q3, the Pillar 2 guidance will be added, and we right now expect that our capital requirements will, by Q3, go up by between 100 to 150 basis points. Moving to Slide 16, a few key ratios. Obviously, much lower net expected credit losses so far this year. We've seen a very strong growth of customer deposits of almost SEK 300 billion. About 2/3 of this is coming from financial corporates. And we note that now the core loan-to-depo ratio in the bank is down to 103%. We have a very stable funding situation in bank and liquidity. As we talked about before, the capital and solvency ratios look very promising. I think I'll stop here, and we can open up for Q&A.

[Operator Instructions] And the first question comes from the line of Andreas Hakansson.

Two questions. First one, if we think about buybacks, have you had a discussion with the Swedish regulator about buybacks for the fourth quarter or for any time? And is it possible to say how long it takes for the regulator in Sweden to approve a buyback once you would ask for one? That's the first question.

Yes, Andreas, I'll take that one. We discuss our capital position with the regulator all the time. Just when it comes to the formality of buybacks, I think in general when it comes to these kind of things, the FSA has around 3 months to approve such a mandate.

Three months from when you actually ask them, then, I guess?

You have to send in an application. And then they have maximum 3 months to do that, yes.

Have you sent in that application already?

I can't comment on that.

Okay. Next question then. You said that P2G would add around 150 bps. That's roughly the same as you -- what you normally say about your management buffer. Is -- should we look at that as one covers the other one?

Not the way we look at it. I mean, Pillar 2 Guidance is a soft capital requirement. But then, as a bank, if you breach it several times, it could become a hard requirement. So I think the way we operate, we're going to see Pillar 2 Guidance as part of the minimum requirements, and then add our management buffer on top of that.

Next question comes from the line of Nick Davey.

Two questions, please. First, on the strategy review that you're mentioning in today's release, I can see the words of invest, investing, investment frequently and a bit of a discussion of cost income ratios in the future. So I understand it's on the summer plans. But can you just share any early thoughts about where some of these investment needs are? How big they might be? How much of a change you might see in the future plan versus what we're used to? And second question, just following up from Andreas really on this question of capital return. Just then a broader question of if restrictions are loosened, how should we prepare ourselves and investors prepare themselves for what your intentions are in the second half?

Okay. I'll start, and I'll ask Masih to complement. The strategic review is in the process of being halfway conducted within the bank. So we will take this year and conclude, and then we will come back to you on our findings. You did get a little bit of a teaser in the kind of reasoning we have very much from an external perspective in the CEO comments in today's report. And the areas are very, I hope, clear what we are considering there. It's an increasing activity and future need for being relevant in Corporate and Investment Banking. It is very much aligned with our DNA, and we have definitely both a quarter and a year behind us that I think supports that point. We can also see an internationalization of the Nordic and Northern European companies. We will definitely have an ambition to continue to invest in and have a very wide and nice capability for our clients in the broader world. The mega trends of sustainability, regulatory compliance and digitization will remain. And if anything, they will be accentuated. And yes, I agree, maybe the word is frequent on invest, but it's not like we haven't in the past. We've just done it under a prerequisite of a falling cost/income for a decade or more than a decade. So to your last point on what to expect in terms of investment when it comes to the financials, it's very much aligned with our previously guided new divisional targets. And what is very hopefully clear when we went out with that a few quarters ago is that we kind of think that the current cost/income of around [ 0.45, ] we've gone from 0.64 I think, we point to this level, it's about where we think it's an appropriate level, not to go down to 0.35, you start having the risk of underinvesting. And you don't want to go up to the 0.55, which is more the average of Europe, because we don't think that's necessarily an easy income play. So where we are today, we're kind of reasoning around allowing this cost efficiency, very prudent and targeted resource allocation to be around this level, which, of course, is a quite big difference from what we have said for many, many years, which has been a nominal cost cap regardless in order to make the bank more efficient. Masih, anything to add?

I think that was perfect. I have nothing to add to that. I can try to respond to your second question on the capital return and how you should prepare yourself. We are still awaiting the guidance from the regulator here. I'm sure that in the next couple of months, we'll hear more. And one has to admit that right now, the base case, given the recovery in the economy, is that dividend restrictions will be lifted or be looser than they are today. And we've said in the past that given the capital position we have, we will come back to the market with some kind of a response or communication around how we deal with this. It's going to be a combination of share buybacks and dividends. And exactly what comes first and what comes later, we haven't fully decided. And we will do that and communicate to you as soon as we know. What I can say generally is that this is not something that will change from one day to another. So on the 3rd of September, you can't do dividends, and on the 1st of October, you can do as much as you want. It's going to be a gradual process. That's how we look at it. The uncertainty about the pandemic, the uncertainty about the economy will be a gradual process. And therefore, our optimization of our capital base will also be a gradual process, whether that means it's going to take a year or 2 years or 6 months or 18 months, we don't know yet. But just prepare yourself for a gradual process.

Next question comes from the line of Nicolas McBeath.

Yes. So first, a question on asset quality. So it seems like now that some of the scenarios and loan loss provisions you took early on in the pandemic may have been on the high side. So I just wonder, if you have any thoughts on whether this has impacted your view on the resilience in your credit portfolio, if you think about that differently, if you think the pandemic has been a good stress test? And if so, if the resilience we've seen so far would make you think differently about the risk appetite in the future, if you think it could be value enhancing to take on a bit more higher credit risk, if that also would be potentially ROE supportive?

Yes. Thank you, Nicolas. I don't think we have been that surprised when it comes to resilience of our asset quality. But at the same time, I think at this point, you have to be fairly humble. And we know that there's been a lot of government support, fiscal and monetary support. And it's difficult to know exactly how the economies and our balance sheet will behave at the point when those support measures are pulled back. So we -- even though we do report 0 credit losses in this quarter, we have kept all the model overlays we took last year intact. We're likely to keep them intact as long as there is still some uncertainty on what's going to happen with asset quality. beyond this period. When it comes to risk appetite, I mean, we go through that all the time. And obviously, with the strategy work we're doing right now, we're going through the risk appetite as well. So if there are any changes there, we'll come back to in conjunction with the presentation of the new strategy of the bank.

May I add one thing, please? Just to differentiate between credit risk in quantum, that's the number of credit risk units you have and the migration out on the risk curve. And right now, there is definitely an opportunity in banking, as I've talked about many times on sustainability in the future. And this means that in order to generate growth, there will definitely be in allowing us to search for opportunities. We also announced previously to dip our toe outside our current home markets in Austria, Switzerland, et cetera. These are small, but definitely, there is no problem when it comes to asset quality to do more business. We are very careful in going out on the risk curve. And by design, we're not loosening underwriting standards or having a strategy where we should go into other type of riskier asset classes.

Okay. And then, just a question on the NII. I think you had some positive impacts in the quarter from lower funding costs from the large deposit inflows. If you could just please comment on the outlook for funding costs in the future? And also, what you're seeing on the margin side on both corporate and mortgage lending, please?

Yes. On the funding cost, we've seen this positive development for a few quarters now. I think most of it is behind us. But hopefully, if credit spreads stay where they are, we have a bit more to go. But absolute maturities, behind us. On the margin side, there's a lot of competition on mortgages, especially new issued mortgages. So we see some margin pressure there. At the same time, when it comes to the renegotiations of old mortgages, that is fairly stable. So this intense competition on new mortgages does not have a meaningful effect on the average margin of the whole mortgage book. On the corporate side, it's fairly stable. In Q2, we've done more lending to areas where you typically have slightly higher margins. So that has impacted the margin composition of the core book slightly positively. We can see that there is an improving margin trend. It's very slow and gradual on commercial real estate, maybe 1 to 2 basis points per quarter. I think that's linked to the fact that we've had this risk-based floor that was introduced about a year ago. Otherwise, it's fairly stable on the corporate side as well.

Next question comes from the line of Magnus Andersson.

Yes. First of all, kind of a follow-up on the strategic question earlier from Nick. When I look at your long-term 5-year aspirations for the divisions that you released in conjunction with the Q4 report, we can see now, you aim for a cost/income ratio below 45. And adjusted for one-offs, I think you're at 43 now in the first half. But when I look at the divisions, I mean, you are at 42% in large corporate and financial institutions, your target is below 50%. While you are at 44% in corporate private customers, you target below 40%. And you're at 40% in Baltics, you target below 35%. So obviously, I mean, you expect to stay at around this cost/income ratio level in the coming 5 years. But it's obvious that you expect a much higher cost/income ratio in the large corporate and financial institutions than today and, vice versa, lower in the other divisions. So you talked about investments in merchant or previous merchant bank and large corporate and financial institutions, primarily in the Investment Banking area. You previously in the last quarter talked about international expansion. Is that it? Because it's a pretty large cost/income ratio expansion we should expect there in the coming 5 years. And in addition, what are the main drivers you see for the cost/income ratio reductions in corporate and private customers and the Baltic? If you can say something about that without front-running your 3-year plan.

Magnus, thank you for that question. It's a difficult one because it's so affected by the timeframe. And the practical side of me wants to say this: don't read too much into it. When you say -- when we went out with the medium term, long term, the 5-year targets, it's an indication for our best assessment where we think cost efficiency is balanced with pursuing client satisfaction and profit maximization. So we want to have the most profits we can on a very prudent type of business, both when it comes to risk and characterized by cost control, et cetera. Now half of the cost income number is, of course -- or actually twice -- 2/3 of it is income, which we do not dictate. So when we have a very strong quarter, the cost/income will go down, as you, of course, understand. It doesn't mean anything for us. It's still in the strategic consideration, cyclical consideration, doesn't come into play immediately. You need to see the cyclical consideration become permanent, then one could change that kind of outlook. So you have to expect a fairly large variation around those 5-year medium-term aspirations, just for the fact of income. It doesn't mean that we will change the whole investment program right now to be more accelerated because we can because this quarter have lower cost/income for us to signify. And the opposite is also true, even if we would have an income drop because of cyclical or share market stock prices go down, we won't change the strategic direction of the group. We don't take that into consideration in the short term. When those things are more permanent, of course, they affect. So we will, in this plan, given the cost/income guidance, have income and profit maximization, shareholder creation as a guiding principle with a more kind of fixed cost/income, where costs and income are related to each other, rather than the last 12 years, where we have completely disconnected costs from income. So regardless of income, we have said what the cost should be. But in practical terms, we will still use in the future cost targets, yearly cost targets. We'll be very stringent on costing what we're supposed to and then income will be [indiscernible]. What we are seeing today is not what we did last quarter, it's what we did years ago. So what we are doing now, we can evaluate in some years. So it's nice to have in our book an unusually solid and robust result, but it's the fruit of many, many years of work that we see here today. So we will not change the costs next quarter or tomorrow because we come up with these numbers today. Masih, do you want to add something?

Yes. I mean, I can just add on your question on C&PC and the Baltics. When it comes to those type of operations, they're typically more scale-based in the sense that if you add Swedish mortgages to the C&PC division, the marginal cost of doing that isn't that large. So we do see that with the sort of current set up we have, we can add more scale, which over time will drive down the cost/income ratio. We also see a scope, given how customers are behaving on changing their behaviors, to take down -- over time take down the physical presence within both Baltics and C&PC. So I think those two combined will take down the cost/income ratios over time to the aspirations we have set. Just a sort of a CFO reflection of what Johan said. So we typically -- if you look at the business we conduct, we have two input variables. We have labor and we have capital. Labor, you can see in the P&L line, capital you see on the capital consumption. We have to look at how we optimize the usage of both these two to maximize the profit generation and the client satisfaction. And if you look at the LC&FI division, we have been very hard on them on their utilization of labor in the past, but being fairly loose on their utilization on capital. From a financial steering perspective, what that leads to is that you do a lot of lending, but you don't do that much advisory because advisory costs a lot of labor and lending just costs a lot of capital. And we want to find the perfect balance here that over -- after 10 years of being loose on capital and hard on labor, you might want to have a slightly different mix to optimize the return and the profit generation of that division. So this is another way of looking at it.

Okay. I think we will come back to this probably along the way and not least when you present your 3-year plan. Secondly, just on capital, following up there, you talked about the gradual process. And obviously, you don't know what the FSA is going to say. But what do you think, realistically, when do you think that you can be down below or within your management buffer range of 100 to 300 basis points?

It's a very difficult question. A lot of things can move around. I mean, we typically don't do acquisitions. But what if we would do one of those? That would consume some capital. There are so many moving parts. But I just -- a way of looking at it is if you look at share buybacks, which in the future will be a part of our capital distribution, there's obviously a limit to how much you can do in a certain year. You have to look at the turnover of the shares. Maybe a certain percentage of the market cap is the maximum of what you can do. But I think, both from a practical perspective, but also in terms of that the uncertainty in the markets around the economy, the pandemic will not go away from one day to another. So both, from a practical perspective and from that perspective, it's going to be a gradual process. But in the end, it is the shareholders' capital that we're holding. If it's on our balance sheet, we will do the best to utilize it and, otherwise, will be paid out to shareholders over time.

But do you think it will be there in 3 years or -- because as it looks now, you are obviously also, on a fully loaded basis, way above the 300, even if I take negative things into account.

We won't plan for that. But obviously, if we generate more capital than we're planning to distribute, the buffer could increase, even though we are planning to optimize it. So it's a very difficult question to answer. But I think, at this point, the only thing we can say that we will, over time, optimize the capital structure in the bank. We will do that gradually.

Okay. Just on capital. Again, I think we all got the impression after the -- or at least I did after the Q4 report that share buybacks would be a preferred tool or definitely one of the tools you would use. Could you consider using already during the autumn this year if the restriction would be lifted? Has that changed your view? Does it changed in any way, or did I misinterpreted you in relation to the Q4 report?

I think post when dividend recommendations are changed, both options are available. So after the 30th of September, both options are available.

Next question comes from the line of Johan Ekblom.

If I can just come back to the cost/income outlook, kind of thinking over the medium term, so you're saying you're already below 45%, which is kind of where you want to be. Historically, I think you said over the cycle, you deliver something like a 5% revenue growth. Should we expect a similar level of cost growth? And I think the -- also if we think longer term, God forbid interest rates ever go up, certainly, that would be -- come with no additional expense. So how should we think about that? I mean, it would seem that sticking with 45% in an improving macro would be -- give you very large rooms for investments. Is that really needed?

Yes. I mean, first of all, thank you, Johan. The cost/income ratio is not a sort of explicit target. The target here for us is to have a good enough profitability. And the target we've set or the aspiration we've set is 15%. And we want to have a good profit growth in the bank. And then we think about how do we optimize those two, at what efficiency level or what cost levels. And with the current business we have and the current anatomy, we think the appropriate level is around 0.45. That could change. If the composition of the bank changes that could change. And if competition changes, that could change as well. In terms of sort of if income growth is 5%, does that lead to 5% cost growth? Well, not necessarily. We won't do investments we don't need, and we're doing this strategy work right now. And based on that, we believe there are investments we will do in this bank that will take up the nominal cost level of the bank, but still keep the cost/income ratio at around 0.45. If we are surprised by larger income growth than we planned for, then obviously, we won't automatically reinvest that in a higher cost base. We'll only do that if we find investments we think are necessary.

Next question comes from the line of Rickard Strand.

Yes. Starting off with a question on corporate lending, just wondering, if you could share any insights to the demand there during the first half of the year, if you've seen any indications of improvements and also read sort of improvements during the last couple of months? And if there are any read into that into the second half of the year?

Yes, I can take that. It's kind of been as we expected, a bit muted in the first half of the year. It's not a reflection of low activity amongst our client base. It's a base effect. So when you see -- when I say muted, I'm thinking, of course, of the delta of the exposure, which is flattish in the last 6 months, which is quite actually good if you compare it to other cycles where this is a very normal pattern. Once we have an external shock, companies are acting very swiftly and very, very forcefully to make sure they have financial stability that then tails off. So what's happening here and now is that the things we did between March and July last year, they are, of course, maturing. Many of those things are shorter in nature, one year. And we are, let's call it, positively surprised in this muted environment that we're still holding at the level. 1/3 of the loan book needs to be written every year in order to keep it constant. So this is a very, very active quarter in order to keep it 2% higher on an FX-adjusted basis than the elevated level we saw last year. Of course, there's no growth. But still without growth, that's a pretty good business. You're very active in it. But also, you can see on the fees and commissions line, loan fees are -- is actually a drag in the delta this quarter, whilst the equity-based and other investment banking fees are the drivers. Now going forward, it's a very difficult question. We don't know, that's the truth. But we can see that optimism, and we're following all the same leading indicators as everyone else, is actually on elevated levels. So there's a higher degree amongst CFOs who get asked in all these surveys around expansion in the future. We can see capacity utilization is going up. We see the fight for labor is going up. We see that GDP is now upward, revised from already high levels. So there's some type of air of optimism around reopening of the economies and facing a normalized world. And we can clearly see it in the client activities in most areas. So it feels like we're getting through it. I will say that, that's -- it's too early to say that the broader-based growth of debt increase in the corporate space is here and now, but let's see. And then there are two other factors away from this kind of broad statement, and that's M&A and its sustainability. And I showed in the presentation the enormous growth. It's not necessarily net growth. It's a lot of [indiscernible] replacing what was previously non-sustainability-linked loans, but it's very relevant for your market share. As far as we can tell, we've gained a bit in most areas there as well. So there is, of course, a little bit of growth, independent of what the market does, if you perform relatively well. And then on M&A, which is, of course, we're clearly lacking, there's been a very heavy Equity Capital Markets activity. And as Masih said, the pipeline actually looks very constructive. But it is, of course, a more slowly moving business lines. You need volatility to be reduced under a longer period of time for large-scale M&A to happen. And they needed to, of course, often be associated with resets of the capital structures in those companies. And that's, for us, a very large potential growth driver.

Then just coming back to your improved inflow into AUM. Just curious to hear, if that's -- sort of if that's on the back of a strong market, or if it's anything related to your sort of the initiatives you highlighted in Q4 and onwards about working on improving the AUM inflow?

Yes. I can tell you, it doesn't feel like we get anything for free. So I would not say it's on the back of a strong market. And also, all the relative comparisons with peers clearly show that it's not for free that we get this. I would be very humble here, and say that we come from a pretty dim history lately, where we've not had a very -- had any kind of net flows to be proud of. We can clearly see over the last 3, 4 quarters that there's slight tendencies. I don't want to be stronger than that. That has changed. And this quarter was the best one from a very low level we've seen in some time, where both institutional side, which we called AMS, private monthly savers, which is, of course, a super-strong annuity type of savings product linked very closely to mortgages, IMs own distribution channels and also the market share for our Life business, all of them performed, including Private Banking. But the number in the quarter was still at only SEK 25 billion. It's a clear shift from what we've seen lately. But I think it's too early to say that we can see that the efforts that we have put in, which are significant to change this. It's too early to say that they're working. But at least we have no reason to believe they're not.

And then finally, just on the Tink divestment. If the deal goes through, if you could quantify the effect you expect in the coming quarters from that on other income?

Yes. We haven't communicated that. We do have a haircut on the valuation we've done in Q2. So if the deal does go through, there will be an additional effect coming at that point in time. But we haven't quantified externally how large that's going to be, but it's not a massive number.

Next question comes from the line of Sofie Peterzens.

Here is Sofie from JPMorgan. I was wondering, in the retail customer or personal customers and corporate customer division, net interest income was quite weak, down 6%, but you had very strong mortgage production. But you mentioned that it's all due to the internal transfer pricing of deposits. How much of that should we expect to reverse in coming quarters? And how should we think about the net interest income here? And then, my second question would be going back to the capital return potential. I realize that you want to be a little bit vague here. But how should we think about SEB potentially paying out more than 80% to 90% of profits? Do you think this is a reasonable assumption? And also, could you remind us what the process is for any interim dividends? Can you pay interim dividends? And would you consider paying any interim dividends? And then just, finally, on capital. I recognize you have the 100 to 300 basis points management buffer. The Pillar 2 G is going up. We have some litigation cases. But kind of -- what kind of core equity Tier 1 ratio would you be comfortable running, with taking kind of the Basel IV into consideration, the German litigation into consideration, Pillar 2 G? So yes, that's it from my side.

Okay. Thank you for those questions, Sofie. We start with net interest income within C&PC. This impact from IFCP, you should expect that to continue throughout this year. So you will see that on the divisional side, they will continue to be compensated less for deposits in the coming quarters, even compared to Q2. So you will see some swings in the second half of the year, further swings from the divisions to treasury. For the divisional level, they have to sort of run fast just to stay still. It doesn't really have an impact on the group. It just means on divisional level, NII will look a bit worse. But on treasury, it's going to look a bit better. I would just say that maybe 2020 was an outlier year if you look at the compensation of net interest income between treasury and the divisions, whereas 2019 was more normalized. So we should go back throughout this year, if credit spreads stay where they are, to a more normalized composition of NII between treasury and the divisions. On the capital, in terms of the payout ratio, which I think your question was about, we don't look too much on that, to be honest. So there is no restriction we put on ourselves when it comes to the actual payout ratio. We have the policy of 50%, and then we will, over time, gradually make sure that we go back to the optimized capital position. And whether that leads to a 70% or 100% payout ratio, it's not an important factor and, to my knowledge, not something that the Swedish FSA really looks at. They look at where you stand in terms of your capital, what the requirements are, and then they're typically fine with whatever you decide to do. So that's not an important question. On your last one, so we've discussed this a few times before. So we have a current minimum requirement of 12.5%. We know that the Pillar 2 Guidance will be introduced next quarter. And then, we expect over time that the countercyclical buffer will be increased again, back to the levels it was at prior to the pandemic. So if you take all of this into account, our minimum requirement will likely go up to around 15%. And then, we say that we want to have a buffer of 100 to 300 basis points above that. So we will operate in the interval between 16% and 18% in the longer term, the way things look right now. Basel IV, it's way off. It's very difficult at this point to say exactly how that's going to be implemented. We know the proposal from the Basel Committee, but very little in terms of the implementation. So we don't really -- we look at -- look out for it, but we don't really incorporate it in the short- to medium-term capital planning. We don't incorporate any litigation process either because we don't know of any that the bank is under.

Okay. And just going back to the payout, you mentioned that -- well, you target 50%. And you kind of mentioned that it's less important and the Swedish FSA doesn't really look at the payout level. But I mean, if you wanted to be over 100% of your profits, would you need any special approvals, or you could just pay over 100%?

It's not exactly clear. There is one regulation saying that if you want to reduce the CET1 level, you might have -- need to have an approval. Exactly how you have to -- the interpretation of that is not fully clear, so it might be. But we have paid more than 100% before. If you look at how much we paid versus the reported numbers, we had, I think, in items affecting comparability, a few years ago, which led to the payout ratio going up to -- I think it was 113% back then, and that wasn't a problem.

Next question comes from the line of Antonio Reale.

It's Antonio from Morgan Stanley. A lot of my questions have been answered. I've got one last, please and just anecdotally, if you could share what you're seeing on the [indiscernible] some of the easing in restrictions also in Sweden earlier in the month. And I'm interested in understanding how you're seeing spending patterns change and how that will affect your composition of your fees and P&L more broadly? What's the outlook for fees in the second half of the year? And related to that, when do you think we might start to see a recovery in corporate cards?

So if I understood your question correctly, it's the businesses that are clearly affected by the national response to shutdown and reopening and fees and commission. Is that -- the outlook for fees. Was that correct?

Yes. Correct. Basically in the pandemic, we've seen a big surge in saving and obviously a significant drop in spending, and that's now reversing. So I'm wondering how you position the bank to benefit from that, especially on the fee line.

Yes. I mean, in a way, we kind of automatically positioned to benefit from it, regardless of what we do. And that is that -- the only big upside that is still left on the payments side is really from the corporate travel and corporate card business, which is in our bank as the disproportionately large business lines. So we have less private cards compared to corporate cards, if you compare us to our peers and as we are predominantly corporate bank. There has been no meaningful recovery, almost not noticeable. But the big shift now is no longer a percentage drag. So it's stabilized on these very low levels, and it's not more difficult than this. When you and I meet next time, we're probably going to be over it. So we need to start traveling again, and that will automatically -- because it's predominantly hotel and flights and representation on those cards. It is a little bit earlier in the recovery when we now see the economies opening up on the domestic corporates. [ People doing -- ] smaller corporates, who predominantly work in the local arena, they're already traveling around now because there's no restrictions really affecting them anymore, but it's fairly small. We need the foreign travel and the representation -- business representation to pick up. On the Investment Bank, I would assume that the monetary policy -- accommodative monetary policy, ever increasing asset prices is, of course, turbocharging the ECM business and all the AUM businesses. So one needs to just -- I think that's related to your macro outlook and how will the asset prices develop from here. And I think it's not too much to say that I think we need to have a little bit of a cautious approach in thinking that house prices and equity markets can't grow to the sky. We're also very well positioned in Private Banking as this has, of course, just -- it takes years for these things that happen so quickly to actually go through the whole bank. And we have seen a very high inclination to save and also wealth being created as anyone who has any assets, more or less, have more of them today than they had in the past. But there is, of course, a risk in there, too, and that is that the propensity to consume will increase rather than save. And we could -- I think I could see that quite clearly in the U.S. reports now that spending is up. It's less credit demanding spending. So I saw the credit card stats in U.S. is typically a little bit of a leading indicator, not easy to compare. But also our macro economists pointed out to us quite recently that the savings ratio had peaked. We're not going to go up from these levels, and that means that the propensity to consume of your disposable income is going to be flat to increase. I think those are actually good things in the end because there's so much savings anyway and also for the structural changes in the pension system, et cetera, that we see a pretty good underlying growth in the savings areas regardless of these cyclical considerations. And then, back to the M&A point. So the M&A is, of course, an upside in position. If this is stabilizing at these very high levels, we would expect the M&A pipelines to also materialize rather than just being pipelines and discussions. And the organic need for expanding your business, given the capacity utilization, is increasing. And also the surveys we look at and referred to earlier, there appears to be an increased appetite from corporates right now to start thinking about expanding their businesses and then sustainability, which is, of course, coming regardless of cyclical consideration. Did I address your question somewhat okay?

Yes, very clear.

Next question comes from the line of Adrian Cighi.

I have two follow-ups on NII and capital utilization. So on NII, one of the benefits you've seen is from a change in mix on your funding side where you chose not to replace some of the funding that matured in the quarter. Is that a development that you see reversing in the coming quarters? Or can you do more of this and potentially provide further tailwinds to NII from this dynamic? And then secondly, on capital utilization, you've in [ passing ] mentioned M&A as a potential. And assuming that this would imply a bolt-on as opposed to a transformational type of acquisitions, where do you see some of your gaps in terms of capabilities? Are these product line gaps, or do you consider M&A as a potential way to speed up gaining that geographic toehold outside of your current footprint?

Thank you very for those questions. On the NII question, the change in mix, as I mentioned before, I think most of this is behind us. As you can see in the report, the loan depo ratio is now down to 103% if you look at the core loans and core deposits. And the senior unsecured funding has come down a bit compared to what it was about a year or 2 years ago. And there's some more to do here, but not that much. So I wouldn't expect too much from funding costs coming down even further in the future. On the capital utilization, I shouldn't have mentioned M&A. It sounds like maybe we have any plans on that in the immediate future, we don't. Just a way of trying to answer the question about that it's difficult to know exactly when and how you can consume your capital. But obviously, M&A is part of the strategy work we do in the bank. We look at that as an option to accelerate or transform businesses that we might need help doing so, or you can feel where you are subscale, you need to add scale to become more efficient and improve your customer offering. So to the extent that this will be part of the strategy, we'll come back with that presentation around year-end.

Next question comes from the line of Namita Samtani.

I've got three questions, please. Firstly, I think we've heard quite repeatedly the need to invest. Yes, when I look at IT expense, which I guess is what's called data costs and the fact for the first half at 6% lower year-on-year. So just wondering why that's the case. Secondly, just a comment on Investment Banking pipeline tilted more towards M&A versus ECM and IPOs in the second half. Is that a way of saying IBC will be lower in the second half compared to the first half? And lastly, a bit of a bigger picture question. Do you think the 15% ROE target is achievable before 2024? Because [indiscernible] you don't have anything close to 15%. So just wondering what we're missing here, if anything at all.

Okay. Thank you. I'll start with the IT expense question. I don't know exactly why it's down 6%. I think you have to look at FX effects and those kind of things. It's not a reflection, I would say, at this point on how much we invest in IT. This is -- I'm assuming that you're referring to the P&L cost, and obviously, IT expenses, if you accelerate those, you might not see it in the P&L, you just see more capitalizations. So -- but in general, I think there's a small reduction in consultancy costs, for example. But it's not a big move and there's no change in the IT spend strategy of the bank. On the return on equity target, I'll take that and then you can take the Investment Banking one. Yes, well, achievable. We've said 15% in the medium term. And we define that as 3 to 5 years away. So 2024 is obviously within that bracket. 15% depends on so many different things that we can't dictate at this point, interest rate level, asset prices. But obviously, we are planning for moving into that direction. And whether that's going to be reached by '24 or later, it's difficult to say. But yes, depending on market conditions, it could be achievable at that point. It could take longer, it could be faster as well.

And on the Investment Banking fees, we are not saying you should expect any lower fee contribution in the second half. What we are saying is that the mix has been very dependent right now on ECM. But it doesn't mean that you replace necessarily ECM with M&A. They are unrelated. But we would foresee that the pipeline conversion into real deals have been very high on the ECM side and very low on M&A. So it's actually something that could compensate for a somewhat lower ECM activity, but there is no sign that it will be lower in the short term. Everything I see here and read and feel is that this continues right now to be a very, very active market. And then on Investment Banking fees, you also have the debt fees, the loans and the bonds and the sustainability financing fees. And none of those are really contributing to growth right now. So I think that picture I'm trying to paint is probably a quite constructive picture for second half as well.

Next question comes from the line of Robin Rane.

Yes, so two questions. Firstly, I would just be interested to hear your reflections on the Vipps-MobilePay merger. And how do you look at Swish in light of that -- this? And then secondly, on the salary costs, I mean, we've had super-strong fees and income growing year-over-year, looking at the half year results, but salary costs are not up near as much. Could we expect salaries to catch up later in the form of variable pay, et cetera?

Okay. I'll start with reflection, and that is really the key word here. It's not my place to talk about Vipps. But it was interesting to see that it's a clear testament to idea of cooperation across nations, across the borders in the Nordics, which we have, of course, all the prerequisites to do. And they've created a pretty large, if not, one of the most noticeable European mobile payment companies through that. And I also -- I never experienced it myself, but I'm hearing they are very good. These are very -- these are good capabilities. Of course, we know Swish as a part owner very well. And this is very much in the future strategy, I think, for payment as a whole to look at cooperation and collaboration and partnerships. So I'm not talking on behalf of Swish as we're only a part owner, but I definitely see this is the future type of discussions that's going to go on in order for combining. Now the ownership structure between Vipps and MobilePay in Denmark and the Finnish, it's very much different from the Swish one, which is more of a cooperation amongst all the major banks in Sweden. So there is, of course, a different governance. But I think it's an interesting development. I think it's a true effort for the incumbent banks to use new technology and innovation to support the clients with the functionality that we all need. And it's pointing to that we can do it, too. The banks are actually quite good in innovation as well.

Yes. Robin, on your second question on salary costs and any impact on variable pay. When we set the cost target for 2021 of SEK 23 billion, we did at that point also say that we wanted to have flexibility of up to SEK 200 million upwards or downwards, mainly depending on the fact that we don't know exactly how the bank will perform 3 years from when we set the target. And we want to have flexibility to be able to compensate the employees of the bank if we are performing well. Now just looking at the first half of this year, we've seen that performance has been very good, mainly within right now Investment Banking, but also other parts of the bank. And we have variable compensation to some staff but also all employee program that can go up and down, depending on the client satisfaction and the performance of the bank relative to our peers. So just, obviously, if the year continues the way it has started the first half and we keep reporting these kind of numbers, there is absolutely a possibility that we have to utilize parts of that plus SEK 200 million in flexibility that we gave ourselves.

Next question comes from the line of Riccardo Rovere.

Two or three, if I may. The first one is, with regard to the COVID overlay that you charged in 2020 and that you are keeping intact for the moment, for how long can they stay intact without being allocated to single exposures? Is it something that you have to do by the end of this year, by the end of next year? How should that work? And related to that, in considering that GDP in Sweden, just in Sweden again in 2022 is expected to be above the levels of 2019, considering the COVID overlay, considering the deposit growth in your balance sheet is outpacing big times the one-off of the loan book, which means that your clients are accumulating more savings than debt. Is that madness, complete madness, to assume that this cost could stay close to 0 for 2 years in a row? I'm not asking you -- I'm just asking you if that is complete madness, okay? I'm not asking of any guide, any particular guidance. And on the NII very, very quickly. The SEK 100 million contribution that you have from markets, why should that disappear? If that is related to the current level of rates and rates are assumed to stay where they are, why should that all of a sudden disappear? Provided I'm getting it correct. Last thing I wanted to ask you, with the return on equity basically in this quarter aligned to the -- to your long-term target of 15%, the difference is minimal, what's the financial advantage of a buyback instead of cash dividends to, let's say, use the capital?

Okay. Thank you, Riccardo. Very good questions. If I start with the first one on the model overlay provisions we've taken, that typically is sort of to the extent you can keep them on portfolio group level, it's very much a discussion with the accountants, to be honest. You discuss what the uncertainty is about the future, whether that uncertainty is on counterparty level or whether there's a general uncertainty in the market where you can't really say,for what exposures you need the provisions. So it's going to depend on that discussion also, obviously, our view and their view on the uncertainty and whether you can say that you need these reserves or not and whether you can allocate to certain counterparties or not. But obviously, in the long term, you cannot keep this kind of sort of model overlays. This was something that everyone encouraged the banks to do and we did it as well. But I'm sure that when you feel certain about the fact that the pandemic is over, this has to be utilized in one way or other, either recoveries or allocated to counterparties where you've seen issues. On your question about sort of the macro development and whether the ECL level could be close to 0, yes, it all depends on sort of your macro assumptions. So it's very difficult to say exactly. We've had that. If you look at it in the past, we have high-level, certain years, in the financial crisis. And then you typically have a few years afterwards we have very low levels for many years. And then it maybe normalizes, or like last year, it goes up to an elevated level, and then it's typically lower. So it's very difficult to say exactly how long it can be low. It's going to depend on macro. So we don't try to call that. But it's not impossible, obviously, that it stays on a low level. On the question on net interest income and the SEK 100 million related to markets. We don't say that it's going to disappear. So what we have tried to do in the past is that we look at the net interest income within our markets business. And as soon as that has deviated from the long-term average, we have tried to be transparent around that. So we look at the last 8 quarters, and if it's different this time, we tell you about that. And we can just note that in the last 3 quarters, it's been elevated versus the long-term average. Whether that elevation goes away the next quarter, it's impossible to say. We just try to be transparent about the current levels versus the long-term average levels. On your last question on the fact that we have a return now close to our ambitions, obviously, that's with lower ECL levels than we think we will have in normal times. The way we look at dividends and share buybacks, it's mainly from a financial flexibility perspective. I think when it comes to the financial engineering side of it, you can have different views on the values of one or the other. But if you look at the financial flexibility side of it, you can obviously see that if you do large dividends, and you've done them and then something happens days or weeks or months post the dividend, you can't pull the capital back. But if you do have a share buyback program that you're conducting over a course of a period, if something happens unexpected, then you can just suspend it and then you haven't paid all the capital out. So looking at it from a financial flexibility point of view, we felt last year when we reported this change in our dividend policy that it's better to have a combination of a slightly lower dividend, but then combine that with share buybacks to allow ourselves to get some financial flexibility.

And with this, I hand the conference back over to Johan Torgeby. Please go ahead.

All right. Thank you, everyone for participating today, and I wish you all a good and, I hope, well-deserved summer break. You have a few more weeks, I'm sure, with all the reports. And next time, or at least this fall, I really hope we can meet again. So thank you for today.

That does conclude our conference for today. Thank you for participating. You may all disconnect.