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

[Audio Gap] That we are happy to present today. As always, we will refer to the PowerPoint slide numbers on this call, and you can find them on our website. If we start on page that describes the financial markets, we can just conclude that we have had a continuation of a strong type of recovery theme from the very weak situation we saw in 2020, following COVID. Overall, it's been a very benign financial markets environment to do banking. And we can see a slight shift towards the end of the quarter where we had some weakness coming in both in the equity markets, a bit higher credit spreads and interest rates also increased. But overall, this was a very supportive quarter from the financial markets' perspective. Just a note on the dialogue and the focus in our dialogue as we see them, it feels like we are slightly at an inflection point. We are no longer predominantly talking about the recovery from 2020, but we are looking forward in the medium to long term. And I think the debate right now is around inflation, energy prices, the current narrative around the trajection for monetary policy and as a consequence, the asset price situation going forward. So in a way, it's a good thing. We are looking forward. On the other hand, it definitely feels like right now, there is an inflection point in what path should the markets take going forward. Next slide, please. We'll just summarize the third quarter, like noting that we recorded a 14.1% return on equity, and had a Core Equity Tier 1 ratio of 20.2%. This is now post the adjustment made for the proposed further ordinary dividend and the SEK 2.5 billion share buyback program we also have announced this morning. The prime drivers behind the result continues to be high customer activity within investment banking, where we've seen advisory and issuance fees increase by more than 100% this third quarter compared to the same quarter last year and also very strong support from the asset-based side of our business. So asset under management and asset under custody both have benefited from this strong market, we have continued to see. We've also received several of the, call it, mass market customer survey. These are for small- and medium-sized companies and for private individuals. And it's encouraging to see that we're making progress in this very important factor for us, namely customer satisfaction that we believe is a key long-term driver of stability and profitable growth. And lastly, we have a strong capital position, allowing for some capital repatriation to be announced now before the ordinary one that will come in January, proposed to be SEK 4.1 per share as a further ordinary dividend, and coupled with an initiation program with immediate effect or tomorrow of the share buyback program that will be active until the day before the next AGM on the 21st of March. Next page, we look at the credit portfolio that had continued a sideline movement for corporates. We noted a 1% FX adjusted growth in the third quarter, which is technically a weaker quarter due to seasonality. But we see the same still organic demand theme as we've been discussing that there is a little bit of less growth compared to 2020, not at least because of the elevated levels of recorded financings that we took on, particularly in the second quarter of 2020. The good side is that we are maintaining this high elevated demand situation, but it's a sideline movements when it comes to the total exposure. Another observation is, of course, that anything with a real estate-based type of development has been more positive. So both mortgages, housing cooperation and residential has continued to grow on a year-on-year basis. Next page, we have been talking a lot about savings and investments. And as many of you know, that's not been an area that we feel that we have performed as well as we would have liked. We have, over the last year or 2, talked a lot about new initiatives, trying to mobilize ourselves in order to become better, and this is very operational in order to do what we do in a more effective manner. Here are 4 data points that we now see that there is some light at the end of the tunnel, we can note a little bit of an improved momentum, but I still want to be very humble and cautious that it's too early to say that we have sorted this out. But the first data point is in the positive trend that we recently have recorded for the net sales of the funds that we have in our own investment management unit in Sweden, this is official data where we can track the AUM, but the blue bars are the monthly net sales. And here, we have gone from 2018 to actually have more outflows than inflows. Then we recovered a bit so we had a stable situation with 1% growth, this is where net inflows is surpassing outflows. And in the last 12 months, we now have a 7% market share of all the net flows coming into the Swedish fund market, which is a clear improvement. However, our market share is estimated to be around 10%. So we are still below in the last 12 months where we would like to be. The second graph to your upper right is an indexed number for how many -- how much volume we get in ordinary monthly savings. And we've seen a 40% increase from 2008 with the vast of the increase coming in the last 12 months, where we've gone up roughly 33% in volume of monthly savings. This is a very stable annuity type of business of ours, and we're happy to see that. The third graph is the lower left-hand side is an indexation again of how many clients are trading in equities and funds in SEB. This has, again, since COVID really increased, and we are now roughly 120% up on the number of clients that trade funds or equities in SEB. The proportion of these 2 in the mobile channel is of an utmost important as this is the way we believe we future-proof our relevance. And this is an area we previously talked about, we've been a laggard. And since 2020, we've had mobile channels developed for buying and selling of funds. And since April this year, we've also had the online trading ability in the mobile channel for direct access for our customers on the stock exchange to buy and sell equities. And we can just conclude that over the last year, we have now 54% of all the trades being done, customers trading in funds is now 54% is now done through the mobile channel. And they're early days, but we have also very rapidly come up to 31% of all the transactions done in equities are now done through the mobile channels. And lastly, we have an indication here on our market share development of new sales in the pension area. And here, we have gone from 8% market share, and we're now hitting almost 13%. So this is also a positive momentum, and we have currently taken the #2 position amongst the peers in Sweden that are active in the pension and insurance business. Next theme is just to try to share with you a simplistic picture with an overall objective for our customer satisfaction. Customer satisfaction is always part of SEB's planning and one of the core ways in how we would like to achieve the strategic targets that we have put out. And we must say that we have a pretty supportive development overall when it comes to the external surveys that are being conducted on behalf of banking customers and what they think of their different financial services providers. And here are 8 of them with particular focus on the Swedish Quality Index that came out a few weeks ago, where we, for the first time, I think, in 30 years, became #1 when it comes to customer satisfaction amongst the larger Swedish banks. There are more banks than large Swedish banks, and we're #3, if you include all Swedish banks in this survey. On the Swedish Quality Index for private individuals, we've had a very solid place on -- in second. We've done a significant improvement in Prospera Private Banking, which was one of the areas we felt particularly strong about last year where we noted a 7th place, we've now improved to 4th, and we still have some way to go with a high ambition here to come up in a very strong way. And the others are around fixed income, large corporate and financial institutions that are from 2020, they will be updated in the near future. But it is very important to stress that we believe that customer satisfaction and making sure that we have a relevant offer is the key of what we do. This is really the way we need to perform in order to meet the financial aspirations of the bank. I will now hand over to our CFO, Masih Yazdi, to talk about the financials.

Thank you, Johan. So if you move on to Slide 8 and look at the Q3 numbers isolated. You can see that the profit this quarter is largely in line with the previous quarter. However, typically, we have a seasonally weaker quarter in Q3, but this time, it's largely in line. So we believe that this is a good set of results. And obviously, compared to Q3 last year, you can see that we have a good income growth of about 9%, a profit growth of 15% and net of expected credit losses, the profit is up 35%. As Johan mentioned before, return on equity of 14.1% in the quarter and a cost income ratio of 0.41 as well as an ECL level of 1 basis point. If you move to the next slide, Slide #9, and look at the year-to-date development. Here, we can see that income is up 11% so far this year compared to the same period last year. Costs are up 1%, leading to a pre-provision income -- a profit growth of 19%. And given that expected credit losses are about SEK 5 billion lower than last year, we see a profit growth in total of 62% for operating profit. I should mention here that we have some FX effects. On income side, we have a negative effect of about SEK 0.5 billion for the first 3 quarters compared to last year. At the same time, we have a positive effect on the expense side of about SEK 200 million. However, given the strong performance of the share price so far this year, this positive effect due to FX on the cost side is offset by higher costs related to variable compensation due to the higher share price. If you move over to the next slide, Slide #10 and look at net interest income. We've seen this line grow by about SEK 1 billion or 5% year-to-date compared to last year. This 5% is mainly due to lower funding costs. And as Johan mentioned before, volume growth related to real estate lending, mainly mortgages. Q-on-Q, net interest income is stable. It's up slightly. That is mostly due to 1 extra day in the quarter and some volume growth, mainly mortgages. We've seen that the net interest income we have in our markets business, as we have told you before, it's been elevated for a few quarters. It continues to be elevated by rough approximately sort of half the level we've seen in previous quarters. If you look at corporate margins, they are slightly up this quarter. That's mainly a mix effect. We see less demand for regular CapEx lending, but we've seen more demand for structural finance, leveraged finance and typically, that type of lending has a higher margin. On the mortgage side, we still see intense competition in the market. We have lower margins in the front book than on in the back book, but the impact on the margin for the overall mortgage portfolio is fairly small. I should also mention that we have some effects when it comes to the net interest income in the divisions and in treasury, and that's due to internal funds transfer pricing and with lower credit spreads now we -- the treasury compensates divisions less for deposits, which means that there's a negative effect on the division's NII and there's a positive effect in treasury. If you move on to the next slide, net fee and commission income. Here, we see a SEK 2 billion increase year-to-date compared to last year or 15%. More than half of this improvement is coming from the asset management business, about SEK 650 million is within Investment Banking, so our advisory business within equity capital markets, debt capital markets and M&A and the remaining improvement is coming from our cards business and the life business. Quarter-on-quarter, we see a small decrease on net fee and commission income. That's good, given that seasonality leads to this line typically coming down more in Q3 versus Q2. There's a lower fee related to investment banking and markets this quarter, but this is offset by asset management, lending and card fees. And on the card side, I should say that when it comes to private card turnover, we see that now that is higher than the pre-corona levels. On the corporate card side, we are still way below the pre-corona levels, but we have seen encouraging signs during the quarter and especially in September, and we are recovering from the low levels we have shown in last few quarters. When it comes to the pipeline, we think that it continues to be very healthy on investment banking, both on ECM as well as DCM and M&A. Moving on to the next slide and looking at net financial income. Here, we see a 28% increase year-to-date. We have some positive valuation effects, XVA, as you know, Q1 last year was a very negative quarter. But if you add the last quarter -- the few quarters after Q1 last year, we have made up for that negative effect and then some. And in the last 2 quarters, we have had 2 revaluations. In Q2, there was the Tink revaluation of about SEK 0.5 billion. And now in Q3, we have the holding in Euroclear that has been revalued by about SEK 0.5 billion. The underlying business has been weaker here in the last couple of quarters, mainly due to the flattening yield curves, but we could see that in September when the yield curve start to steepen again, the underlying business in fixed income has started to improve again. We have earlier guided for this line being at SEK 1.3 billion to SEK 1.5 billion in the divisions, excluding XVA and excluding treasury, and we keep that guidance going forward. Next slide, operating leverage, looks good. So far this year, we have seen a SEK 1.2 billion increase of the average quarterly income, which is the highest level we have recorded last 10 years, both in nominal terms and in percentage points, so a 10% increase. So to summarize the last 10 years, we have had 8 out of 10 years with income going up. And given that we have kept expenses fairly flat, 8 out of 10 years, we've seen the profit go up and the income CAGR for last 10 years is now 4%, and the profit CAGR is about 8.5%. If you move over to the next slide on the capital development. Obviously, we have seen some movements during the quarter. But if we start with where we ended Q2, we had a capital buffer of 860 basis points. During Q3, we have generated 44 basis points of capital, net of the 50% we reserve for dividends. The further order in dividend and the share buybacks we have announced has cost us 150 basis points. And then we've had some regulatory changes in the quarter. The Pillar 2 guidance has been introduced, which leads to 150 basis points higher requirement for us, but that's been partly offset by what's called the M factor, the Pillar 2 comment, which has been removed which leads to a 25 basis points lower requirements. So in the end, we end up at 640 basis points when it comes to our buffer in the quarter. Pro forma, as we do expect that the countercyclical buffer eventually will be increased back to levels it was pre-corona, we are around 500 basis points in terms of buffer. On the next slide, some key ratios. Worth pointing out here is obviously the improved asset quality, seeing the net expected losses this year being at 1 basis points. We have seen a large inflow of deposits across the board, both when it comes to financial corporates, nonfinancial corporates and households. And year-to-date, we've seen almost a SEK 400 billion increase of deposits. This means that our liquidity ratios and funding ratios look very stable and good. And as we've discussed before, so does the capital position of the bank. Now I'll hand back over to Johan for our save-the-date announcements after you've taken. Yes, the financial targets, yes, I missed that one. Sorry. So we're keeping, obviously, the financial targets, 50% payout ratio. This buffer when it comes to our capital, 100 to 300 basis points. And we have said also in the report that we will gradually work our way down to that interval going forward. And obviously, we have a return on equity target that is to be competitive with peers and with the long-term aspiration to be at 15%. Now I can hand it back to you.

Thank you, Masih. We'll just end by sending out a save the date, as we have many times during this conference calls had themes around sustainability. We've decided to invite all of you in a broad way to come and listen to SEB's work that we've been doing over the last couple of years, including targets and ambitions for the future. We'll also have external speakers, and this will happen on the 17th of November, and it will be something like a 2-, 3-hour type of session you will all be invited to and welcome to attend, to -- further details to come. And with that, we say thank you for your attention, and we hand over to the operator, please.

[Operator Instructions] The first question comes from line of Andreas Hakansson from Danske Bank.

First one, on the NII and the sustainability at NII, volumes seem to be picking up on the corporate side. So if you can comment a bit on that. But also, when I look at your funding structure, you have a continued increase in deposits and the debt -- issued debt is continuing to go down. So do you think you're going to continue to see a tailwind when it comes to funding driving the NII? That's my first question.

Thanks, Andreas. On the loan book, yes, there is a tentative and 1% FX adjusted quarterly growth on corporate it's a 4% annualized which is a very normal type of level. I don't want to say that we have seen this kind of lack of broad-based organic demand has been changed during this quarter, but there is a constructive pipeline around M&A transactions, which are more, call it, financing driven than ECM. So that we talked about last quarter, that is still the case. And as Masih mentioned, there is a little bit of an uptick. What has gone up here is on the leveraged finance, the structured finance, infrastructure and real estate. So those are the ones that are on the margin has gone up. Then on top of that, we still have the positive expectation on the green super cycle. It's still not something I could guide will materialize in a quarter or 2 but there definitely is enough discussion to go around to conclude a lot of things are happening. And these are massive infrastructure like transformational projects that many companies needs to go through. But well, it's a constructive and stable with some potential upside from these areas that are not yet been seen in the numbers. On funding, Masih?

Yes. I would say, in general, we haven't -- going forward, it will be difficult to take the wholesale funding down further. That's mainly related to regulatory reasons. We have to have a certain share of outstanding senior unsecured and nonpreferred senior because of the MREL requirements. And so I would say that most of the funding tailwind we've seen in the last 12 months or so is behind us, and you shouldn't expect much more to come.

Okay. And next question, I heard some people complain about the size of your buyback program this morning. I didn't expect any until next year, but you say that you want to have 100 to 300 bps buffer, and you say that pro forma you had 500. That should give you substantial room to do more buybacks. Is it just that you want to wait until next year? Or what's holding you back?

Well, you're correct, and we just wait. We think this is a well-balanced approach to do something, call it, midterm. The next date in the calendar will be when we call to the AGM in late January. This is what we have done for now between the 20th of October until Jan. And the timing for the buyback program should, of course, be also thought about in that shorter time period. This is not an announcement for a yearly program. It's just here and now.

The next question comes from the line of Magnus Andersson from ABG.

Yes. Just to follow up on Andreas' question there on capital and a bit about how we should think about you continuing to reduce your excess cash position from here. Just when we go into the next year, should we from here now rule out additional dividend payments in addition to your 50% payout ratio target, i.e. a continued combination of dividends and share buybacks to take the excess cash position down? Or should we be at 50% payout and just share buybacks in addition to that? That's the first one. And secondly, Masih, still talked about that you expect to be done within your management buffer target range of 100 to 300 basis points within 1 to 2 years from now. Is that still valid?

Thank you, Magnus. If I start with the first one, I think when the Board looks at the excess capital position we are in and the toolbox to adjust that, they're looking at all the tools available, which means you have the ordinary dividend, you have a potential for further ordinary dividends or extraordinary dividends as well as share buybacks and exactly how they will combine the different tools to get there. It's going to be up to them. We have a capital plan in the bank we present to them, and there are many ways to do this. So I don't think anything should be ruled out [Audio Gap] ordinary dividend and then share buybacks over time. But in this sort of more extraordinary position, I think all the tools are available to the Board. On the timing, I mean, we say gradually, we will get down there, 1 to 2 years sounds fair, exactly how long it's going to take. It's difficult to say. It depends on many external factors. We have new regulation with Basel IV, probably announced next week, but to see how that's going to impact us and the timing of the introduction of that. You have what we really believe in is the sustainability super cycle. We're really hoping for that to kick in. It has started to some extent, but not the magnitude that we're hoping to see. And we want to be very potent if that happens, having a lot of capital to be able to take a large share with that demand coming from customers. So there are many things that could happen, and therefore, we think it's very good to have a gradual approach to adjusting the capital position.

Okay. And just if I may, I am one of those who thought that the buyback program was a bit smaller or at least smaller what I had anticipated. So my question is, when I look at the SEK 2.5 billion if I annualize this to SEK 5 billion, is that what you think you can do in a year? Or is that the wrong way of looking at it, that it could be -- I mean, it could be upsized when you are done with this program if you are satisfied with the outcome, et cetera?

Yes, I don't think you should do that. I mean you should remember that this is the first time we are buying back shares in the bank, at least in modern history. And even though it's sort of simplified from an external perspective, there are a lot of technical aspects of how you set up a program, how do you actually do it. And we see that as a test. So we have set up a program now, and this is the way we conduct it, and it's good to start with a smaller amount also given that we have a more limited time period, we can do it. And then exactly how we then do it the next time, we will see and also when it comes to the volumes. So I don't think that you should sort of look at the SEK 2.5 billion and take it times 2 and then you have an estimate of the sort of future buyback programs, we'll see.

The next question comes from the line of Johan Ekblom from UBS.

I think we've exhausted the buyback questions, but maybe 2 unrelated questions. You talk again in the report about the need to make further investments. And I think last quarter, you talked about the cost/income reduction being largely a thing of the past. Can you talk a little bit about where you see investment needs? And if there's anything you can tell us already now about broad picture of what the quantum is relative to the current pace of investment? And then I guess, secondly, the market is starting to price in rate hikes much earlier than or -- than the lack of rate hikes being signaled by the Riksbank. Can you just update us on what's your rate sensitivity given the large growth in deposits, et cetera, that we've seen over the last 18 months or so?

Sure, Johan, thank you for that question. On the investments, we will come back to you in greater detail at the latest in conjunction with the Q4 report, but I can give you the things that we have decided on and we're working on here and now, which is really investments in the area of advisory, predominantly in the areas of expanding our corporate and investment bank. So we are in the process of hiring people and setting up a client strategy to how to approach Austria, Switzerland and the Netherlands. These are not very significant in numbers, but still an important strategic change to become Northern European rather than just a Nordic bank with a headquarter in Stockholm. Secondly, we have the area of private banking or private wealth management, which is investments, of course, in banking, as you all know, is around people and technology. So it is, of course, associated with costs and having more people on the ground and meeting more client and a pursuit of opportunity. And here, we are predominantly focused on 2 areas. One is to just expand geographically our private banking and wealth management business. Also, there's a technology content in order to improve -- continue to improve our online capabilities for trading, savings and investments in the mobile channels. Next area is around custody. We have a very long-standing partnership for global custody when it comes to BBH. We are continuing to add staff and investments. These are technical investments, technological investments that we've done in the past, they need to be maintained. But right now, we have a very good momentum in our custody business. On top of that, we also have sub-custody, the Nordic securities, which we are investing in as this is now, of course, quite a large change in the competitive dynamic in this area, and that is in favor of SEB, who is very committed to this business line. And then we have the mobile channel revolution for retail banking. So this is another area where we will focus our resources. These are not dramatic from the past, but this is about an acceleration in order to be quicker creating more real-time solutions in a robust manner and making sure that the best-in-class often fintechs or niche banks or monoliners, is a true, call it, reference point for what we need to achieve. And then there are other things in the core technology platform, SEB X, cloudification, something around the data journey, which are all part of the future thinking of future-proofing the bank. On rates, yes, we just note what you just said. There is, of course, a huge shift in this inflection point, very important to the banking industry and that is if this change in narrative or at least expectations in some areas where the rate pass from central banks in the short end will change which in a technical sense would be very, very positive as we continue to have this very unique situation we've been in for many, many years, where deposit is a non, call it, functioning business line, whilst lending is a very well-functioning business line, because there's no profitability to be had, and we have in Sweden decided not to charge on any savings account for private individuals. So that would be welcomed and it would be a normalization from this very large economics experiment that happened in the global world of huge quantitative easing and permanently or long-term establishment of negative interest rates. On the other hand, an increase, I think in interest rates could also be factored in as a major risk. We do talk a lot about asset prices being supported by monetary stimulus and low yields. And we have increased indebtedness in the whole system quite significantly over the last decade. So right now, it's a very potent tool for central bankers to increase rates. It's likely to assume in my mind that it has a meaningful impact. So there's always a risk that the rate hikes come too early and they're too large that they actually create instability and introduce volatility and the uncertainty. But I think the central bankers are very clear in their point that that's something they really want to avoid. So I have nothing more to say about the rates. Masih, do you want to add something?

Well, I can add something to both of your questions, Johan. So on the first one, I'm sure you're interested to understand what does this mean, the higher level investments for the cost base of the bank next year and going forward? We'll come back with that. But just a note on next year. So recall that we do have quite large corona-related savings last year and this year, mainly related to travel and entertainment. So if you look back into 2019, we spent about SEK 400 million on that so far this year, we're just north of SEK 50 million. We do expect that to recover, not maybe fully to the levels it was back in 2019, but to some extent, and that's likely to happen next year. So next year, you will have investments we will do in the business as well as some recoveries of corona-related savings and so just have that in mind for next year. On the rate sensitivity, just to be slightly more concrete, the sensitivity is about SEK 1 billion for a 25 basis point rate hike in Sweden that's the gross effect just on the deposit side, and we have to wait and see what happens to the lending margins of the bank. You could argue it's slightly higher now with the higher deposit base, but that depends on to what extent these deposits are sticky and to what extent they will change when rates go up. So again, we have to wait and see.

The next question comes from the line of Adrian Cighi from Cr閐it Suisse.

Adrian Cighi from Credit Suisse. I have a follow-up question on NII and 1 on your view on the investment banking activity outlook. So on NII, you've mentioned some brief comments on margins in the quarter. How do you see them developing going forward? Do you see an acceleration in the Swedish mortgage market margin pressure? And then secondly, on the activity -- investment banking activity, you've mentioned up 100% year-on-year. Is this driven by a few sectors? Or is it broader based? Do you expect this to sort of remain elevated in the near term? And maybe any comments you can give us on your pipeline in the near term?

Sure. Thank you, Adrian. On mortgage margins, the cautious comment Masih made, I would not say that it's accelerating. We have lived under this type of change in business dynamic, market dynamic and pricing for a long time, and it's not accelerating. If anything, I actually think we are getting to a very normalized level where these new competitions and the tough competition environment is the new normal. So not an acceleration. On the 100% fee, of course, that's a Q3 number always be a little bit cautious because it's a low-activity quarter when it comes to booking and activity. But we see no reason regardless of the seasonal effect to caution on the activity in investment banking. It looks still very constructive. When it comes to sector, well, it's broad-based, but it's not broad-based by type. So it has been that couple of markets, and it has been equity capital markets. So the primary secondary capital markets businesses, it's not been driven by large M&A fees. We also have some recovery on payment cards, which should be factored into the fees and commission type of analysis. However, that's from a low base, even though it's up 10% in payment fees this quarter compared to the same quarter of last year. And in that sense, there is still some upside. So in our world, we're not doing all we could do for NII when it comes to the event-driven financings and when will we have the bigger picture of sustainability, green super cycle. And I'll just take 1 minute on velocity of the balance sheet, which you need to just appreciate. The best thing for us is when we have an event-driven, call it, balance sheet commitment that is required by clients in a confidential manner before they do transformational things. The velocity of that type of engagements are much, much higher. That means that it's not the same thing as a 3-year or 5-year or a 7-year permanent debt that you put on. You actually put on the same amount of volume or more, but it's only there for 3 to 24 months. So there's a very different type of profitability where loan fees and NII goes up quite significantly, but at a very, call it, asset-light or cost-efficient capital way because the velocity is higher. And that is what we are relatively largely exposed to compared to many of our peers around here. And this is, of course, the one that we see a very constructive medium-term outlook on right now. Things can change, but it looks good.

The next question comes from the line of Sofie Peterzens from JPMorgan.

Here is Sofie from JPMorgan. I was just wondering if you could give an update on the outstanding litigation cases.

Yes, they will be short. The -- as far as we know, there is no litigation against the bank. We have our regulatory normal processes, and we continue, if you are referring to particularly information gathering for the U.S. and working with them. So no updates to report.

What about the German tax case because there is quite a lengthy comment in the quarterly report around that. Should we expect any outcome from here?

Yes. There's no significant update that we have received any new information or changed our view around the securities lending business that is being debated in Germany, how it should have been taxed in history. However, there has been a new circular that we thought it would be prudent just to disclose which is giving a reference case, which we don't think is that relevant, but it's giving new information around what can be expected in the future dialogue. But when it comes to SEB and getting any information for us, there's no news right now. And then this will be a long process. This -- I think this -- you need to at least allow for 3 to 5 years before we can conclude in this matter. But new information can, of course, come any day.

Okay. That's very clear. And just going back to net interest income. So you mentioned that the funding cost tailwinds are basically fading away. If loan growth remains at this year, next year, is it fair to assume that next year, you will have relatively low net interest income growth because if we look at your loan growth in 2021, year-to-date, it has been kind of low single digit, what was it, 1% or 2% year-on-year. So how should we think kind of about net interest income growth, if you have margin pressure, funding tailwinds or disappearing potentially no rate hikes, what will really drive low -- net interest income growth next year?

Yes. Sofie, I'll try to answer that. I mean, we don't do a forecast for NII next year, but we do comment that this year so far, the main contribution has been lower funding cost. And we don't see that continuing into next year, the way things look right now. When it comes to lending growth, I mean, there is strong lending growth with everything that is real estate related, mainly on mortgages. We are growing at 7.5% this quarter compared to same quarter last year. But then on the corporate side, I mean, right now, we do have muted demand on regular corporate lending. But at the same time, the economy is recovering, resource utilization is going up is actually starting to become higher than a normal level. And typically, when that is -- has been at the higher-than-normal level for a period of time, you start to see corporate lending recovering and increasing again. So whether that's going to be a theme for next year and at what point next year, we don't know. But right now, it is muted demand on the corporate side. If it's not event-driven. And on the real estate, the mortgage side, it's going fairly well, and the funding tailwind will probably not continue into next year.

Okay. That's very clear, but you didn't expect any margin or you got to expect the current margin pressure accelerates but not to accelerate from the current level on the interest income side?

On the mortgage side, I don't think there's any reason to believe that the margin pressure will accelerate. It will still be intense competition. It will be there, but it shouldn't accelerate from here. On the corporate side, it depends a lot on the mix effect, so what type of corporate lending do we do. In Q3, it's been a positive margin effect. We think that given how the pipeline looks like right now, it is possible that, that positive margin effect due to mix can continue for a couple more quarters. It doesn't mean that the underlying margin development like-for-like is positive, but the mix effect is positive right now. But if I may just add, there is no margin pressure identified on the corporate book, which is the large one. This is very much only related to the mortgage side. So it's stable. There's no margin increase other than the mix, which is, of course, different. And then I'll just make 2 more points on the velocity you need to assess because that's how the loan book translates into I -- So they are different. But you're absolutely right. Of course, in the long run, the loan growth is driving the NII because that's the, call it, the banking type of business that generates it. The other thing why it is partly muted now, and it will take some time, is that cash is, of course, growing. So cash at hand for corporate needs to be consumed first. So this is just a general statement that you see deposits going up for everybody. And of course, that means that less borrowing is required. This goes I saw from the U.S. banks that reported a lower credit exposure on credit cards, et cetera. And it goes for the whole economy that we see these cash tie-ups that's also, of course, a source that is typically first used for any type of outstanding or investments.

Okay. That's very clear. And then my final question would be on M&A. We had one of your peers say they want to expand Denmark and Finland. Is this something that you would consider kind of looking at? And would you consider expanding into Finland and Denmark and what are your thoughts here?

Yes. We have an organic very modest, but still a very clear growth strategy outside Sweden for large corporates only. We don't comment on M&A. I can say that we don't have any in our current business plan, this is not an M&A-driven business plan. We are, broadly speaking, organic. On the other hand, we, of course, always look at all options available to us.

The next question comes from the line of Jacob Kruse from Autonomous.

Maybe just a follow-up on the last one. Would you say, given your current strategy in terms of the focus areas, is there anything in these assets that you feel add to the target areas that you have set out? And then secondly, just about some of your initiatives on the retail brokerage side with the mobile apps, et cetera. Is that an indirect competition with peers like Avanza Nordnet? Or is this more a support for your private banking client base? So just what is your ambition level there in the Nordic region? And then maybe thirdly if I could. Do you see any reason or any need to change the structure of how so all these things like SEB X and other more innovative projects are being held or owned, I would say, the kind of hidden within the greater P&L of SEB?

Thank you, Jacob. The first one, I actually can't answer without guessing too much. I know too little about what they have in their portfolio. This came out quite recently. Broadly speaking, I'm just making a general comment, we are very well penetrated in Norway, Denmark, Finland and Sweden. If you were to look at number of large corporate clients, which was -- is our focus, that would say, they have a deep meaningful relationship with SEB. We are close to 100% in Sweden and Finland. So there's very little, call it, organic growth in terms of new clients in our current thinking about SEB outside Sweden. However, I can't rule out that there are things I don't know. So I'll just leave it there for now. On the mobile app, what we are talking about savings in investment, that's predominantly on the retail mass market side. It's not large corporate or institutional, and it is very much so that it should be seen as a competitor to the online brokers that have had a fantastic run over the last 2 decades, in order to service the client base of this part of the world in an innovative, very good way. We have, of course, lost an opportunity here. This is an opportunity loss that we haven't really had the same capabilities. And we see the number of clients, and we're talking about million or millions that are actually financially literate, very interested in financial markets and like to do call it self-service. They like to trade themselves, owe funds, et cetera. So what we now launched in April is kind of the first version of the basic minimum viable product to not have clients to leave us because they find a better opportunity to do these things outside the bank, but it needs to be still developed. And we are -- that's what the focus is. Then on SEB X and other partnerships and fintech investments and BankID and Swish and those -- that's just a very large portfolio of you call it hidden values, and I guess it is to a certain extent. But that is just motoring on. SEB X has just commercialized and launched it's a very quiet one, but we do have an offer available on AppStore right now to download the first new branded bank for solopreneurs, single employed called UNQUO. You can download it today and try it out, if you want, even if you're not a company you can see how it looks and how quickly onboarding is, et cetera. And then for the cooperations, they are, of course, more of utility nature, many of them. It's where we have partnered with our peers. And we have tried to find an infrastructure solution that benefits all. So I'm saying that there are enormous values in my book from all those type of partnerships, but they're very hard to assess in a traditional type of fintech investment area. It's not impossible. We have seen a very interesting transaction made by Denmark and Norway in their equivalent to Swish. And I know that these companies well that are separate from SEB, but we are, of course, a large stakeholder, they are considering strategic options, too. Masih, anything?

No, it's a very good question, a good point. We do talk a lot about what kind of values these different assets would get in the market had they not been owned by an incumbent bank. So we do have that discussion, and it's a very important point. Swish stand-alone has 7 million or 8 million users. And the question is, what would that be valued on a stand-alone basis. So we do have that discussion -- those discussions. But we do have to cooperate with the other banks which also have a holding of these assets, or we have a partnership with them. But surely, that's something the banking industry, the incumbent banks have to work on that when we do innovation that we can extract the value of that innovation.

The next question comes from the line of Rickard Strand from Nordea.

On the corporate deposit side, I was just going to ask you if the sort of current elevated level of corporate deposits in these discussions you have with your clients, do you see that these levels could sort of remain as a wet blanket over the demand going forward? Or do you see that the composition of these deposits make it less likely to be so that corporate demand could pick up more sooner than later?

Yes. I don't know if I want to use the word wet blanket, but I kind of want to and say, yes, it is definitely a risk. You need to also think about microeconomics. Macroeconomically, that's very clear. Microeconomic is very different. So a company who has an evaluated of deposit on their, call it, current account, will definitely be able to use that for regular spending. It's much less relevant for large-scale transformative. It's not enough or nowhere near. So it doesn't really change the picture for M&A, but it does change this organic need for borrowing for working capital need or such. If you are, call it, voluntarily accumulating more liquid funds because you don't have anywhere to spend it for now, that will be used for sure because it's inefficient for them. And as you know, we are broadly speaking, charging for that money. So from a corporates perspective, it's no value being created whatsoever, over and beyond whatever they've decided to have for contingency reasons. Then I think this could go very quickly. I believe it's a very, very clear consequence of monetary stimulus. So if monetary stimulus stops, positive yields becomes introduced in the corporate bond market, in the government bond market all of a sudden, the bank deposit market as a true competitor at a positive yield, and it could move very quickly into another place. And that's, of course, in the positive yet. But you need probably to see tapering of monetary stimulus being reduced because right now, the cash needs to go somewhere and it kind of all ends up in a bank account at the end, regardless of whom you spend it to because then you will spend it to a corporate or a private person, and it comes back. So it's a monetary phenomenon in my book.

And then regarding the investments that you have talked about both in the corporate and also in the retail segment, going forward? Sort of if we could get a sneak peek of your upcoming financial plan, do you see sort of a lag between when these investments will be taken and when you will see the sort of higher growth taking off? Or do you see that they will materialize simultaneously in the P&L?

It won't be simultaneously, and we won't give a sneak peek.

Okay. Okay. And then a final 1 on the -- what you have talked about in the investments that you're doing now in the new savings app for your retail clients. Are you also considering to broaden your product offering and start distributing savings products from external institutes there and external fund companies, et cetera? Or is it still sort of mainly SEB products that you want to offer there?

No. It's certainly not SEB products that will be offered on the, call it, to cannibalize on the opportunity as a client to get others. So it will be an open platform. We will have thousands of funds and fund companies available to you, but of course, also SEB.

The next question comes from the line of Maria Semikhatova from Citibank.

Yes. A couple of questions. First, just a follow-up on this new app that you launched in April. How many users do you currently have? And then a question on you had net outflows of SEK 8 billion for the quarter. Could you provide a bit more color on retail versus institutional and maybe by country as well I think you mentioned the outflows from the Estonian pension reform, if you expect further impact going forward? And the final question, if you could provide at the group level, the impact of volumes versus margins for this quarter?

Okay. We have decided that we don't go out with a number of clients that are trading equities in the app right now. But we have shown the index today that we have more than doubled the number of trades and that we have 30% plus of those in the mobile channel. We will take that with you your question and see if we can get back to you at a later stage.

Yes. On the outflows, yes, we did have SEK 8 billion of net outflows during the quarter. It's -- you could see in September that when the stock market had a worse performance, there were some outflows out of equity funds. At the same time, we did see some inflows within fixed income funds. These outflows are mainly related to what we call strategic assets. So basically, private banking customers that house where their assets with us. So the yield related to these outflows is very, very low, it's not nonexistent. So the underlying business, the retail business is actually doing fairly well during the quarter, although we did see some outflows. So the mix effect, if you want to call it that, is actually positive in terms of fees on the quarter as the outflows are related to very low fees and what remains at the bank has higher average fees.

And then on the impact of volumes and margins if you could comment on that.

Related to -- can you explain that, please?

Yes, you commented that because of the transfer pricing, there was a different allocation. But if you look at the group level, can you disclose the contribution of volumes over the quarter versus margins?

Well, we just say that there's a positive contribution from volumes during the quarter. There's actually a positive contribution from margins during the quarter as well. But if you look at the increase in net interest income in treasury, which is reported on the group functions, that entire increase is coming from internal funds transfer pricing so you can add as much back to the divisions really from that increase. And then you're going to have an estimate of what actually has been sort of removed from the divisions into treasury.

The next question comes from the line of Riccardo Rovere from Mediobanca.

3, 4 questions, if I may. The first one, again, on the capital return. The actions that you have announced the dividend, yes, let's call it, extra dividend and the buyback is 3/4, roughly 3/4 is cash. 1/4 is the buyback. Is it a way to look at what you might eventually decide to do in the future? Or am I just looking too much into this? The second question I have is, Johan, when you mentioned right at the beginning of the call, you have roughly 7% market share in mutual funds. If I'm not mistaken, you mentioned that your natural market share should be more similar to 10%. If I got it tight, it would be a kind of 50% increase in market share, which is not irrelevant, I could say. Do you think this can be done organically? Or are you thinking about maybe adding a little bit of acquisitions, or some kind of support tailwind from acquisition in that. The second -- the other question I have is on inflation. If we assume the inflation will stay elevated for a while, do you think this will sooner or later be somehow incorporated in your cost base? Or could it eventually hamper credit demand, especially the corporate demand is bottlenecks in the supply chain had to, let's say, to last for a while. And then another question I had on RWA is can -- at the -- with the stage where we are, can we say that negative credit risk migration impacting risk weights in RWA can we just forget it now once for all? And the last question I have, you still have the overlay on the large core products sitting on your balance sheet and still being part of the furniture. For how long can this continue? Will you take a final decision this year? Will you go on taking this for also in 2022? What is the dialogue here you're having with your auditors on this?

I think I'll start with the capital and the market share and investment management and inflation, and I'll hand over RWA and overlays to Masih. So on capital return, we haven't explicitly communicated that type of mix. But what we have recent with you guys around before, is the following narrative. Before we changed to 50% payout ratio and share buyback, we had a practical history of paying about 70% payout ratio. There has not been, in my mind, any shift in terms of how much we would like to repatriate or not in total compared to the past. And for me, those 70% is a good indication of where we ended up the last 3 or 4 years we had -- before we had this change. So if we were to do that, I would say 50% of a dividend payout ratio, which is lower than the 70% we used to have, creates increased flexibility for us. We are increasing the probability to be able to pay that number because it's lower in good and bad times. We will then allow the share buyback program to calibrate on top of regardless of what happens. So if it's a really bad period in the market, you can cancel it if it's a surprisingly good one, you can increase it. But the base case is still for me somewhere around that historical 70%. It depends very much on the -- at the starting point. Right now, we are starting from luxury position and sometimes in history, we've been saying that it's a bit much for the taste of being able to support the increased demand that you might see in the future. So I think that gives you a little bit of balance around how we are considering it. On the 7% and 10%, it's all organic. So in order to get -- the 10% is just that statistic that we showed in the presentation is that the official statistic for Swedish fund in Sweden, which is, I think, roughly 80% or 90% or so of the funds. We are, of course, also selling abroad. We have then the institutional business. So the total AUM is closer to SEK 2.4 trillion and of which SEK 1,400 billion. So out of which, this is the Swedish one. This is where we sell through the channels, the digital channels, through the physical branch office and telephone bank. And here, there's no reason if we do this well, we shouldn't be at our natural. We probably have around 10% of the fund market in Sweden. And we should also have 10% of the new sales. That's my only point on that. On inorganic, we don't need to -- it's not acquiring asset managers to get there. On inflation, I think it's a very complicated issue in terms of assessing the consequence and you take both clients and the bank. So I do think that if the inflation is maintained on a more permanent high level, it will affect us just like any other company, that will be a cost increase in the bank that has not been planned for or foreseen. And we also know that the financial industry do experience a lot of anecdotal evidence as we speak of higher cost inflation than average. This is a compensation, which is, of course, 70% of our cost base it's to compensate people. It's on IT, where services in order to buy information, real-time systems they are not becoming cheaper. They're becoming more expensive. And then the transformation, which is meaning that we do less own developed IT, and we're buying more of services. Take the cloudification of our bank, for example, that goes away from in-house producing all the infrastructure required, and we're moving it out to a third party and we buy the service. That is not an investment that you then capitalize. It's more of an operating cost, but it's replacing an own investment you otherwise would have done. So inflation will, of course, hit there for us like anyone else. On the client side, however, inflation means that companies are increasing prices. So there will be many who benefits from inflation of our client base, improving credit quality, improving profitability it's the ones who cannot push through any cost inflation they're experiencing through pushing it through the client, which means that producer price inflation might be a tricky thing, but inflation is, of course, at a price increase. If that is not associated, not associated with an increase in interest rates, it's just going to be the good thing, people will increase prices, and they will try to push through cost increases to the end customer, whilst not having an increased cost of financing, the financial net cost. If it increases cost through inflation, meaning higher interest rates, you will have a double cost increase. You will also have to pay more for whatever indebtedness you have. And there, the analysis is, of course, pretty simple. If you don't have any debt, it won't affect you, if you have a lot, it will affect you a lot. Masih?

Yes. To your last 2 questions. The first 1 on risk migration and I'll answer that contingent upon something. So if the recovery continues based on our economists' view and the sort of consensus' view then yes, you -- in the next 12 months, you should not see negative risk migration. We had positive risk migration net in Q3. It's more likely that's going to continue then turn around if the recovery continues. And the last question is the same thing. I mean if the recovery continues, we have put on about SEK 1.4 billion in overlay last year. We will, in the next few quarters, obviously look at that. And if the recovery has continued, we would have to start to reverse some of those recoveries if it's not utilized for credit exposures that we have seen that have deteriorated. So assuming that doesn't happen, yes, this will be reversed at some point gradually again, exactly when we start and how to do it, it's going to be a decision that we take, obviously, in cooperation with our accountants.

But this is -- but the thinking about this will probably start in '22. Am I right in?

That sounds about right.

[Operator Instructions] The next question comes from the line of Robin Rane from Kepler Cheuvreux.

Yes. Hopefully, 2 shorter ones from my side. The tax rate has been pretty low at 70%, I think, for 2 quarters now. What should we assume as tax rate going forward?

Yes, Robin, it is correct. It's been lower than what we typically guide for, which is around 20% or so. The main reason is that we've had some valuation gains that are tax exempt. In Q2, we had the Tink revaluation. And now in Q3, we have the Euroclear revaluation, and those 2 are tax exempt, which takes the tax rate down. We don't expect these kind of revaluations to happen all the time, at least not to the magnitude we've seen in the last 2 quarters. So we still believe that the normal tax rate is around the 20% mark.

Okay. Great. And then secondly, you said that the front book margin was lower than the back books. Could you provide some of the differential there?

No, that's pretty much what we want to guide for. It is lower. There is intense competition on mortgages on the front book. But given that the front book is about 5% of the book, so 95% is the back book. It takes some time for that to have any real implications on the mortgage margins in general.

The next question comes from the line of Martin Leitgeb from Goldman Sachs.

Yes. Just a couple of follow-ups on the mortgage market in Sweden. I mean in terms of front book, back book churn, I appreciate that we provide the guidance on the yield differential but how quickly will they see through? I mean if we assume a split viable fixed and the usual maturities, is it fair to assume 20%, 30% of that book rolls over each year to the new front book pricing? And then related to that, some of your peers called out that the continued switch from viable into fixed rate mortgages is also impacting margin. Does this also apply for SEB and could you update us on where the split is for SEB currently in terms of viable versus fixed and how it has evolved over time? What I'm trying to get to is how we should think about mortgage NII going forward. Should we assume that the margin, which is edging lower is more than offset by continued volume growth? And second, just a question on house price growth, which was obviously extraordinarily strong in Sweden over the past year. Do you see risk that there could be policy measures being applied to the Swedish markets in order to try to offset or at least slow down some of this house price growth?

Thank you for those questions. So when I talk about the front book of the mortgage market, we're talking about the 6% or 7% growth that we have right now. So new mortgages that we grant. So the back book or the prolongation, so the book that we need to renegotiate the prices for every 2 years. That part is stable, whereas new mortgages are given out on a lower average margin than the back book. So it takes quite a long time before that has a large impact on the whole mortgage book, that's pretty much all the guidance I can give you. We have seen the same kind of trend of more fixed rate mortgages and less variable mortgages. Margins on fixed rate mortgages, 1 to 3 years are slightly lower than the variable side, so that has already led to marginally lower margins. I'm not sure if that trend is going to continue, but most of that impact has already happened. On the house price, yes, obviously, to the extent that the house price growth is leading to higher household indebtedness, that obviously leads to a higher risk of new regulation coming in. At the same time, the Swedish FSA here has done a lot in the last decade. You have the LTV cap. You have the first amortization, the second amortization, you have the risk weight floor on mortgages. And there is a debate here on to what extent can macroprudential regulation really curb this development we've seen. So it sounds like at least right now, that if they use new tools, it will not be macroprudential regulation, i.e., the Swedish FSA coming in and make it more difficult for people to get a mortgage. And already now, risk weights on mortgages are the highest in Europe, in Sweden, which -- and historically, it has been the best quality mortgage book. So the question is whether you can increase that further, especially when we know that in Basel IV, it actually goes down again. So it doesn't really matter. So surely, regulation, the risk of that increases with house prices going up and indebtedness going up, but it sounds like right now that it will be -- have to be other tools and that were used historically to curve that development.

So in terms of mortgage and I know, it sounds like we do have a fairly comfortable view that this could continue to grow basically the volume of settling margin. Is that fair?

Yes, I mean as long as the market is growing around 7%, there's a lot of supply to go around for a lot of mortgage providers. If the growth rate does come down to closer to 0, then you should expect more competition and more margin pressure.

There are no further questions at this time. I would like to hand over back to our speakers for closing remarks.

Okay. Then I'll just end and say thank you very much for participating today, and we wish you all a good Wednesday. Goodbye.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.