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

Good morning. This is the conference operator. Welcome, and thank you for joining the SAP's Second Quarter 2022 Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Johan Torgeby, President and CEO. Please go ahead, sir.

Thank you very much, and welcome, everyone, to this Q2 2022 summer quarter report. As customary, you can find the presentation that together with our CFO, Masih Yazdi, we will go through today on our website. Starting on Page 2 with summarizing the highlights of this quarter, we can see that we've had a very solid operating performance despite the worsening macroeconomic outlook and Russia's war in Ukraine, and we thanked it very much to the very well-diversified business model of SEB. I also want to point out that as we have had heightened uncertainty, and higher volatility, the demand for certain services and products that we have, has increased quite markedly and we'll come back to that later in the presentation. Return on equity came in at 12.3% and broadly unchanged regulatory minimum buffer of 480 basis points. We continue to see a robust asset quality with low expected credit losses of 6 basis points in this quarter. Flicking to the next slide, just a few comments on macro, which has clearly been the theme of this quarter. The equity market has continued to show some weakness, although some stabilization in the last couple of weeks. Interest rates have continued to be at elevated levels, but also an interest rate there's been signs of some stabilization lately, but credit spreads have more or less continued to widen during the second quarter. And this is, of course, mainly due to the inflation rates that are affected by the war in Ukraine and now being spread around the economy and hence, monetary policy has changed dramatically during this year. On Page 4, we just summarize the year so far. Financial performance have gone up 6%, measured as operating income, and we have a solid underlying result of up 5% before credit losses and imposed levies. The imposed levies is the word for the resolution fund fee and the bank tax together. However, including the more normalized level of expected credit losses compared to last year, as the very sharp increase in imposed levies, both higher resolution fund fee in the introduction of bank tax, we have so far this year came out with a bottom line result 2% below previous years. Now I'd like to double-click on 3 areas of the bank during this quarter. So on Page 5, we are focusing on SEB's diversified business model in the context of fees and commissions. As a universal bank, we are more or less exposed to all areas of the financial market at all times. And this is a little bit like swings and roundabouts. The stability is very obvious on the top line. However, a lot of things are happening beneath that top line. And here, as the 9% increase year-on-year in fees and commission needs to be explained, you can clearly see that lending fees, payment fees and card activities are the 2 beneficiaries, partly because of the COVID recovery, but also that lending demand has increased during the quarter, and we've seen very high activity in establishing loans. The 3 weaknesses or anything that is near more or less directly linked to asset under management or asset under custody or you're hurt by the volatility in the market, which reduces activity such as ECM. And you can see there that in the quarter, we were 9% down in custody mutual funds, this is the life, investment management and investor world. Secondary markets and derivatives, which I will come back to, showed a 3% decline, which is a very modest decline given the very sharp volatility and changes in the market. And issuance of securities and advisory predominantly driven by weaker ECM business and IPOs, down 3%. On the next page, you can see Page #6. We double click on the business area, we broadly call markets, which is fixed income, currencies and commodities and equities. Also here, the group as a whole in the markets area show a modest increase compared to the same quarter last year. However, beneath that, a lot of things has happened. The obvious negatives have come from the fixed income area where the inventory, the market valuation impact of increased rates and increased credit spreads have been very pronounced in this quarter, minus 81%. Predominantly, this is driven by market valuations on securities that you have on the books. However, currencies and commodities have clearly benefited. So the volatility, the increased need for hedging, risk mitigation, reallocation of portfolios and taking care of whatever strategy industrial companies may have around sourcing of energy in other commodities have been very, very high activity. And equities, I'll come back to. To the right, we then double click on fixed income and can see that we had more or less a flat result, 0 P&L contribution from what we call rates. These are more or less the risk-free or very low credit risk elements of the fixed income business that we conduct. However, we had a small uptick in the fixed income of credits. This is, in our opinion, a very strong result in an area which has had enormous challenges during this year. So even though it's down 81%, we come in at a very stable result. On the equity side, it's important to know that we're also here a full service provider. So equity sales and trading, which is the volatile part, has also gone down in the year, but we also have a large business in equity finance, which has been very robust during the quarter, hence creating a big cushion, and therefore, you haven't really seen any drop in the whole area of markets during this quarter compared to last year. Then we go back to our favorite slide on the credit portfolio, Page #7. What we normally show here is just the exposure. And just to remind everyone, exposure is different from lending that is the sum of the nominal amount that we have signed up for with the client. It's the credit exposure at risk. The client in certain products thereafter decide if they actually want to borrow the money or not and that's the lending. We have today also included lending as it's a lot of things moving around in this market. So first on corporates, we can just note a 21% increase in the corporate credit exposure compared to last year. However, we've had a very significant depreciation of the Swedish krona and as roughly half of our business is outside, only half of this is real volume FX adjusted. That's the 9%. We also had, if you remember, the fourth quarter this year, a significant uptick in exposure because we had several serial large events that we were involved in. Those have now more or less fallen off the balance sheet, and they've been converted into other type of capital markets transactions. And therefore, year-to-date, we are more or less flat when it comes to the credit exposure. However, as we have replaced all of those nominal amounts during this quarter, that's a much higher activity in the lending area than we saw Q2 last year. We have, therefore, need to replace all these volumes with other business. We've also seen a clear trend that more money has been drawn, and this is, of course, more related to NII, looking at the lending by sector. And here, the year-to-date lending is now up 6%. And in the quarter, it was a 1% increase, indicating roughly a 4% annual rate for that. We'll come back to mortgages later and commercial real estate. With those few introductory remarks, I'll hand over to Masih to go through the financial results.

Thank you very much, Johan. I'm on Page 9 now and look at Q2 results isolated. You can see that operating income is down 2% compared to the previous quarter. The main highlight here is net interest income that's up 10% compared to the previous quarter and 20% compared to the same quarter last year. The big negative is the net financial income line, which has halved compared to the previous quarter. I'll come back to that. On the expenses, you can see that it's up quite significantly during this quarter. That's predominantly due to the fact that we had low expenses in Q1 due to the falling share price. And as the share price has stayed at that -- those low levels, we are now more in line with the targets we have set for the full year being at SEK 24.5 billion in expenses on an FX-adjusted basis. Expected credit losses are down from the previous quarter and at 6 basis points, we believe that are on low levels. And here, again, you can see that compared to last year, imposed levies have increased quite significantly with the back tax being introduced and the resolution fund fee going up. If I move to net interest income, we have seen a 16% increase so far this year compared to last year or SEK 2 billion. Most of that is coming from volume growth, mainly on the corporate side, but we've lately also seen some improvements when it comes to deposit margins due to the rate hikes so far this year. Quarter-on-quarter 10% increase of NII that is coming from deposit margins improving as rates going up, but that's been partly offset by lower lending margins, mainly in mortgages. I'll come back to that on the next slide. As Johan mentioned, we've had some bridges and some of these were paid down or syndicated out in late June. They haven't had any negative effect on NII really during the quarter, but that will come in the coming quarters. We've also seen some improvements in NII within our fixed income business. And overall, we believe that during this quarter, about SEK 200 million to SEK 300 million of net interest income is short term in nature and should in the coming quarters come down again. At the same time, given the fact that we had a rate hike by the end of June that hasn't had impact on NII so far, we do still see some volume growth, and we do see prospects for improving lending margins on the corporate side as credit spreads have widened significantly. This doesn't necessarily mean that net interest income will come down in coming quarters. We have to see what happens in the market. Just a couple of comments on mortgage margins. We're looking here on the -- on Slide 11, on the left-hand side, what's happened to our pricing on a 5-year mortgage compared to the average pricing of our peers, and we're comparing that to the spread of a 5-year covered bond, this is not a sort of -- this is not our funding cost, it's just a proxy for our funding costs. In practice, we have a mixture of different funding sources when looking at our funding costs. But as you can see, both the prices from the banks as well as the 5-year covered bond have gone up sharply. In the chart in the middle, you can see they are priced minus the 5-year covered bond and our peers price minus the 5-year cover bond. And you can see that this has pretty much collapsed during Q2. And our price or our margin in this sense has gone down by 50 basis points during the quarter. But at the same time, the average margin for our peers has gone down by 80 basis points. So it's a big difference there in terms of delta of 30 basis points. And this can very much explain the fact that we've had lower mortgage lending growth so far this year compared to our peers. We're slightly surprised when it comes to price discipline on this market, and we do have the ambition in the long term to be pretty much in line with our back book market share of close to 14%. And we'll make sure that in the coming few months, we'll adjust our service, availability and price to make sure that happens. If I move on to Slide 12, look at net fees and commission. Johan has commented on most things here. So as he said, lending fees and cards are up in this quarter, whereas asset under management fees and mainly investment banking-related fees are down. Just a couple of comments on the fairly large net outflows, you can see in the quarter. And just mentioned here that about SEK 13 billion of the net outflow is related to the new partnership with Ringkjobing Landbobank that we put on, that have now been moved to their distribution. And the remaining part is really coming from 1 institutional mandate with very low margins. If we look at the underlying business within Private Wealth Management & Family Offices and our retail business, flows are actually pretty stable during the quarter, which is fairly good given the high volatility in the market. If I move to net financial income, here, Johan has also commented on a few of the developments. But overall, we think it's an underlying -- solid underlying business development with strength within commodities and FX and a very challenging environment within fixed income. The main reason for the decline here is due to valuation effects. So you have a negative XVA effect of about SEK 300 million compared to the previous quarter. But the main negative effect here is coming from the liquidity book within treasury, where you have an inventory of very -- the high-quality assets such as covered bonds and supernationals, but with widening credit spreads, you get a negative valuation effects. So going forward, if spreads do come down again, this should reverse. And if they don't, over time, this liquidity book will reprice at higher levels and lead to a higher net interest income. On Slide 14, looking at operating leverage. And so far this year, it looks good. We've increased the operating profit before credit losses and imposed levies by SEK 0.5 billion per quarter. So, so far, it seems like investing more in your business can continue to lead to positive operating leverage. Page 15 on the capital development, fairly simplified this quarter with a marginal decline of the buffer from 490 basis points to 480. We've added 40 basis points net of the 50% reserve for dividends, but at the same time, the weakening krona has led to the capital buffer coming down by 50 basis points. Over time, a weakening krona is not bad for our business as it leads to higher income. But in the short term, the balance sheet is adjusted very immediately, you have this negative effect on capital. On Slide 16, looking at expected credit loss allowances. So all the allowances, all the reserves we have in the bank relative to the exposures that we have, that is at SEK 8.6 billion during Q2, up by SEK 400 million versus the previous quarter. We have kept the overall model overlays of SEK 2 billion intact. But we've done -- what we have done during the quarter is to fully release the COVID-19 reserves within the 2 divisions, C&PC and the Baltics, but we've done a reassessment of the balance sheet of the lending book based on the geopolitical interest rate and inflation risk that we see. And on a party by counterparty level, we have made a new model overlays that adds up to approximately the same level to fully compensate for the release of the COVID-19 overlays. And you can see the distribution of the overlays as well as the underlying credit reserves based on the divisions on the right-hand side. On some key ratios then, a couple of things I would point out. The main thing here is the very strong deposit inflows. We're increasing deposits by about SEK 500 billion over 2 quarters, and we have a loan-depo ratio in Q2 at 0.93, which is by far the lowest level this bank has ever had. So we see a big demand for depositing assets on our balance sheet. Liquidity ratios are slightly weaker compared to end of last year, but they are stronger compared to Q1. And then finally, you can see the capital and the total cap ratio compared to Q1, which you can see here has improved as we issued in AT1 during the quarter. On the last slide, you have the financial targets. There are kept unchanged. Dividend, capital ratio 100 to 300 basis points. We'll try to be there by the end of 2024 and want to have a return on equity that's competitive with peers with the long-term aspiration of 15%. And we have continued to repurchase shares of about SEK 1 billion during Q2, and we'll continue to do that according to the current mandate until October. That was it. I think we can open up for Q&A.

[Operator Instructions] The first question is from Andreas Hakansson with Danske Bank.

So we start with NII. And you talked this morning about SEK 408 million of NII coming from more treasury and trading-related areas. So Masih, when you say that SEK 200 million to SEK 300 million is not sustainable. Is that really what we should be taking out from that SEK 408 million? That's the first question.

Yes. Thank you, Andreas. In this kind of environment, there are a lot of things happening at the same time. And so it's very difficult to try to get an understanding of the NII development going forward. It's not a linear trend because you have -- when it comes to treasury, for example, you have how much treasury charges the divisions on lending and how much they pay to the divisions on deposits. And you have different models there. And then over time, they can move in different directions on a quarterly basis, but it should net out in the long term. What I'm saying -- I'm not saying that SEK 200 million to SEK 300 million is unsustainable. Can just confirm that about SEK 200 million to SEK 300 million during the quarter is short term in nature, and it is based on bridge facilities and a higher net interest income within our fixed income business than we've had historically. It is absolutely possible that going forward, that is offset by further strength within fixed income and with new bridges coming up. And then we have the fact that rates have increased further, and we are fairly positive on lending margins on the corporate side as credit spreads have widened, and there is a lag in the system where banks over time will adjust their prices according to the new spreads in the market. It just happens much faster in the capital markets than it happens when it comes to our lending and the margins we charge from our customers. So yes, we think about SEK 200 million to SEK 300 million are short term in nature. And if it's not replaced by something else, that should come off the books and that NII line in the coming couple of quarters.

But more by other things, as you said, potentially.

Sorry, say again, please? .

No. Yes. Just the SEK 200 million, SEK 300 million, is it for, like Masih said, that doesn't mean that NII has to go down. That could be offset by the higher margins and the higher rates and so on, right?

Yes, that's absolutely possible. And to the extent that spreads are where they are now and stayed at that level and the liquidity book in treasury, for example, is reinvested in higher-yielding securities, that should also lead to higher NII. So it just depends on what happens to credit spend and given how fast the market is moving, it's very difficult to predict or give any guidance on what's going to happen. But the general trend is that rates are going up, which is positive for deposit margins and the general trend is that credit spreads are going up, which typically is good for lending margins in the longer term.

I just want to take the opportunity to highlight that if you use the investment grade, credit spreads of 50 basis points at year-end as a proxy currently above 100. The natural effect is, of course, that we have now doubled the NII -- expected NII on any given portfolio compared to the past. The pain with having that positive statement is that you need to take the modified duration of the average portfolio times that's changed and take it as a negative right now. So -- and as an old fixed income guy, I actually think this is quite healthy for the fixed income market, although we're going to have a lot of volatility and a lot of pain to go through before we normalize rates, then we will have a different level. And of course, adjustments will be made to portfolio. So I'm not making a prediction. I'm just stating the obvious, perhaps.

Yes. Perfect. And then a question on mortgages. On Slide 11, you show that mortgage margins are coming down. But is that really correct? Because what is it only -- what is it, 45%, 50%, I haven't calculated on Q2 now, or your mortgage is actually funded with cover bonds, while the rest are deposit funded where you haven't started to pay anything. So shouldn't you say that mortgage margin is actually flat in the quarter?

Yes. I mean we're not -- it's really just comparing the rate the 5-year covered bond, which is a proxy for the margin. It's not the actual margin. And I think different banks have different models. What we do typically is that we blend covered bonds with senior unsecured funding when we look at our funding cost for mortgages. And whether you mix deposits into that or if you see deposits at different products, you can have different models for it. But in general, you can see in the quarter, irrespective what duration you look at, that funding costs have gone up clearly more than the average price of each mortgage for each tenor. So there is a clear margin decline for mortgages so far, very lately in the last couple of weeks, spreads are going down on covered bonds, and banks have started to adjust their pricing downwards. So maybe this will sort of average out over time. But it is slightly surprising how little mortgage rates have gone up relative to the sort of our funding costs will go up in the long term.

And then finally, the mortgages as well. We saw that activity levels in the housing market slowed quite a bit in May. Could you tell us a bit about volumes in June and July? Or are we seeing a real slowdown? Or how does it look?

Yes. I mean there's -- when it comes to transactions, there's a slowdown of about 25%, 30% to my recognition. But when we look at our mortgage book, we are issuing pretty much the same amount of mortgages this June as we did June last year, as prices are higher now than they were a year ago. At the same time, given that our pricing has differed a bit compared to most of our peers, we see an outflow of old mortgages, so to say. So therefore, we come up with a net increase of 0 basically in June, but we do issue mortgages at fairly high level still. It's more than SEK 10 billion per month of volume growth, gross, but then that's netted out with as much outflows. But there is obviously a slowdown in the transaction market. And generally, we are more dependent on transactions happening for mortgage book to grow. We are not as strong when it comes to people just moving their mortgage loan from 1 institution to another. And then we are more focused on the large cities. And as prices nominally are higher there and prices now are going down, that could have a larger nominal effect on our mortgage book compared to most of our peers.

The next question is from Magnus Andersson with ABG.

Yes. Just continuing on NII there. If you could give us some flavor around the competitive situation on deposits. First of all, you noted that the deposit base, we saw that it has increased quite significantly, if you could say, where that's coming from? Secondly, if you could say something about how you think rates can go before you will have to change rates on transaction accounts. I know that you recently raised rates on your [indiscernible] for 3 to 6 months, but I guess that's a quite small product, but you didn't do anything to your other savings account. And following to that, is that [indiscernible] is that the 2% of your deposits in corporate and private customers. So that's the first one on NII.

Yes. I mean, as you could see in the numbers, we've seen very strong deposit inflow so far this year. It's a very sort of polarized environment right there -- right now, you have some companies needing more liquidity because of working capital needs. And because of that, we have some lending growth. But then you have some companies with a lot of excess liquidity and especially financial institutions and the risk appetite has gone down. So you see some inflows coming in deposits. So obviously, given the current pricing, we still generate and attract a lot of deposits. So in that perspective, the competition isn't that high, I would say. We don't feel pressure to increase prices at this point to generate or attract deposits. As you can see, I mean, our loan-depo ratio is at its lowest level ever. But then with constant tightening, structurally, liquidity in the system should be slightly drained, and you should see deposits structurally go down. But at this point, we don't see that we need to change prices too much to attract more deposits. On the transaction accounts, we don't envisage that we will pay an interest rate anytime soon. Historically, we've only paid an interest rate on transaction accounts when the repo rate has been above 3%, 4%. So we are far away from that. We will probably pay an interest rate on savings accounts. And as you said, we are paying that on the sort of the 3- and 6-month tenor savings accounts. And those are very small. But obviously, there could be flows from the current saving accounts where the interest rate is 0 to these tenor accounts, given the fact that we're paying the interest rate of 0.5% for the 6 month and 0.25% for the 3 months. So those kind of flows can happen and that will have an impact on the margins. But here and now, there isn't high competition for deposits, I would say, because there is still a lot of excess liquidity in the system.

Okay. And then just on a more detailed note on your net commission income, that was really strong in the quarter, just if you can say something, I think the deviation is primarily driven by very strong lending and card fees, if you could say something about the sustainability there.

Yes. I mean, outlook on fees is clearly more negative than the outlook on net interest income. And there are a couple of reasons for that. The lending fees are very high this quarter. So I think it's not a sustainably high level. It should come down even though -- I mean our balance sheet has grown quite a lot. So if we keep the same size of the balance sheet, lending fees are structurally higher than they were a year ago, but probably not as high as they were in Q2. And then an asset management business, obviously, at the end of the quarter, asset prices are clearly lower than the average of the quarter. So if you assume that equity prices will stay where they are now, you should see some further sort of headwinds on the asset management fees going forward. So -- and then investment banking, you should be aware that we did have a very high level of activity by the end of last year and early parts of this year before volatility increased. And that activity has sort of some legacy elements to it. So you still continue to get some fees with sort of related activity to that activity. But over time, if volatility stays high, that should sort of taper off. But then, yes, you could see better sort of development within markets with volatility staying high. But the general thing I would say is that the outlook on fees is clearly not as positive as the outlook on net interest income.

And the card fee level, nothing strange in there. It was up quite substantially, 17% quarter-on-quarter?

Yes. Well, no, it's a combination of the recovery from the pandemic, but at the same time, also the fact that you have 8% inflation, which means that just to consume the same basket you consumed a year ago, you need to pay 8% more. So this morning that the inflation is up to 8.5%. So obviously, that has a positive effect. Over time, if this leads to people having to reduce their discretionary consumption, that could have a negative effect on the card business because if you're paying more for your housing and electricity bill, which you typically don't pay with your card, you pay with an invoice, your consumption using your card could go down. So there are positive and negative effects there. But I think we are sort of on a new post-pandemic level now. And obviously, we shouldn't go down to the sort of the during pandemic levels again.

The next question is from Nicolas McBeath with DNB.

So first, a clarification on the NII. So in Q1, I think you mentioned that you had SEK 200 million in unsustainable NII coming from bridge financing. And now you increased your NII by around SEK 700 million quarter-on-quarter and your assessment now is that there is between SEK 200 million to SEK 300 million of NII that maybe not fully sustainable. So does this imply that more or less entire increase in NII in the quarter, you find sustainable. So the -- yes, not really an incremental NII of sustainable nature in this quarter? That's my first question.

Yes. I mean you're right. So the reason we add up to SEK 100 million to that sort of short-term nature of NII, it's really the fixed income NII increase we've seen in the quarter. The bridges are sort of unchanged. As I said before, some of them were paid down by the end of the quarter in Q2, but haven't really had an impact on net interest income. So it is correct that the remaining part of NII should be fairly sustainable. I mean to the extent you can say it's sustainable, it depends on interest rate levels and volumes and all that, but it's more sustainable than the SEK 200 million to SEK 300 million.

Okay. And then a question on the property management loan book. And if you see any increased demand for bank loans from property companies that may look to replace bond financing given the worsened bond funding conditions and whether you're happy to take on more property management lending volumes should you see -- yes, a good business case for doing that. I know you've historically been somewhat conservative with increasing your overall exposure to this segment. So yes, any comments regarding that would be interesting to you, please.

Yes. Absolutely. Thanks, Nicolas. I can take that. There has been some tendency for the debt capital markets to be shying away from some of these refinancings of bonds. And you've also seen a significant credit spread widening. However, the average maturity for most of the active participants is fairly low. So there has been very little requirement to test the volume depths of the bank or that DCM market. At this point, it's more like observable prices, honestly. But there's a small tendency that discussions have gone up with these companies in order to shore up liquidity and other things. But it's not this quarter or next, it's for the next couple of years if this were to be maintained at the level. And it's very different. I would say the majority of real estate companies do not have any urge for this discussion, but some might do. When it comes to risk appetite for us, we changed nothing. So underwriting standards are intact and we continue with a cautious, very conservative view on how much commercial real estate, in particular, we allow. And as I think we've said many times in the past, we have an internal measure never to go above 10% of the nonfinancial loan book, nonpeak loan book in terms of real estate and that will be maintained. But to support existing clients is 1 of our key values. So we will definitely -- if transactions are good, meet our underwriting standards, be able to if we want to support companies.

Okay. And then a follow-up on that. Given your underwriting and collateral in this portfolio, how large price declines in the commercial property market do you think it would take for you to start to make meaningful loan loss provisions in the segment. Could you share any comments on what kind of internal guidelines you have with regards for loan to values in property management, if you have any caps that you don't do lending above when it comes to LTV?

Yes, Nicolas, we did include in the presentation an appendix slide on our commercial -- our real estate portfolio in general. You can see that on Page 21. There, you can also see the average LTV we have currently on commercial real estate as well as residential real estate and housing co-ops. So you can make your own calculations on how much prices need to drop for those averages to be above 100%. I would just say, generally, the lending we do is very sort of cash flow based. So it's more interesting to look at what's happening to the cash flows of these companies. And we do include on that slide, a stress test we've done of the 20 largest real estate companies that we have as customers. And there, you can see that we've stressed them based on a 3-month diver going up by 400 basis points and look at their interest coverage ratio in that scenario. As you can see, all of them will be at 1 or above 1 in terms of interest coverage ratio with average at 2.1. One other point when it comes to the price decline, just remember that there are risk weight floors on both commercial as well as residential real estate. And there, we can conclude that prices need to drop by 25% before we see any capital effect of real estate prices coming down. And now I'm only talking about commercial and residential property on mortgages, prices need to drop by much, much more than that before there's any capital impact.

Nicolas, If I may, just this has been, of course, the topic of this quarter. And I think it's important that when anyone does analysis to differentiate between the equity markets outlook, the profitability of any given property company compared to the loan losses, this will incur for the financial banking system. There's a huge difference in those 2 another. We have seen and observed significant drops in share prices for real estate companies and significant credit spread widening. But for a bank, you need a systemic proportion of these companies to have a failure to pay their obligations to their bank. And therefore, the cash flow is the first most important thing. And even if you have a 400 basis point, we don't have any of the large companies in our book that we won't think be able to pay. And that's, by the way, assuming they cannot increase any of their rents. So it's just [indiscernible] everything else being constant, put in the interest rate. The other bit is that once that happens, that might not trigger a default or an expected credit loss either because it's subject to timing and financing. And thereafter, you need the LTVs to be above 100, you to incur a loss or the market liquidity to be so poor, you can't sell any household or residential or commercial real estate. There's no price for them. So that's the banking analysis, and that's a quite separate one from what is going on mostly in the media right now, and that is about the profitability of any particular real estate company. So I just want to make that point.

Perfect. That's very clear.

The next question is from Robin Rane with Kepler Cheuvreux.

Yes. Thanks for the presentation. So back to the mortgage margin there, perhaps a clarification. So you say the SEB margin on mortgages is down 50 basis points. Is there any timing effect here? So that funding costs have increased faster now than you've been able to increase prices? That's my first question, please.

Yes. Just to point out, our margin is not down 50 basis points. We're just comparing here the 5-year price versus the 5-year covered bond. That's not the same thing as the margin. It's just a proxy for that. We're just trying to illustrate what's happened during the quarter. Yes, it is definitely a timing effect that given the sharp increase of covered bond spreads and funding costs in general, there's been different strategies seemingly among the banks to adjust prices. And we can just conclude that we have adjusted prices more, not as much as funding costs have gone up, but more than our peers, and that largely explains the fact that we've had very poor mortgage lending growth recently, that's the point with that slide.

And do you think you need to adjust down prices in order to project the back book share of -- back book market share? Or do you think peers will eventually catch up?

Yes. We won't be in a rush to go back to our backlog market share, but we will have an ambition to go back there over the next few months, maybe by year-end, we'll see how fast we'll do that. But I think it will be a combination of other banks adjusting their prices to more sort of reflect the changes in funding costs and maybe to some degree, us having to adjust our prices to be more in line with our historical price, which has been sort of mid-range among the banks. We're typically slightly lower because we have a different customer base than the average of our peers. And then we obviously will look at other aspects as well. I mean, we do want to sort of serve our customers as well as we can in terms of availability and general service level. And if you can pull those levers, it's typically better levers than just adjust the price.

Okay. And then you previously talked about costs being -- some parts of the cost base being normalized following the pandemic. Is that something that you already are seeing? Or could we expect more headwinds from costs normalizing going forward?

Yes. I mean the main cost decline we had during the pandemic was travel and entertainment, that came down from an average level of about SEK 100 million per quarter to close to 0 during the pandemic. In this quarter, you can see that it's up to SEK 80 million. We don't think it's going to stay at that level. We think it's going to be lower than that. So we do see a reduction -- a structural reduction versus pre-pandemic expenses. But there is -- in the short term now, we've seen a lot of activity, a lot of customers that want to meet us, both due to the volatility, but also due to the fact that we haven't met them physically for some time. So we think that the level you see in the quarter is actually higher than we will have long term in the bank. But overall, I mean, we're running the investments we do in the bank in line with the strategy we set forward 6 months ago. We're doing the investments in private wealth management. We're doing the investments within investment banking and all the investments we need to do within all the compliance areas and financial cloud prevention. And that's running very much according to the plan. So we think we are sort of on target. And in terms of development, we do see already that we're getting a positive development from the sort of front office investments we're doing in the divisions. You can see that in PWM, the client intake has been clearly higher so far this year than it was last year, and it's been clearly higher than the targets we set forward, and that's just 1 aspect of it. So we do believe that the investments that we planned for in our strategy are paying fruit already, but we're only 2 quarters into a 9-year plan. So we'll have to see what happens going forward.

Okay. That's very clear. Last question. So one of the reasons you previously kept the COVID overlays was that you saw a risk for a sort of pent-up bankruptcies that would perhaps increase when the government support schemes ended. So you don't -- do you see a risk for that still now that you've reversed the COVID overlays or -- and is this covered by the new sort of geopolitical overlays? Or how do you think about that I think?

Yes. I mean, we don't think there is any reasons to have the COVID overlays anymore, and that's why we've taken them out. We don't see the risk related to COVID anymore, really. But obviously, new risks have emerged. And therefore, we have done new assessments of the exposures we have and the vulnerabilities we see in them. And that is due to sort of the current concerns we have with geopolitics, rates and inflation. And based on that, we've just done new assessments. And this is a very sort of bottom-up assessment looking at client-by-client level and see to the extent they are vulnerable to current developments. And in the end, we just ended up with pretty much the same kind of total overlays as we had before related to COVID, but it's a completely new assessment based on completely new risks. So it has nothing to do with the historical overlay related to COVID.

The next question is from Omar Keenan with Credit Suisse.

So I just had 1 follow-on Magnus' question, please. And I had a second question on capital planning. So firstly, I was wondering if you could help us a little bit with the rate sensitivity number. You've seen really good deposit growth and you've probably seen how the banks behaved after some rate hikes. So could you give us an updated rate sensitivity number versus gross of any lack of mortgage margin pass-through, please? And my second question on capital planning. So when you're looking forward to 2023. Clearly, it's a more difficult market environment and you gave us some very interesting color around what kind of asset price falls are needed to even impact LGD flows. Could you help us understand a little bit around how probability of default change in the book just so that we can sort of understand what the risk of rating migration is?

Yes. Thanks, Omar. On the rate sensitivity, so our previous guidance is that when it comes to Swedish rates, 25 basis points, higher rates means about SEK 1 billion of gross sensitivity, just looking at deposit side, and then you have to make your own assumptions on the lending side and what's going to happen to margins on the lending side. And so that's the gross number. And typically, it's less than that because typically, lending margins, especially for mortgages come down when rates go higher. It's very difficult in the short term to say whether you're going to see a linear effect. As I said before, there are many things moving at the same time. You have liquidity books that will be repriced at higher levels but that takes time to get an initial negative effect on your valuations, then over time, you get a higher NII. So there are many things moving around, and you shouldn't assume this will be very linear. But over time, the sensitivity should be around that. We also have a sensitivity to Euribor or European rates in our corporate lending business that we do in euros and in our Baltic business. We've said it before that, when it comes to the Euribor sensitivity, that's moving from negative territory of 50 basis points to 0, that has a negative effect on us as we have some Euribor floors in our lending. We've seen half of that negative effect during Q2. And given where Euribor is now, the second half should come in the next quarter. But then we have positive sensitivity in the Baltics. So I mean, we have some sensitivity and it's sort of working as we expected. The deposit inflow is mainly coming from financial institutions and corporates where you typically don't really have a margin on deposits. So it hasn't really changed the sensitivity that we have. On the capital planning, I mean, there are so many things we take into consideration. We do our capital plan. It's the volume growth we see. It's the macro risks that we see. And as you mentioned, the sort of potential risk migration. During this quarter, we've had some negative net risk migration. At the same time, the new lending we've done has been at good risk weights. So overall, the average risk weight is actually down during the quarter. With this kind of macro outlook, you should expect net negative risk migration, which will have a negative effect on the capital. We've said that in the past, and it hasn't happened. But this time around, it should happen. But to what extent that will impact the capital buffer, it's difficult to say. And given the fact that we have so many risk-weighted floors now on mortgages and CRE and RRE, the impact isn't that large given that the concerns really are within those areas where we have risk weight floors. So yes, and we take into account more sort of long-term effects of IRB models needing to be reapproved by the FSA as well as Basel IV being introduced in 2025. So that's what we do. Here and now, we stand at 480 basis points, clearly above our target range, and we're still doing the dividend of 50% and the share buybacks that we've announced. And the Board will take sort of new decisions every time there is a need to do so. And the next step for them is to take a new decision in October to what extent and whether we do share buybacks from October until the AGM. So that's the next sort of decision point for the Board.

Next question is from Sofie Peterzens with JPMorgan.

Yes. Here is Sofie from JPMorgan. I was wondering, my first question would be on kind of the credit quality of the new loans. So on the corporate side, you have seen 12% growth year-to-date, and you have seen 9% growth on the commercial real estate side. And you also have seen got to refinance the lending facilities in the second quarter and first quarter. Could you just kind of give a broad overview of these corporate and commercial real estate and bridge financing lending, how much is investment grade? And what share is noninvestment grade? That would be my first question.

Okay, Sofie, I can answer the general themes. So first, most of the lending growth you've seen is actually drawn on existing facilities. So it's exactly the same for that part in credit quality as the SEB credit quality, so to speak. For the new business that has been -- as gross numbers being quite large and non-real estate. That's mostly investment-grade and some structured finance private equity, which, of course, you have collateral and something else, very similar to the mix that we have in the bank. So I would say, for argument sake, there's no change in risk profile in the new business that we do. And the last one was investment-grade share, sorry, what was that?

Yes, the share of investment-grade lending.

Or what was the share of investment-grade lending? Well, it's the majority, but yes, I can't -- I'll checkup the number if you want it exactly.

If I just make a general comment there, Sofie. I think in general, when you have this kind of markets where all the risks are surfacing, you should be less concerned about lending growth because everyone is so diligent in the underwriting in this kind of market. You should generally be more concerned about high lending growth in a good market because at that point, you don't see the risks as clearly as you do now.

Yes, you're always more thinking about like if I look at the FAS, for example, that filed for Chapter 11 in the U.S. last week, it looks based on their regard perspective is like your -- the house bank for them similarly, I guess, some of the commercial real estate companies that we know that they have a lot of funding issues, they can't access the funding markets. And I know you are kind of limited in your commercial real estate kind of growth ambition, but 9% growth year-to-date is still quite a lot. So I was just wondering if these exposures are they got a weaker credit quality clients that you have on the book. But I guess it sounds like it's not the case.

No, that's not the case at all. And generally speaking, the FAS case, we can't comment on, although it is public that we are the financial adviser. But I can say that everything has been taken into account in the 6 basis points of future expected credit losses. And would we have anything, we would have disclosed it of that nature, but there's nothing to comment on over and beyond that.

Okay. My second question would be on the IRB overhaul. The Swedish FSA seems quite kind of, I don't know, worried or -- but they are going to guiding that the IRB overhaul could potentially have a relatively big impact on the Swedish bank. So I was just wondering how you think about the IRB overall impact for SEB and really coming in the fourth quarter or first quarter next year, if you could give a little bit more details here.

Yes, I'll try to do that, Sofie. Yes, that process is ongoing, and it will probably take a year or so before we get a final decision on what that's going to mean for us. And we're working on our sort of application as we speak. Generally, if you look at the current models that we have and relate that to the historical default that we've had, we believe that they are conservative. And if you compare our risk weights that we in general have to European banks risk weights relative to the historical defaults, I'm pretty sure that, that analysis will show you that we have been much more conservative than basically all European banks. That's our input in this discussion with the FSA when we do this overhaul. And we'll obviously try to convince them that it is important to look at the data when you do these models. And the data shows that we've had very low losses relative to the capital we reserve against those losses. But in the end, I mean its -- decision is up to them, but we'll do our modeling. We'll try to validate that as well as we can and document it. And then in the end, it's going to be a discussion with them at what calibration level these new models are approved at.

Okay. But also, I guess it's fair to see Sweden hasn't had a credit event in the past 30 years, but clearly, it does also impact the model.

Well, if you look at the data, the data shows that Swedish GDP per capita has grown as much as European GDP per capita in the last 5 or 10 years. So it's been a very similar economic development. What I think people miss in this is that banks up here have pretty good underwriting standards. And I relate that a lot to the financial crisis we had in the early '90s that a lot of things changed. We had a much bigger crisis here. And I think the banks, in general, not just SEB, but all banks here learned a lot from that. So past experiences are important when it comes to underwriting standards. So -- and another point I would look at, if you look at our net interest income, the net interest margin, it is clearly lower than European banks on average. So either we do have better asset quality or we are extremely poor at pricing risk. And you have to make your own mind up around that.

But related to that, I guess, your models don't go back to early 1990s when you modeled the probability of default and loss given default. So I guess your models [indiscernible] maybe the past 10, 20 years, max. So you haven't had a credit default or you haven't had any loss experienced in your model?

Yes. The requirement is that the model should be based on 5 years of history, and we use much more than 5 years, and we do have elements of the '90s crisis in our models.

Okay. And the final question, could you just confirm that you still have around SEK 7.6 billion of total assets in Russia and Ukraine and that you have no provision against this exposure.

Can you repeat that, please?

Yes. In your annual report, if I look at SEB had combined total assets in Russia and Ukraine of SEK 7.6 billion, you had around SEK 1 billion of book value in Russia and Ukraine. Could you just confirm that these total assets are still unchanged and that you have no convictions against these loans or total assets?

Yes, I can confirm that. In terms of our exposure, I mean, it's a lot of deposits that we have at Central Bank in Russia. And in terms of the lending, we have a big majority, more than 90% is -- there's a parent guarantee from a Nordic or a German company on that exposure, and we feel comfortable with those parents of those subsidiaries we lend money to in Russia.

But it's still legal entity, the exposure is in Russia or Ukraine, right?

Yes, but guaranteed by the parent. So it's not the legal entity's credit quality that comes in the equation, it's the parent if the guarantee holds or not. So I just got the number here from a very adept colleague. So around 65% of the volumes that we have written under this quarter was investment grade. And therefore, that means 35% wasn't, and that's 5 percentage points higher than the average. So the balance sheet is currently 60% investment-grade, 40% is below BBB minus.

The next question is from Namita Samtani with Barclays.

I've got 2 questions, please. Firstly, I understand your M&A policy, but I wondered if your appetite for M&A has increased in the past few months, given valuations of certain fintechs and even other financial players have significantly dropped, or looking at it from another angle given a noticeable proportion of employees have been let go from some of these fintechs, do you have appetite to increase hiring in the tech or the data space. And just a follow-up on that question, what's the preference between balance sheet growth, buybacks and M&A. And secondly, just a question on the German business. How do you intend to protect this given the macro vulnerabilities in Germany right now?

Yes. Thank you. Nothing has changed on the, call it, acquisitive appetite, M&A appetite, given the market turbulence lately. And that is then to say that we have in our business plan and our strategy is predominantly organic. So no assumptions in the bank are really based on anything, but -- and organic expansion in this strategy that we released 6 months ago. We did open up for partnerships. And within partnerships, there are, of course, sometimes interesting cooperations that entail that you acquire or you share part of the equity with companies. And we've done this very successfully, mostly in fintech and -- green techs, fintech, as you have seen in the past. So nothing has really changed. What has changed or you have to stand up these days. Things are moving around in the market. There's definitely going to be problems and opportunities being created. So there is an increased focus in monitoring what's out there, both in the -- on the West Coast of the U.S. as there's a lot of fintech center around there. So there is definitely heightened activity level. And as you have seen, the valuations in the technology space and the start-up space is very volatile and has been moving around a lot. Then hiring tech, we are super interested in hiring tech people that are now being laid off. There is now, as far as I know, 63,000 people that have been laid off this year within start-up and technology companies around the globe. And this is definitely an area where we have often talked about the very tough competition for talent and where the new economy, the start-up the fintechs, of course, have attracted a lot of good talent. That is now, of course, coming to us and we have already hired in the strategy that we have some during the last months. Was there another -- was those 2? Germany, sorry. Germany, we are doing everything we can on, call it, the academic level. So we're stress testing the bank given the extreme uncertainty around how particularly the gas supply will develop. We've also used the Bundesbank scenario. So they've done a lot of work on how this could affect the German economy, come -- if the worst come. And we put that through and do all the preparations. I feel fairly comfortable right now that we can and -- we can handle those issues given the strong capitalization, the strong liquidity and the very strong asset base that we have in Germany, in particular, where you have a very focused large corp focused business for SEB.

The next question is from Rickard Strand with Nordea.

A follow-up question on the Swedish -- your Swedish mortgage growth. So you mentioned in Q1 that you had some issues with your customer service center. Just want to hear if those issues are resolved now. And also a follow-on to that one. If we see the market growth slowing down substantially in the coming quarters. And you also mentioned that SEB naturally has some headwind there, if we have a scenario where transactions slowed down. In such a scenario, do you still feel that you would prioritize coming back to growing in line with the market or would you rather than prioritize margins instead in such a scenario?

Yes. Thanks, Rickard. When it comes to customer service, no, it's not fully solved. It's never fully solved because we want to improve all the time. I think it has improved since Q1 and we see further improvements going forward. But if you look at the data, it seems like the main reason we're not taking our fair share is the price. But then obviously, we try to sort of pull the service level -- lever as much as we can because that's a better way of serving your customer than just reducing price. But that's continued sort of improvements all the time. In terms of the transaction level and whether that sort of could lead us not taking our fair share. I mean you're right, I mean if there are structural reasons why we, in the short term, cannot take our fair share, we'll take that into account. The main thing for us is that we don't want to lose good customers of the bank, and we'll do whatever we can, both in terms of service level and price to make sure that they don't leave us. That's the main point.

And then second question on costs. I know you haven't given any guidance on the cost levels, absolute levels for the coming years, but you've hinted cost income of around 45% and just sort of -- how should we think about if interest rates give a positive contribution or rate hikes give a positive contribution to NII? Should we still consider 45% to be a level you'll be around? Or would you reconsider that given the sort of uncertainty of the long-term implications and how sustainable the rates are and also the uncertainty about sort of loan loss impact, et cetera? Just curious to hear your reasoning around that.

Yes. Firstly, on the 0.45, that's nothing that sort of dictates how much we invest a certain year. That's more of a long-term implicit level we think we need to be at to reach the 15% return on equity. So that's just how we use it. It's an implicit target. It's not an explicit target. Secondly, you should just be aware that this year, we've moved the resolution fund fee out of the NII number, and it's below the cost income line. So everything else equal, we should actually have a lower cost income level than 0.45 to reach the 15%. And we'll revisit this by year-end to make the necessary adjustments to that. So I mean, by the end of this year, we'll look at the investments we think we need to do for next year. And based on that, we'll make a decision on the cost target for next year. And those investments will be based on what we need to do in '23 to reach the 2030 target we put forward in our strategy. And we calibrate that based on the development so far, the appetite we have and obviously the profitability of the bank here and now. If rates go up and that leads to a better income line than we have expected, then obviously, that sort of creates room to do more investments in the short term, but we don't want to make the decisions based on that. We want to make decisions on what makes sense for the bank to do. So yes, that's how we look at it. I mean there is 1 big uncertainty when it comes to next year that we haven't faced in many years, and that's salary inflation. We've been very used to about 2%, 2.5%, 3% salary inflation for a long period of time. And now this is a big uncertainty for next year given the high inflation numbers. So we have to wait and see where that lands when it comes to the centralized negotiations. And obviously, that will also impact how much extra investments we can do in addition to the salary inflation that we might get next year. So that's a sort of added uncertainty this year.

The next question is from Jens Hallén with Carnegie.

Yes, 2 risk questions. First on the model overlay reallocation. Can you say something about the sectors where you apply them to? And then second my question straight away is on commercial real estate. Thanks for the useful strategy you put in into presentation. I just wonder, when you do the stresses, do you also then do a stress when the wholesale market is closed for these companies, i.e. if it's closed, they have lots of short-term funding. Could that then potentially be a liquidity stress for the commercial real estate companies, breaking covenants and then in the end, your exposures, i.e., how much do you look at the whole debt structure for these companies when you will be stressed? And so those are my 2 questions.

Okay. Thanks, Jens. On the model overlay, I wouldn't look at sectors. It's more a counterparty by counterparty. But obviously, to the extent that a company has a lot of expenditures related to energy, for example, that's going to have a negative impact on their cash flows. So there -- it's more based on individual names in different sectors rather than sort of certain sectors being impacted. On the CRE, I mean, what we do take into account, as you saw there on that slide, we assume rates to go up by 400 basis points. But then a lot of these companies have hedges on, which means that their funding cost doesn't go up to the same degree as the short-term rates go up. So we take that into account. In terms of sort of a liquidity crunch, these companies not being able to refinance themselves, it doesn't really affect in the short term because they don't have to refinance themselves a lot of them in the short term. But then also there is a potential possibility for them to get bank financing instead. But the general answer is that no, I mean, in this type of a stress test, you look at their funding costs going up and assume that they can fund themselves. If the -- it's absolutely impossible to fund yourself at any spread levels, then that's a different scenario.

Yes. And I'd like to add 2 things. Yes. First on the model overlay. So every counterparty is taken in the normal expected credit losses, overlays are over and beyond. And you do it bottom-up when uncertainty is particularly high because it's almost like an expert judgment. Yes, you can say that this is the probability of default from a company who is heavily dependent on energy prices. You know that your point estimate in this particular instance, is more uncertain than normal. So you use an expert judgment, some wisdom and some sound thinking that we need to put a little bit because the world is moving. And that's why it is very much so. And of course, exposure to Russia is one of the factors going in. And then what you alluding to on the real estate side is the liquidity analysis rather than the credit quality analysis. So that's not necessarily in there. There was some part of credit and liquidity analysis that marries and that's the availability of funds, et cetera. But right now, I think your point is a very important one. Right now, this is not a credit quality issue. It's a very high uncertainty around liquidity. And can I refinance a debt at a reasonable price tomorrow rather than necessarily the quality of the asset might not have changed from yesterday but the market's appetite to refinance me might have changed. And those are very separate and analytical tools. And the PD doesn't change because the probability of you not meeting your obligations, it's kind of the same from the company operational side, but it's significantly reduced because you don't have liquidity to pay your bills.

The next question is from Martin Leitgeb with Goldman Sachs.

I really only have 2 follow-ups on commercial real estate and thank you very much for all the color given in the call already. And the first one is just -- I was wondering if there's any portion of your commercial real estate book you're particularly focused on? I mean, historically, when we have seen large moves in commercial real estate, it's some form of speculative development and stuff like that, which creates credit issues going forward. Is there anything you could comment in there in terms of your overall book and the disclosure on Slide 20 is very helpful on what portion of your CRE book you're particularly focused on? And secondly, I was just wondering, you made a comment earlier with regard to lease indexation. And I was just wondering, is that very common in Sweden basically most of the commercial leases in your CRE book index? And could this be essentially a meaningful offset to obviously higher swap rates?

Yes. Thank you. If you can -- in this day and age, you probably understand that the subsegments of the real estate exposure, which you are particularly focusing on comes from 3 areas. First, the category that has a pass through contractual strength or not. So if you have inflation, do you have a real estate exposure where you have pre-agreed with the tenant, how to increase it or not? If you don't, you are more exposed, of course, to see how negotiations will go in the future and that goes both for increased costs and increased inflation in general terms. The other one, subsegment is the -- not everyone has the same cash flow, it's the relatively weaker cash flow metric. So we show on our slide we today averaging 4.6 an interest cover ratio. That means that operating profit available to service your interest rate is 4.6 higher. And then that subsegment, which is in the weaker end, that's where you particularly need to focus right now to stay close. And then that is natural then to say the third is leverage. So very intertwined. So right now, it's more of the ones we have relied heavily on high indebtedness. They are, of course, more exposed than the ones who are hard looking lower on both cash flow metrics and LTV metrics. And we have shared with you there the averages of our portfolio at 46% for the commercial residential side and a 27% for the co-op side on the residential side. And then I don't dare to answer the percentage or proportion of what is indexed or not. But I hear from many clients that there is a lot of the retail lease contracts that are indexed in some shape or form. But then I don't know, Masih, if you want to give some more color on that mix.

Yes. I mean I'll just couple of general comments. In commercial listed companies in general have -- will index their rents to inflation levels. And that typically happens in October every year. So in the very short term, given that on the funding side, they have a lot of hedges and they don't need to do a lot of funding. In the next 12 months, you'll see a lot of real estate companies actually improving their cash flows because their income will go up more than their interest expenses. So that's pretty interesting. And obviously, it will be good if they keep some of these cash flows for potential funding costs going up later on. If I would talk about concerns in general, I would say that we are clearly less concerned about the large real estate companies that we have exposure to because they are scrutinized quite a lot. And it will be more concerned about really small real estate companies with maybe SEK 50 million of loans that they've invested in the last few years, where you have sort of difficulties fully getting grips of the entire book because we're talking about many more exposures where you don't have this sort of process of going through several committees in the bank when the credit is approved. So in general, I would be more concerned about the smaller ones rather than the large ones.

The next question is from Maria Semikhatova with Citibank.

A couple of questions. First, clarifying on net interest income. If I look at your fact book, funding cost on customer deposits increased from 3 basis points to 22 basis points over the quarter. So I just wanted to clarify what part of your deposit portfolio have been repriced up in second quarter? And following up on AI, if it's possible to isolate the impact from FX moves quarter-over-quarter. And then your interest rate sensitivities implies roughly SEK 250 million from a 25 basis point hike on deposit margins. And we saw that the increase in NII was over SEK 400 million from deposit volumes and margins. I know there are different things going on there, but is it fair to assume that far the pricing is trending above your expectation or your guidance on interest rate impact? And then separately on cost of risk outlook, you reiterated the outlook for the full year that you expect cost to be -- cost of risk to be below -- to be at low levels this year. So we are now at 7 basis points in the first half. Is there anything you could add, let's say, on the outlook for the second half compared to the first half?

Yes. I try to go through those questions. On the deposit margin going up from 3 to 22 basis points, most of our deposit is from corporates where you have market pricing, basically. So with rates going up, you're going to pay more for those deposits. So you should just be aware that this is a mixture of all the deposits we have. It doesn't mean that we've changed the deposit rates by that much on the retail side because us being very heavy on the corporate side, this sort of average deposit price goes up as much as you can see. So it's mainly corporate basically. On the interest rate sensitivity, again, there are a lot of moving parts. So we have a sensitivity to the repo rate, but we also have a sensitivity to STIBOR going up. And given that the 3-month STIBOR expects further report hikes, it means that STIBOR has gone up more, and there is some sensitivity to that. So to the extent that we have had higher sensitivity in Q2 relative to the 25 basis points, it also includes the fact that this STIBOR is up more than 25 basis points. And then that's the SEK 400 million you mentioned, that's really sort of the deposit margin development in the divisions related to how much treasury charges or pay the divisions on lending and deposits. And there are sort of lags between how much they charge and how much they pay on the lending side and deposit side and those lags will play out over time. But in a short period of time, we're talking about 60 business days, there are lags there. So you can sort of fully trust that, that is in line with whatever we guided for on the interest rate sensitivity. We guide for a sort of more normalized level that happens over a period of quarters rather than 1 single quarter. Cost of risk, second half of the year. I mean, the only thing we can say, we believe it's going to stay low. We don't see anything here now deteriorating. In terms of asset quality, we think we are well reserved, both in terms of the total allowances we have related to the Stage 3 loans. You can see that at 55%, if I don't recall that incorrectly. And then we have these overlays of SEK 2 billion that we have for a potential rainy day. So we think it's going to stay low this year. And then going into next year, it depends on, obviously, what happens to macro. We've seen a long period now with negative revisions on the outlook on GDP growth in many countries. And obviously, if that continues, that's going to sort of deteriorate the outlook, but it could also rebound and look differently. So we have to wait and see what happens. But what we have visibility on is the remaining of this year, and we think it's going to stay at low levels.

Just on the FX move impact on NII, if it's possible to isolate, how much it contributed to the increase?

Was that a mortgage impact?

Impact from exchange rate moves.

Okay. Exchange rate moves Q-on-Q is very limited. It's about SEK 50 million in total loan income, and pretty much unchanged on the cost side. Year-to-date versus last year-to-date, it's SEK 500 million positive on income, it's more than 50% of that comes on fees, so less than 50% on net interest income, and it's about SEK 200 million on costs.

The next question is from Riccardo Rovere with Mediobanca.

I have a couple for Johan and maybe a couple for Masih too. Starting with Johan, in 2020 at the time of COVID crisis, we saw the corporate loan demand going to the roof in the first part of the year. Remember, well, that slide of the new commitments. And then we saw a decline or, let's say, a stabilization or a stagnation in the following quarters. My question here, do you see corporations in those days behaving more or less in the same way as the first half 2020? Or do you think this time is different? This is my first question. The second question I have comes to your green strategy ambition and so on. When you presented your strategy months ago, there was something that was considered to be dark brown and now is seen as a bouquet of red roses. Does it change anything? Does it open up brand-new opportunities for you? Or we should take that kind of strategy as it was and changes nothing? This is the second question. Then I have a couple for Masih. The first 1 is on overlays. Is it possible to have an idea whether in the SEK 2 billion that you have set aside for energy-related, war-related, Russian invasion, whatever. Is there any part of assets maybe includes at least as a scenario probability weighted of a complete cut off of gas from Russia to the Nord Stream in Germany and then we'll probably go through the whole continent. Is that something that you have taken into account when you have set aside those SEK 2 billion, which by confidence are more or less the same number of COVID overlays. And the other question, I wanted just a clarification more than anything else. When it comes to the part of NII related to fixed income, bridge financing, the SEK 200 million to SEK 300 million that you have been mentioning before and a couple of hundreds that you mentioned be in Q1, just need to understand, this is not a one-off or at least it's not a one-off by nature, maybe the number is a one-off. This number will continue to be there. It could be higher, lower, could go up and down quarter-by-quarter, but it could actually be 0, but it's not a lump sum that disappears. It is just something that is very difficult to, let's say, also for you to have an understanding how this could go on. Is that fair assessment of what you said?

Thank you, Riccardo. Excellent questions. We can sit here now for some while. So your observations from 2020, I'd have to remind everyone, we did SEK 139 billion extra credit exposure granting in 8 weeks because there was some sense of panic. And this is again, large corporate. We can compare that to now where you have actually seen that the outright level what we do today is on par or higher than we were then. So we have been able to currently maintain that. We call this whole concept of temporary or short term, it's very much a concept of what time perspective do you have. Do you want it to be replicated next quarter? Yes, we are very keen in telling you guys, this cannot necessarily be replicated in the next day. But if you take 3, 5, 10 years, like I do, these are super stable businesses. We will have bridge financings, we will have these levels that we've now incurred in the long run replicated. But I have no clue if it's going to be lower or weaker next quarter. This time, it's very different. And this is how I would resell, Riccardo. Pandemics are by nature at a transitionary feature. They come and then they go away. It's a health crisis that you need to deal with that has economic consequences. But it doesn't necessarily change the economic fundaments of the world, but it might change your perception on how to travel, where to travel and how you view the risk of diseases and pandemics and epidemics, et cetera. But that was -- there's been very little panic in the financial markets from a corporate banking perspective this time around. A war in Ukraine is more slow-moving animal and it has definitely more permanent potential consequences for the planet, for the world, for the geopolitical situation, as you see with energy -- energy for the globe and therefore, monetary and fiscal policy. It affects politics, it affects everything. But it's a more slow moving, and it's certainly not a passing phenomena. A war might be a passing phenomena, but the consequences could be permanent for humanity. Therefore, we do see some very small tendencies to a similar pattern, but not this panic all at the same time. And as I pointed to in my presentation, the difference between loan lending this quarter compared to credit exposure is unusually high. That, therefore, must mean that people are using commitments that has previously been undrawn to cover for the consequences of this economic reality we face today. Hence, working capital goes up. I spoke a little bit about this as a positive potential in Q1. Now it came -- it's certainly part of why lending is growing in this quarter because people are using previous commitments, maybe to cater for higher input prices. The classical thing, it now costs 10%, 20%, 30% more to get the material and the services you need to produce your good before you can sell it. And there's a time lag. Working capital goes up and you need to draw your lines, you need to contact your banks. And this is, of course, much more uncertain where this permanently lead. And I think that we continue to see that this is a potential driver in the future, that's slowly but surely, particularly given your German situation where rationing -- rationing of electricity might be a reality later this year in Germany. Of course, there will be a lot of working capital need, enormous, I would say. All these companies need to pay their salaries and their bills, but they might not be able to operate as freely that they have because they need to shut down for periods of time or even evenings, what do I know. On the green presentation or the dark brown that you now call roses, it is very interesting. We have decided for now not to change anything. So on the brown, the green and the future, the 3 indices that we are track. We are all more or less on track, as we said, when we presented them last fall. And the big question is, of course, how to treat natural gas in brown. And just as a reminder, we treat 100% of the gas as a fossil exposure. We make no difference between oil and gas. If it is a fossil-based energy material, we include it. And of course, now everyone wants to say that you shouldn't treat them similarly. But to be prudent for now, we do treat them both as brown. And then we'll see if this needs to -- I mean we are hoping for a taxonomy. We are hoping for a definition of green exposure in banking and brown exposure to be agreed by everybody, and then we will change these metrics so they become comparable or at least add a metric, so it becomes comparable. But from our viewpoint and our part of the world, we still think that gas is not as good as nonfossil-based energy generation. Masih?

Yes. On the SEK 2 billion overlays, no, that does not include a stop of gas to Germany. That will be a clearly more adverse impact on macro. So the SEK 2 billion is based on the current macro outlook. But obviously, that would be good to have if things get worse. On NII, you're absolutely right. There are not -- these are not one-offs. These are short-term in nature. But because people in general see NII as very stable, we just want to mention that there are parts here that are short-term in nature, could easily be replaced by other things that are short-term in nature, but we don't know at this point and especially the fixed income part, and that's why I say SEK 200 million, SEK 300 million, that one could easily stay on the books. We don't know, but it is typically short-term in nature.

Just a quick -- very, very quick follow-up still on overlays. Is it fair to assume that now those SEK 2 billion will be part of the furniture for quite a while?

Can you hear that, please?

The SEK 2 billion or is it fair to assume that they will be there for a while?

Yes, exactly, that you will not be allowed to release or to use it given what's happening. It was supposed to go away. They went away, but they've been replaced and now there were the SEK 2 billion will say again, at least this year for sure, maybe 2023, too, I would imagine. Is that fair to say?

I think it's fair to say that the triggers for the SEK 2 billion being removed are a bit more -- or less tangible than the triggers for the COVID-19 to be removed. That's the way I would say. But I think generally speaking, in principle, these are temporary because you can't have sort of evergreens in terms of overlays, especially in the discussions with the auditors, it's important to have clear triggers for when these type of expert judgments are on the books and then remove them on the books. But yes, you're right, it's difficult -- more difficult to find triggers for this than the COVID-19 overlays.

The next question is from Nick Davey with BNP Paribas.

Nick Davey from BNP Paribas Exane. Three questions, please. The first, briefly, a follow-up on the point about the German gas switch off. So you say it's not covered in your SEK 2 billion. Could you give us any insights from your stress tests with the Bundesbank as to how bad that could be? Second question, listening to your talk on capital, you're saying there are possible enormous working capital needs from company, you're talking about PD migration. Do you think you -- we should all deemphasize buybacks in our thinking for the next few years? And third question on repricing. We focused a lot on mortgages and you're saying the Slide 11, I guess if you did it for corporates, that spread would be quite negative. So would you be more optimistic from here about repricing on mortgages or corporates?

Okay. I'll start. Thank you for the questions. The German Bundesbank, sorry, I mean what Masih said is absolutely correct. We need to do every quarter an assessment with everything we know and we do that bottom-up. If we find that the bottom-up is scaringly, we worried that it's not adequate because other factors can be taken into account such as increased uncertainty, we can add an expert judgment and say that all these companies are particularly difficult, so we add something. They're temporary in nature. When it comes to stress testing, that's the whole plan of SEB's capital, which it is included in the way that we do adverse and severe at first, the Lehman case, and this is part of the ever-going work in the bank. So in that sense, it is 100% catered for. So we would have done this update and said we have adequate capital to now to stomach it. But if it does happen, we know that it's then 100% probability that the economy will be affected. Today, it's not 100% probability. Therefore, that will, of course, change next quarter when we know more. And the working capital need is, of course, a potential outcome that if you do get some shortages on keeping your sales up because you have to shut down from time to time, you need to carry more inventory, et cetera. What was your question around PD migration? If we...

It's more a point generally about capital trend. So it's really the broad observation you're telling us that as the situation deteriorates, your PDs might go up, your risk-weighted assets might go up. The volume picture is quite strong. My question -- yes.

Yes. I don't worry about that, but Masih will now tell you why.

Yes. I mean, in general, I would say that any dividend or buyback for any company is really a sign of weakness to be absolutely honest. It's better to be able to employ all the capital you generate in the business you do. We have a higher return than our cost of capital. And therefore, the optimal situation will be that we don't pay a dividend and do no buybacks because we can reemploy all the capital and continue to grow our business. So if there is a higher working capital need and risk is going up, which typically means that margins are going up, then it will be better for us to just employ that capital and service our customers. It will be better for them. It will be better for our shareholders as well. So sure, I mean, if that happens, then that's good. It's going to create more value than to do share buybacks.

Okay. And mortgage versus corporate repricing?

I can start on that. We spent a lot of time on this call talking about the retail side of Sweden. And I just want to say that if you do look at the NII, which has improved significantly in this quarter, please look at the slide masthead. It's all in LC&FI. So what we haven't talked about is the 50% of the bank that is outside Sweden and the largest division in the bank and the dynamic between M&A and DCM on the books under the trading, et cetera. So I think there's a clear positive opportunity for the first time in a very, very long time to reprice corporate lending, just a fraction of what has happened in the corporate bond market would be a very positive endeavor. We also, also as banks, have experienced a higher cost of funding in the public debt market. So even if we can to do what the bond market do on the loans, we definitely need to cater for increasing the price just because of the fact that it's also been more costly to source the funds. So I think those margins are going to be much more down to what is corporate banking in Europe having to do in order to cater for higher cost of funding for the European banks as well as seeing that the probability to default as it is priced in the public bond market is clearly indicating higher credit spreads. On mortgages, I would almost say it's the opposite. So mortgages is one of the safest asset class you can have, albeit we are at a peak-ish level right now on valuation of property and one can ask is the vintage 2021, '22, the peak vintage of mortgages. But this is a very domestic, highly competitive situation, but all banks to different extents will enjoy or not enjoy a return to positive interest rate environment. And that has very much to do how much deposits you have and what dynamics it has on it. But this is a minor question in my mind. The big one is we also in, but that's certainly the case for the Swedish domestic mortgage bond market and the Swedish deposit taking for retail. And there, I think it is much more like I have said in the past, much more prudent to assume there will be a new equilibrium in 1 or 2 years' time between margins on mortgages with margins on deposits, which is in between the interest rate sensitivity assumption, which is that you don't change any margins anywhere else but enjoy the benefit from deposits. And we have also introduced a positive yield on the savings accounts in Sweden to 50 basis points for 6 months tenure and 25 basis points. So there is something happening on both markets, the deposit market and the mortgage markets. So I guess the answer -- the short one to your question is, it differs a lot and it's a positive for corporate and negative for mortgages.

And sorry, just to pick up on the corporate point because that's sort of what I was probing at your response. So you've been at the forefront of repricing upwards on the mortgage side. Do you think you're there on the corporate side as well? Because what we can see in the data so far is it's been quite a muted response compared to what you've seen in the bond market. So is there anything holding you back other than time?

Yes. We have no pricing power on the corporate side because we are globally exposed to competition. So I cannot have any meaningful impact by ourselves in any market when it comes to the large corporate multicurrency RCFs. They are priced by 10 banks together and it's a much more sticky type of things where the lowest price, the bank is willing to lower the cheapest, often is the price dictator. And then you get an option to participate or not. On the domestic side, in mortgages, it's much more down to the competition here to dictate what it is. So we cannot -- we don't have a price list for corporates like we have for mortgages. So there's no such resemblance. So this is more a macro trend. There is a little bit of bilateral pricing power in the corporate space. That's typically also the domestic SME and mid-corp where you can do similar things, but not when it comes to the large exposures we have, it's a global phenomenon.

Okay. So the 10 other banks are all exposed to the same funding conditions that you are and all watching the same bond market conditions that you are, let's the other 9 are still dragging their feet and being a bit irrational.

Correct. I've been doing this for 25 years. The difference between a 5-year unsecured exposure on a corporate credit, do the 25-year graph between the bond market and the loan market? Loans are always cheaper, more or less; not always, but absolutely 95% of the times. And now the difference is the largest one I've seen in a very, very long time. That means that we are driving up -- banks are much more slowly moving. It also is true on the opposite, by the way, when spreads tighten in the bond market, banks don't lower the price immediately either. So we work with these RCFs, they are typically 5 years long. And that's kind of our cycle in the corporate banking market, while bond market today, it's a 1 day long, they reassess the credit spread every day.

Gentlemen, there are no more questions registered at this time, Mr. Torgeby, back to you for any closing remarks.

No. Thank you very much for this. I think it's a particularly topical time. I wish everyone a good summer. I do need to say one thing that no one asked about, and that was the fees and commission on LC&FI. And I just want to point out that the volume growth in asset under custody was a major thing for us compared to 1 year ago while this has performed relatively stable. So we've gone from SEK 13 trillion to SEK 19 trillion in assets under custody. And I think it's an area we rarely talk about, but I just want to make that point that as we have really changed in the last few years, 5 years, from also being a custodian custody bank. And that's an important focus area in the strategy going forward in combination with AUM and AUC. So thank you, everyone, for today. I wish you all a good summer and hope to see you this fall. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.