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

Good morning. This is the conference operator. Welcome and thank you for joining the SEB's Third Quarter 2023 Results 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 good morning and welcome to our Q3 result call. As customary, you can follow the slide show that we will refer to. You can find it on sebgroup.com under Investor Relations. Starting with some highlights. We had a return on equity during the third quarter of 19.8% on a capital Tier 1 ratio of 18.9% resulting in 430 basis points of capital buffer, above the minimum requirement. We saw a significantly improved availability and customer satisfaction among our retail customers in Sweden and that was not only during Q3, but has been evolving during the year. Credit quality remains exceptional and very robust. And we will continue with the share buyback program volume of SEK 1.25 billion per quarter. Flicking to the next page, I thought it would be interesting to share a few data points we received during this quarter. As some of you have heard me say before, banking is all about its employees. The human capital that we deploy is of utmost important and the most highly correlated employee survey index to performance is engagement. But starting with the customers, as you may remember, we did have some issues during 2022 when it came to operational statistics around the effectiveness of banking. This was post COVID and had many potential explanations. We now have seen a marked improvement where the queue time for the telephone bank has got more than 30 minutes down to less than 3 minutes both for corporate and private customers. In this quarter, we also had a new recent all-time high in our NPS. It's of course the Net Promoter Score that we measure on actual clients in SEB after interaction with us and we've now established the level in the mid-70s, which is typically regarded to be excellent. We also have gotten the SKI survey where they specifically ask about the telephone service and if you got help with the errand you were looking for the bank to solve. And here we came out among all banks in Sweden in the third quarter ranked #1 with an acceptance score of replying yes of 84%. We just recently did our annual survey around engagement among employees which is, as I said, highly correlated to high performance institutions. And we also here noted a new all-time high in the bank of a score of 82, which takes us to the highest decile of the financial industry included in this very vast survey. And 2 more awards was mandated by Prospera; 1 was one we haven't had for some time, which is of course the most appreciated equity house in the Nordic as well as the Nordic External Asset Manager of the Year. On the next page, we have a slightly more mixed picture. These are our classic surveys in society about banks where we saw a 1 notch downtick on corporates in SKI and flat in corporates in the Finansbarometern. It was also flat around private individuals among larger banks. However, we did see a clear positive trend in private wealth management and the private banking score improved from seventh place 3 years ago to now being #2. On the next page, it's just a very long time series of the performance of SEB and I would argue that we are fighting short termism as we speak. There's been quite a lot of very short-term perspectives being introduced in the finance industry, in the banking sector and it is of course resulting in looking very much on this particular year and an elevated level or a higher-than-average level of profitability and income. But I do like to think about these things in multiple years and you can just see a bank in play, which is very, very well diversified. You can look here in this graph on income and profit in the worst time we have experienced in the early '90s, almost not traceable in these numbers. Russia crisis of '98, the IT bubble burst 2001, the global financial crisis, et cetera. And if you do have a multiyear perspective, you can see a very robust institution that has the swings and roundabouts and it tends to even out over time. On the next page, we've double clicked on, what I call, the derisking of the banking sector and in particular around SEB the last 10, 11 years. I think most of us know that we have added a significant amount of capital in the banking industry and so in SEB, we have stronger liquidity measures and better liquidity availability than ever. We have had very much a tightening of underwriting standards and we have had asset quality improvements during this time. But here are 3 different ways to also think about derisking swings and roundabouts and the diversification of an institution. The first one is to look at our internationally exposed business, large corporates and financial institution, and see how the geographical development and diversification has changed over time. And here, we can see a clear and very strong picture that the dependence on concentration risk of being Swedish has been reduced and the international part of SEB has slowly, but surely increased over time. Another way is to look at the credit quality of the nonretail bank book. That means that this is not household lending or SMEs, but mid corporates and large corporates, et cetera. And here you can also see that the asset quality improvement can also be traced just by looking at the credit rating distribution in the portfolio and we currently have the vast majority in investment-grade exposure. There is also a diversification measure HHI, where a lower number is better where you actually look at noncorrelation amongst different areas and here we've done this analysis on sector; manufacturing, finance, insurance, real estate and households. And here, we can also see that we have very little concentration risk or single dependence compared to the average Nordic peer. And this is of course something when the market is not moving in 1 direction for all segments, something that is hugely valuable and that means that also in the next phase of whatever the market or the macro environment might bring that we stand strong and able to conduct our business in any macroeconomic circumstance. Now I will hand over for the financial result of Q3 to Masih.

Thank you, Johan. We're on Slide #8 looking at the financial summary year-to-date. We've seen an income growth of 31% very much driven by the strong growth of net interest income up 49%. The growth rates year-on-year are coming down, but still at high levels. Expenses were up by 11% so far this year compared to last year. We've seen a clear reduction of expected credit losses of being only 1 basis point compared to 7 basis points last year. And the biggest growth we have in the P&L year-on-year is on imposed levies due to increased risk tax in Sweden, but also the introduction of what's called the solidarity contribution in Lithuania. When it comes to the year-to-date numbers, one should note that on the income side, we have a positive effect from weakening Swedish krona of about SEK 1.5 billion and a negative effect on the cost line of about SEK 400 million. So overall, the weakening Swedish krona is positive for our financial results. We're also reiterating our cost guidance for 2023 and with the current FX rates, that guidance is in a bracket or interval of SEK 27.1 billion to SEK 27.6 billion. If we move on to the next slide, Slide #9, and look at the Q3 numbers isolated. We continue to see an improvement of net interest income although the quarter-on-quarter growth rates are coming down quite clearly and stand at 3% in this quarter. Fee and commission income is seasonally lower in Q3, which is typically the case, but they're slightly higher than the same quarter last year. We continue to have a good level of net financial income, same level as Q2 of SEK 2.6 billion. And one should note that we have a couple of one-off items in this quarter reported on the other income line. One of them, which is about SEK 0.5 billion, is related to a buyback of a covered bond that we have bought back where we have a net gain and then we've done a liquidation of an old SEB subsidiary, which has led to about SEK 100 million of a net gain. On expected credit losses, you can see that we have a small net reversal. We've had a small positive effect from the macro updates we've done during the quarter. We have a couple of new reserves for a couple of counterparts, but we have a couple of releases as well and we've reduced the portfolio overlay by about SEK 100 million, which now stands at SEK 2.5 billion at this point. Move on to next slide, Slide #10, and look at the operating leverage. The same slide as Johan showed, but at a sort of slightly shorter time span of 11 years. The conclusion here is that we've been able to double the income of the bank in the last decade or so at the same time as costs are up by about 20% and combined, this has led to a quadrupling of our profit before expected credit losses and imposed levies. On the next slide, you can see the development of the credit portfolio. The overall picture is that credit demand is muted across the board, both when you look at households as well as corporates, and obviously this is the whole intention of the current monetary policy so it seems like it's working. There's a slight FX adjusted decline of the corporate lending book, but at the same time we've seen some new off-balance sheet exposure during the quarter. So we have a slight increase of the FX adjusted credit portfolio. Swedish mortgages continue to be flat. We do continue to see an elevated level of amortizations and the number of transactions in the market are lower than historically. And just to note on commercial real estate, the FX adjusted growth rate is slightly negative. So despite the fact that there is a general trend of firm -- bank financing, that is not enough to offset the general lower demand when it comes to credit from CRE. Move to the next slide and update our view of the real estate market. Here is a slide we've showed a couple of times before. To the left, you have a typical balance sheet structure or capital structure of the listed real estate companies we have, all of them listed. You can see that in general these companies have about a 50% equity on the liability side of their balance sheet, which is financing the investment portfolios of properties that they have. Below the equity, you have about a 30% buffer of unsecured bonds before you would start to hit what we typically do, which is secured bank lending. So generally, you need to see a very sharp deterioration of collateral values before it impacts the financing we do to these companies. On the right hand side of this slide, it's about the same portfolio. Here we're only looking at the companies that have a BBB rated or lower rating and what levers they have pulled over last year and then we've updated this with the levers they have pulled during Q3. As you can see, we've had 1 or 2 more companies that have suspended dividend or have done bank to bond refinancing. But generally, there's been fairly small changes. I would say about this portfolio that many have pulled levers, they're in a slightly wait-and-see mode. And at this point, many of them feel that they've pulled the levers they need to pull to be in a sufficiently good place and I guess awaiting the future macro development and the potential changes in policy rates. Move on to the next slide and deep dive on net interest income. So as I mentioned before, up 49% year-on-year and only up 3% quarter-on-quarter. Here we continue to see a positive contribution from our Baltic business and this is offset on a different line in post levies as we're paying more in Lithuania on bank taxes there. The contribution from Swedish households continue to be pretty flat. So we've seen a continued margin pressure on mortgages, but that's been offset by improved margins on deposits. What's worth noting when it comes to mortgages is that despite the fact that margins are very low and still lower than the back book margins, in Q3 we had slightly higher margins on new mortgages that were issued compared to Q2. Whether this is a new trend or not, it's difficult to say, but at least we've seen a positive development there in Q3. Forward-looking on NII and we understand there is a lot of sort of uncertainty on how this will develop. I think the best guidance we can give is that if policy rates are unchanged at current levels, the most likely scenario is a slow downward drift of the net interest income line. Moving to the next slide looking at fee and commission income. Holding up well, flat year-on-year. In Q3 it's slightly down, mainly a seasonal pattern. We see less activity in investment banking related fees, but that's been offset by slightly higher asset management related fees and card fees are pretty much unchanged helped by fairly good consumption and high inflation levels. Move on to net financial income on Slide 15. Same level as Q2, SEK 2.6 billion. We've seen a negative effect of XVA quarter-on-quarter of about SEK 400 million, but that's been offset by a fairly large re-evaluation of our stake in 1 of our strategic holdings, in this case Euroclear. We continue to believe that the NFI line should be around the historical level of about SEK 2 billion per quarter and there is no sort of reason to change that. So move on to the next slide, look at the capitalization of the bank. The capital buffer has come down by 20 basis points in Q3 standing at 430 basis points. We've seen a fairly large negative effect of regulatory changes. This is related to the Pillar 2 add-on we had in our last supervisory assessment as well as the move of the commercial risk weight floor from Pillar 2 to Pillar 1. This has been almost fully offset by the profit generation post dividend that we had in the quarter of 60 basis points. And worth noting that we have deducted the full SEK 2.5 billion we had in approval from the Swedish FSA when it comes to share buybacks despite the fact that we're only executing on half of that during Q4. On the next slide, we have some few key ratios that we typically show. I think worth noting here is that we have probably one of the highest net stable funding ratios we've had at 114%, up quite significantly from Q4 last year. We've done a large amount of wholesale funding year-to-date more than SEK 180 billion as we are preparing for potentially more uncertain times in 2024 as we know that positive tightening will continue and that could sort of shore up liquidity or make it more difficult. So we are prepared for that by doing more wholesale funding this year. Finally, on the next slide, we just reiterate the financial targets we have. Around 50% dividend payout ratio of EPS, a long-term capital buffer of 100 basis points to 300 basis points. We are reiterating that we should be within this interval again by year-end next year and that we want to have a return on equity that is competitive with peers. And obviously now we're above our long-term aspiration of being at 15%. And just finally, just note that when it comes to share repurchases, we do say this will be the main form of capital distribution when we are in excess of the 300 basis points when it comes to capital buffer. It doesn't necessarily mean it's going to be the only form of capital distribution. With that, I'll hand it back to Johan so he can talk about an upcoming event.

Thank you, Masih. That's the last slide of the prepared remarks. And this is just a placeholder and a strong invitation to all of you to participate in our annual event, which is called Transition in Numbers, on the progress of the bank in the last 12 months within the area of sustainability and transition. We will also update the key metrics that we are sharing, the brown and the green as well as financed emissions in this event. So a hearty welcome to all of you. We will have several external speakers as well of note. Operator, we'll stop there and take Q&A, please.

[Operator Instructions] The first question is from Rickard Strand with Nordea. The next question is from Nicolas McBeath with DNB.

Can you hear me?

We can hear you well.

Perfect. So first, a question on profitability. So almost 19% ROE in the quarter and you've been delivering around 18% or higher ROE for a few quarters now. So could you please elaborate on how you think about the sustainability in this kind of profitability? What main drivers do you see impacting your ROE for the next couple of years?

Yes, I'll start. First, the process we typically have in the bank is that we evaluate fees at the end of the year and this goes both for the return on equity target or aspiration of 15%, but also by the divisional cost income and more specified return on equity. We do this through a triangulation one could say where we look internally what do we think we can achieve with the current plan. We then look what is required compared to peers that we need to be a very competitive investment compared to others in our sector. And then the third is what is required in the overall market in order to attract equity capital in a stable way returning a well-balanced risk-adjusted return. We will do that again. As you are implicitly alluding to, this is of course a different environment and we've now had several quarters where we've been above the long-term aspiration. And generally speaking, we'll do the work now in Q4 around what we believe for the future where we do have more benign circumstances going from the strongly negative interest rate environment to the more positive. It doesn't mean that we will change it. It depends on where we land. But definitely we will have a review on all these things as cost income is also on a group level below. I think the difficult thing we will have is to try to have a steady stable state after these very large movements that we are currently adapting to. So we are still at the end of the beginning. So we are in the beginning of changing the environment quite dramatically from the last decade and now we are kind of getting to the peak level of short-term interest rates macroeconomists predict and then we will have a slow moving adjustment during 2024. So I'll say on strategy, Nicolas, it's very clear in the business plan that by design we are trying to enhance return on equity regardless of where we start through an asset-light focus. So we do have several measures in the strategy, which are pointing to less capital-intensive areas that we want to expand in those in order to permanently improve the return on capital employed and equity. Masih, anything else?

Okay. And then also a question on capital. So how confident are you that you will indeed be within your target range by end of next year and what are you waiting for before you increase the capital repatriation to shareholders? And just related to that as well, even if you increase the buyback, it looks like it would be difficult to calibrate down excess capital just using share buybacks given your strong capital generation. So should we expect most of the excess capital and earnings you generate to be shifted out by extra dividends rather than buybacks? And now I'm speaking about dividend above your ordinary 50% payout. And if so, could you say anything on the potential timing of extra dividend? Is it likely for Q4 this year or more likely that we should wait until the end of next year before we see larger extra dividend if that's your ambition?

Yes, I can start there, Nicolas. I guess I mean when it comes to how we will get to the 100 basis points to 300 basis points, it depends on your forecast of the capital generation in the next 5 quarters. We obviously as always had a Board meeting yesterday and the Board reiterated that target to be within that interval. Exactly how we get there? As I said before, we have share buyback as the main form of capital distribution when we're above 300 basis points, but it doesn't mean that's the only lever that the Board can pull to get there. Whether it's going to be shares buybacks, extra dividend, a combination of the both or whether we will grow our business more; which doesn't seem to be the base case right now that there's a strong deterioration of the economy and some of the capital is consumed that way. It's just difficult to say. What we know at this point is that this is what we've decided right now to do another SEK 1.25 billion share buybacks. We reiterate the target for year-end next year and we're committed to that target and exactly how we get there, it's difficult to say exactly what the timing of that will be. One way I would look at it that when we set this target, we had a buffer of 590 basis points and we're just over half way of the time frame, the 3 years, we said that we will be within the 300 basis points and we've come down to 430 basis points. So from one perspective, we've pretty much done exactly what we said that we should. The decrease of the buffer starting of 590 basis points down to 300 basis points has gone at the pace it should go at if you would have assumed a linear decline of the buffer down to 300 basis points.

Okay. But what are you waiting for at this point? Why you're not increasing the share buyback base given the kind of rates of how much capital you accumulate basically every quarter now? Is it something you're seeing, some kind of uncertainty that is making you a bit more cautious in this quarter and the next as it looks?

I don't think we're seeing anything, but what everyone else can see in the sense that there is a lot of uncertainty. We have geopolitical uncertainty and that is trickling down to a lot of economic uncertainty. We have recessions or threats of recessions in many of the jurisdictions where we operate. We do have a very strong starting point in terms of asset quality and profitability going into that. But at the same time, it is obviously a fairly uncertain environment out there. We don't have a crystal ball, I don't think we can see what this will lead to more than anyone else can. But obviously we have a more uncertain environment. We don't have anything in terms of knowing about something that will happen that is negative that you don't know about. So there is nothing like that, that we have information you don't have in terms of negative things that could happen, but we have the same information when it comes to the general macroeconomic uncertainty.

So just a follow up. If the uncertainty prevails for another year or so, do you think there is the risk that this kind of capital target that you've set could be pushed back another year?

It's a very hypothetical question. This is the target we set almost 2 years ago and that is what's been reiterated at this point. So we will keep on that and we have had a history of setting targets and achieving the targets we've set. So to the extent that we have given out guidance and promises, I think the track record we have shows that we have lived up to those.

The next question is from Namita Samtani with Barclays.

I've got 3 questions, please. Firstly, why has the regulator given you a Pillar 2 add-on of 100 basis points for your IRB models when you've previously said in the past you don't expect the review to have much impact? And secondly, a big picture question. If rates were to get cut, there are other European banks which could sustain or even grow their net interest income trends they're seeing right now given the hedges they have in place. I guess that would be a bit more tricky for SEB given the lack of hedge. So do investors have to accept that revenues for SEB will probably decline if rates get cut or do you see offsets in other parts of the revenue stream? And finally, just in the report, you talk about continuing to see some asset quality deterioration in the quarter. Could you tell us which sectors or countries you're seeing that in?

Yes, I can start. So on the Pillar 2 add-on, that is not based on an assessment at what level the new models will be calibrated. The add-on is based on the fact that the models have not been approved yet by the Swedish FSA, which is the case for all Swedish banks. I would say that this is a combination of us not working fast enough with the models, but also on their side not having had the resources to look at the models at the pace that was needed for them to be approved at the point that they need to be approved. So as long as the new models have not been approved, this is the add-on we have. It's a capital add-on to create an incentive for us to get the models approved as soon as possible. So I think there's a signaling value in that, that the FSA believes that a buffer of 100 basis points or add-on of 100 basis points creates strong enough incentive for us to get the model approved, i.e., the new models should lead to a capital consumption increase of clearly less than 100 basis points from their assessment. So that's the way of looking at it. So as soon as the models are approved, we will have a new calibrated model and this add-on should be removed at that point. On potential rate cuts, yes, I guess it's correct that you have some banks that have deposit hedges that we don't have. I think you need to look at what does that cost in terms of capital consumption related to what you're hedging yourself against. And with the legislation we have up here in Sweden, we have very sort of strict capital add-ons when it comes to interest rate risk that makes these kind of hedges not profitable in the long term. Saying that, we do have other natural hedges in our business. So if rates are cut, they will probably have a positive effect on our fixed income business. It could potentially have a positive effect on our FX business as rates could be cut at different paces in different jurisdictions leading to FX moves, which would benefit our business as we are helping customers with hedging their FX exposure. And obviously it could have positive effects on our fee generating business when it comes to asset management business, when it comes to investment banking. So I think we do have other natural hedges. We were a pretty profitable bank in the 0 interest rate environment. We're more profitable now. But obviously not all the cylinders of the bank are operating at full speed now when rates have moved and volatility has been introduced. So I think in a rate cutting scenario, we have other parts of the bank that could perform better than they are now. On asset quality deterioration, I would say there is a general deteriorating asset quality, but it's more in sectors that have more leverage or are closer to the end consumer. So consumer discretionaries, builders or financial -- leverage finance is an area where you have more deterioration. I should say though in Q3 in terms of volumes, we had more upgrades than downgrades in the balance sheet. In terms of the number of companies that were downgraded, we had more downgrades than upgrades. So if there is any sort of signal value in that is that we as a bank have more exposure to companies that aren't that negatively impacted by the current macro decline.

The next question is from Sofie Peterzens with JPMorgan.

Sofie from JPMorgan. Just a follow-up on the share buyback. So this year I guess it's quite clear that the share buyback will be SEK 5 billion. But is it fair to assume that it could be up to SEK 10 billion next year or would you even consider like SEK 15 billion, SEK 20 billion share buyback next year? Like if you could maybe just talk a little bit what the maximum and minimum share buyback amounts are that you kind of consider and what the main drivers here are? And then my second question would be around the commercial real estate book. I see that the ICR stress that you do on 7% interest rates are only for 2023. But considering that we are in November, next year it seems that maybe '23 is a little bit short dated. Could you also give the ICR stress numbers assuming you would do the same stress for debt that matures in '24 and '25? And then just a final question on the windfall and banking taxes in the Baltics. How should we think about the tax in Latvia and the potential impact? And I guess the banking tax in Sweden is unlikely to be included in the 2024 budget that was proposed by the opposition, but do you think this is something that the current government could potentially consider next year or in future?

Okay. So maybe I can start on the buyback volumes and, please, I'm not guiding, but I'll reason with you what the natural limitations are. And it's very important when you engage in a larger scale share buyback that you can hand on heart and say that you're not affecting the price and that has to do of course with the liquidity and the volume being traded. I would today make a guess. We haven't done this yet, but I would make a guess and that is that SEK 10 billion would not be any problem whatsoever, SEK 15 billion might. So I have no more guidance to give than that, but there is some natural limitations to it. Masih, you want to do the ICR?

Yes. I don't think we have any numbers on '24 and '25. I guess it depends on your expectations of interest rates and how they will continue to move during '24 and '25, whether they will come down. So we don't have any numbers on that. So what we've disclosed I think is for 2023. I'll just add on the share buybacks. We have typically a mandate from our AGM to do up to 10% of the outstanding shares, but some of that is used for other sort of hedging programs when it comes to long-term intensive programs. So that's sort of the absolute upper limit. On the windfall taxes, there is a discussion in Latvia. That's correct. We don't know how that's going to end up. One of the proposals is to half the mortgage rates in the country, which obviously feels a bit strange because they're in the ECB and ECB wants to raise rates so that inflation is curbed, but we don't know how those discussions will end. Obviously if that happens, that would have a negative financial effect on us, but it will also have other more severe effects, I would say, when it comes to the climate for doing business in that country. So obviously we are following all of these discussions both in Latvia and other parts of Europe and trying to make our voices heard when it comes to how we think this will be negative for growth in the long term and the stability of the financial industry.

And what about Sweden? Do you think the probability of a windfall tax is 0 in Sweden even though the opposition proposed that?

No. I mean the budget has been presented and it's going to be supported by the parliament I think in November and there is no proposal in that budget from the current government, which has a majority in the parliament, to introduce a windfall tax or increase the current bank tax. So I think there was a proposal from one of the -- or a couple of the opposition parties, but they're not in power. So that doesn't impact anything at this point.

Okay. That's clear. And you don't think a windfall tax could be something that the Swedish government considers like 1 year down the line?

It's difficult for us to speculate in that. We can only sort of confirm that there is no windfall tax in the budget that was presented, which is the one that will be in place for 2024.

Okay. And actually, if I may, just 1 final question. Foreclosed or forbearances, did you see any increase in forbearances this quarter?

No, we haven't.

The next question is from Alex Demetriou with Jefferies.

Just more of a theoretical question. So we've seen changes in the savings rate following changes in the Riksbank rate. So you gave previous guidance about level of where interest rates have been charged in the transaction accounts. Are you able to comment on either the historical spread between saving rates and the Riksbank rates? And are you likely to see any changes in savings rates not triggered by a change in the Riksbank rate?

Yes, I can take that. Historically, it depends on how far back you go. But if you go back to just before the financial crisis, which is the last time we had policy rates at current levels, so typically we saw back then that banks introduced a positive rate on transaction accounts approximately when the policy rate hit 3.5%, 3.75%, which is very similar to what happened this time as banks here typically introduced a positive rate of 25 basis points when the policy rate was increased to 3.75%. So it seems to be very similar. On other saving accounts, I would say generally right now the interest rates or the yield of that is fairly high compared to what the policy rate is if you compare that to the history. Whether the savings rate could be increased even if policy rates are unchanged, that's obviously possible. It depends on competition. We don't see that that's going to happen right now, but it depends on competition. If there's more competition for deposits and we want to make sure that we have a competitive offering, that could potentially happen, but we've seen very little of that historically.

And then just a follow-up question. What are you seeing in terms of mortgage margins at the moment? Do you still see them quite compressed? How do we kind of think about those going forward and when are they going to, in your view, kind of normalize again?

Yes. I mean as I said before, we've seen an improvement of new mortgages -- margins on new mortgages during Q3 versus Q2. It's difficult to say whether that's a new trend or not. Margins are at extremely low levels close to 0, but at least they were slightly higher in Q3 versus Q2. We can see that in Q3, there's been slightly better activity in the market. You saw a fairly good amount of new sort of houses coming up in the market and apartments during Q3 and we've seen a fairly sort of good level of transactions compared to Q2. So there is potentially a demand effect here. But I think the most interesting part here is the supply effect. You've seen new entrants in the mortgage market in the 0 or negative yield environment where you've seen these new entrants having a viable business model in that environment and that business model is not viable anymore to the same extent when we have positive rates. So there are a few smaller mortgage providers that are clearly struggling in this more normalized environment and maybe that's helping the supply side and therefore, margins won't go down any further from the current levels. That's just more sort of a speculation.

The next question is from Riccardo Rovere with Mediobanca.

3 questions, if I may. First of all, I would like to know if you can comment a little bit more on the contribution of the liquidity fund in treasury department which came, if I understand it correctly, SEK 500 million negative in this quarter. It was positive Q1 and Q2. The second question I have is on the overlay. If I remember correctly, if I understood it correctly, you have used SEK 100 million or so; now you're left with SEK 2.5 billion, which is still a sizable amount. What we should do with that? And the third question I have is again on capital. Correct me if I'm wrong. In this quarter, you have -- your RWA got better to SEK 4 billion because of commercial real estate. You deduct SEK 5 billion of -- sorry, SEK 2.5 billion of buybacks. SEK 1.25 billion that you have announced, another SEK 1.25 billion that you have not even started but not even yet announced. You don't take into account the profits that you will make in Q4 so you upfront everything and you take nothing on the positive side, which is like saying that you do anything you can to bring the number down. So reality is that the common equity Tier 1 ratio is probably above 19%, which is exactly where it was before the CRE risk weight. So the question is with a buyback of SEK 1.25 billion per quarter, which heralds at best 15 basis points of capital per quarter so nothing, how can this tool be preferable to a cash dividend considering that you need to get AGM approval, Swedish FSA approval while on the DPS, you just need -- it's much less complicated to bring up the payout ratio? How can it be that instrument so more, let's say, the preferred one also considering the stock at 1.3x, 1.4x, 1.5x the tangible equity depending on the day?

Riccardo, that was an interesting question. So starting with the liquidity buffer in treasury, I don't recognize the numbers you mentioned. There is no SEK 0.5 billion negative effect in Q3 that I know of. So I don't know where you got those numbers. The liquidity portfolio in treasury has some credit risk in it, but very small amounts that generally the yield on that portfolio sort of should over time go up with the fact that the new securities invested in that portfolio will be high yielding. There is a negative effect on maybe the P&L. That's driven by the internal transfer pricing, which means typically that treasury has charged the division less for the lending activity. So you see an offsetting effect in the divisions when you see a negative effect in treasury, maybe you're referring to that change during the quarter. On the share buybacks and dividends, I mean the only thing we can say is just to reiterate the target we have for the full year next year or end of next year to be within the interval, which one of the sort of 2, share buybacks and dividends that are preferable. Again I mean it's a balance, a combination because that's what we have in our targets to do a combination. It is possible that if share buyback standalone are not sufficient to take us down to that interval, then you would have to do other things. An extra dividend is possible, but there could be other effects as well. You could have a deteriorating macro environment, you could have much stronger lending growth because you have customers that need help with liquidity, I mean hypothetically you could consume the capital in other ways, acquisitions. We are doing AirPlus, which we are closing next year. That's going to have a negative effect of just over 40 basis points. So there are other ways of using the capital. But surely, I mean the main sort of levers to start with are share buybacks and dividends and exactly what combination will be used to get to the 300 basis points, we don't know yet, but the promise is to get to 300 basis points.

Okay. Masih, and the overlays? How do you think about it?

It's correct. We're at SEK 2.5 billion and we have total reserves of SEK 7.7 billion. So we think we are well reserved going into a potentially more uncertain environment. What we did this quarter is to remove or reduce one of the overlays by SEK 100 million. So typically how that works is that we have put on an overlay sometime in the past based on a certain uncertainty, a certain scenario that could happen. We now removed or reduced that overlay by SEK 100 million because the scenario we had used with that overlay the SEK 100 million is not really viable anymore. So to the extent that we have argued for the SEK 2.5 billion to be added as overlays, if the justification of that changes over the course of the next quarter or next year or 2 years, then that overlay would have to be reversed. So that's how it works. We justify it by looking at a certain uncertainty; if that uncertainty goes away, then the overlay goes away as well.

Okay. If I may follow up on second because this is somehow linked to the capital repatriation. Reality is that -- I mean the situation is deteriorating, so very deteriorating. I mean or wrong the market is concerned about CRE in Sweden, Sweden right or wrong is supposed to maybe enter into a recession in '23. So all that stuff should be somehow captured by your internal models in expected losses one way or the other. And you have also -- but if that is the case, in any case it's translating in 0 losses and you have this SEK 2.5 billion. So this SEK 2.5 billion is actually capital is another 30 basis point of capital or so. So why should -- does it mean that your risk cost in '24 and maybe even in '25 will stay at very low levels unless the SEK 2.5 billion overlay is a capital buffer that stays there forever?

We have no intention to having portfolio overlays forever. We've done benchmarks with other European banks in terms of the amount of overlay we have as a share of the balance sheet. We are pretty much sort of in the middle of the pack so we don't think we stand out in any way. This is obviously something that was introduced post or in conjunction with the pandemic when the general perception was that the models couldn't fully capture the uncertainty you had. And I guess this is something that will need to be discussed with policymakers and regulators to what extent do the models capture the risks and uncertainties you see because we have felt that this has been prudent to do and we are keeping ahead of it, but obviously have good discussions with the auditors on how these overlays should change over time. But it's not a permanent overlay we intend to have forever.

The next question is from Magnus Andersson with ABG.

Just 2 very short ones on capital. First of all, the way you see it, is the below 300 basis point management buffer target cut in stone or will it be up for negotiation in Q4 in some kind of annual target review that the Board does? And secondly, just when did you apply for the current share buyback approval?

Yes, I can start. Set in stone, I mean it's difficult to say. I mean if we have, let's say, a pandemic in Q3 2024, is it then still set in stone? It's very hypothetical. The only thing we can do is to just say well, do we still have this target or not? And we still have this target and it was reiterated in the committees we had with the Board and in the Board meeting yesterday. So that's the only thing we can confirm at this point. When it comes to the current share buyback, you have typically a 4-month notice period with the FSA. So 4 months before we get the approval and we got the approval a few weeks ago. We apply for it. So that's how it works.

Okay. And could there be an element in here of return on equity being I mean good enough, high enough also on the current capital position so that actually managing the capital base is less important now than it used -- than it was when you introduced the target in Q4 '21?

Well, I'd say absolutely. If you are profitable enough with the capital buffers you have and you feel less pressure to completely optimize your capitalization especially when you have a fairly uncertain macro environment. So the combination of the uncertainty in the macro environment, us being a profitable enough bank helps with having more flexibility on how you adjust the capital buffer to the long-term levels you want to be at.

Okay. And just secondly, on cost to follow-up on Namita's question where you elaborated on the income side and what the offsetting factors could be if rates would fall and you get pressure on NII. I mean in relation to that, what flexibility do you have on the cost side if income growth would slow significantly in '24? We see for example that headcount continues to increase and have done so for several quarters now in a row for Q4 '21 I think.

Yes, that's correct. The headcount did increase in Q3 as well, but I think it was only 64 people. So clearly less than what we've seen in previous quarters. So there's been a clear slowdown there. We typically try to operate the bank looking at the long-term things we want to develop. There are a few levers to the extent that you have less activity in some parts of the bank, you obviously could reduce headcount in those areas. Those are typically very sort of activity related areas. Investment banking as an example is an area where you typically adjust the headcount you have or adjust the capacity you have to the sort of prevailing environment. We typically as a bank are much less volatile in adjusting our headcount than sort of pure U.S. investment banks. So we're much more stable in that sense. But there is at least some flexibility in there. But it depends on what kind of headwinds you have incoming, let's say, '24. But typically we are investing for the very long term. We have a strategic direction for 2030 so the main focus is actually on building on our capabilities to fulfill the targets we've set for that year rather than 2024.

The next question is a follow-up from Riccardo Rovere with Mediobanca.

Very, very quick one. In the report, you say that the fact that you had bought back a covered bond portfolio is going to have a negative impact on NII going forward. Is it possible to have a rough idea of what could be the impact if it's material or not?

Yes, I can take that. It's actually mathematically the exact same number because if you buy the bond back at $0.95 on the dollar, you make 5% so that's [ 500 ]. If you refinance that at the same time, you will just have it in the new spread out over the maturity. So I would probably think 3 to 5 years or something like that.

It's 6 years.

6 years, good. 6 years. You divide that [ 500 ] by 6, that's the negative impact you didn't have before.

The next question is from Rickard Strand with Nordea. Mr. Strand, we cannot hear you.

Can you hear me now?

We can.

So first follow-up question on buybacks. Given that you announced a SEK 1.25 billion program yesterday and then you do a SEK 2.5 billion deduction, should that imply that the run rate will be the same into Q1 '24? And then a second question on capital repatriation is that the ongoing tax case in Germany that you have currently not taken any provision for. Just want to hear how that affects the capital planning, if you think that could play a role here in the planning and the 300 basis point target for end of next year or do you think that, that will not impact the planning for next year so to say?

Yes. When it comes to your first question on the share buyback. Yes, I think it's sort of reasonable to think that Q1 will be another quarter with the same pace of share buybacks as that is the approval we have. Since the notice period to the FSA is 4 months, it will be difficult for us to apply for a new program above the SEK 2.5 billion and be able to execute on that in Q1. So I think the base case scenario should be that we execute on SEK 1.25 billion in Q4 and potentially if the Board then approves that, to execute on SEK 1.25 billion also in Q1. That's the approval we have. On your second question on the German tax case. What we said in our annual report, we've updated that and sometimes in the quarter report is that we haven't provisioned obviously for the tax risk in Germany and we have the intention to appeal that with both the import system and that process could take anywhere between 5 and 7 years. So we don't see that as a potential risk in the very short term or maybe even in the medium term. It's something that could potentially have a negative effect longer down the line.

Do you think that it still would be unregarded?

Well, I think everything is regarded. So when you do an assessment of the capitalization, you need everything you know about and things you are uncertain about would be included in the assessment you do. As we discussed before, obviously the return on equity we have at this point is also included in that assessment. We do want to run an efficient balance sheet in the long term. But in the short term, you feel less pressure when you have the levels of profitability we have today. So all these sort of different uncertainties and information we have is regarded in the planning we do.

And then a follow-up or a question on, Masih, your comment previously if I heard it correctly that if we see rates being still at the current level, we should expect that NII starts to gradually decline from the current run rate. If you could elaborate a little bit on the main drivers there and what do you think will cause this decline from the current level?

Yes, I'll do that. I mean there are a few caveats there you need to have in place. So the first one is that lending growth is very muted so if the balance sheet is not growing, that's one of the caveats. The second is, as you mentioned, policy rates being unchanged. We know at this point that there is a continuous trend with customers adapting to the higher interest rate. So we've seen flows from lower yielding saving accounts to high yielding saving accounts. That should continue for a few new quarters. So potentially if you keep everything else equal so no lending growth, no policy rate changes; the only impact you have on NII is this sort of continuous adaptation to the rate environment, money moving from low yielding saving accounts to high yielding saving accounts. And then that should have a negative effect on net interest income and therefore, there should be a slow drift downwards. That's how we reason around it. It's very uncertain I should say where NII will go from here, could be higher and it could be lower in Q4, it's difficult to say. But in the sort of more medium term next few quarters, it is possible or maybe likely that the only effect on NII is this continuous move from certain saving accounts to others.

One on the same topic. Given the sort of quantitative tightening that's currently happenings and which is then taking down deposit volumes that then in combination with potential repricing of your current loan book, what is the net effect of those 2 impacts having on your NII?

Yes, difficult to say. I mean one should keep in mind that we have done a significant amount of wholesale funding already this year. Had we not done that, let's say we've kept our net level fund ratio stable at the level it was that when we went into this year, then obviously NII would already be at clearly higher levels than it is. So we already had a negative effect of already adjusting to a quantitative tightening world by issuing more wholesale funding. So whether that's going to forward-looking have even more negative effect or not, it's difficult to say. But we have clearly used some of the NII strength by already adapting to the new environment.

Gentlemen, Mr. Torgeby, there are no more questions registered at this time.

Okay. Thank you very much. Then we'll conclude the call there. And I hope to meet you all in the near future. Thank you very much.

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