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

Good day, and thank you for standing by. Welcome to the SEB Financial Results Q4 2023 Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Johan Torgeby, President and CEO. Please go ahead, sir.

Thank you very much, and welcome to everyone to SEB's full-year results for 2023. As customary, we will refer to the slides that you can find on our website, in the PowerPoint [ Presentation ], for today's presentation named, Financial Results Q4 2023. On our Highlights page, we'd like to first start with a very strong performance in customer satisfaction. This is probably one of our most important areas that we follow in order to make sure we are relevant for our customer base. And it's encouraging to see that we maintained the first position in the customer surveys, both for large corporates and for financial institutions in the broader Nordic area. Secondly, we have an exceptionally strong bank with very robust asset quality and a very solid capital position. And the return on equity in this quarter amounted to 15.2%, in line with our long-term aspirations. We will also today double-click on the cost guidance for 2024, which our CFO will go through in more detail later. But the headline is that we target to be equal to or below SEK 29 billion, reinvesting approximately SEK 1.5 billion extra in 2024. And we have a proposal from our Board of Directors for the AGM when it comes to capital repatriation, and that is a dividend of SEK 11.5 per share divided between an ordinary dividend of SEK 8.5 and a special dividend of SEK 3. And in addition, last night, we also announced the share buyback volumes up until the AGM of SEK 1.75 billion. Turning to Page 3, we'll just have the full-year financials for 2023, amounting to 24% increase in operating income, 10% increase in operating expenses, resulting in a 34% operating profit before expected credit losses and imposed levies and bank taxes. We did have a significantly lower credit -- expected credit loss level during the year, but a significantly higher imposed levies through bank taxes and fees. Earnings per share increase is 44%. On Page 4, we now clearly for the second quarter in a row, can see the muted demand for credits. So looking at the credit portfolio and the lending by corporates, household commercial real estate, I'll just summarize this and say, we're around flattish. It's a sideline movement [ plus/minus ] 1% or 2%. And this is clearly as expected, as now we can see the monetary policy actions biting -- actually making loan demand move [ sidelines ]. Next page. On Page 5 is something we think is very important, and that is to look up. Think about the long-term perspective. 1 year is a very short period of time. And here, in the last 32 years, we, of course, have a guiding principle to generate operating leverage over time, where income increases more than cost in a way that supports our clients with good lending opportunities, good advice and good investment opportunities. We will have a very elevated speed of increase following the rapid increase in rates we've experienced over the last 18 months. And there is, therefore, quite natural that an increase of this magnitude of 40% plus does not repeat itself. It's not a sustainable growth rate. And it does resemble some of the features we saw in the year 2000, where we also had one of these very rapid -- of -- which was then followed by somewhat more of a consolidating P&L over the coming 2 to 3 years. On Page 6, we will just give a incremental perspective to our broader financial contribution. As you may have seen, there is a lot of discussion around the increased profits in the banking sector. And I would just conclude that we do have a 42% increase in operating profit. And this is, of course, not to be misled going to what is called the bank. We had beneficiary owners in the [ tone ] of millions of households through the owners that has provided SEB with the capital that we then redeploy in society. And here we have just listed our 3 largest ones with investor where this dividend and this operating profit belongs to foundations and over 500,000 single investors. We have then pension funds with millions of individuals who is dependent on capital income coming from banks and from companies like SEB. And we ourselves have about 250,000 direct investments from individuals who choose to save and invest some of their capital in the bank. We also, to a similar tone, have increased the resources provided to public finances. Taxes and imposed levies are up 46% year-on-year and amounts to SEK 14.4 billion. And there's also been a discussion about corporate tax and bank tax and risk tax and mortgage tax. And we would just like to highlight that we are now having, including bank tax, risk tax, et cetera, a 26% tax rate. And you also saw an elevated level, that Masih will come back to during this quarter, compared to the 20.6%, which is the Swedish corporate tax rate at the outsets. And lastly, our customers. Deposit beta means that how much of the interest rate increase in society or in the markets was passed on to the deposit takers of your institution. And here, it's an international comparison that I think is quite staggering, that in Sweden, we are a positive outlier in this context from the viewpoint of clients, [ mainly ] passing on 75% of the increase in interest rates compared to the Eurozone average where only 26% was passed on. With that, I'll hand over to Masih to go through the financials in more detail.

Thanks, Johan. I'll start on Slide 8, focusing on the Q4 results. As you can see on the slide, we see a lower operating profit in the quarter compared to the previous quarter. That's mainly driven by a slightly lower income, seasonally higher costs in Q4, but predominantly driven by higher net expected credit losses and a elevated income tax level. I'll talk a bit about 3 of the lines here that we don't have a special slide. I'm going to start with net expected credit losses. As you can see, they are at SEK 664 million in the quarter or 9 basis points and that's clearly higher than the previous quarters most recently. When it comes to the expected credit losses in the quarter, more than half relates to one single counterparty. The actual loss related to this counterparty is less than SEK 50 million. But the reserve we've done is more than SEK 350 million. This is now a company that is going through reconstruction. And if that is successful, it's a likelihood that it will be upgraded. And some of the reserves we've taken, which haven't been realized losses, can be reversed. The underlying asset quality is pretty much unchanged compared to what we've seen the last couple of quarters. Then, on imposed levies. They're at almost SEK 1.1 billion in the quarter. There are going to be -- there will be a few changes in 2024. We expect the resolution fund fee to go up. We expect the bank tax in Sweden to be largely flat. The solidarity contribution in Lithuania will be largely flat on a year-on-year basis. And then there will be a new levy in Latvia related to mortgage lending. All in all, we expect both levies in 2024 to be in line with the Q4 level of 2023 per quarter or maybe slightly below that level. On the income tax expense, we have an effective tax rate of almost 26% in the quarter. There are 4 one-offs in this line in this quarter relating to, for example, a corporate tax that has been introduced in Latvia, retroactively higher corporate tax in Ukraine, and a dividend payment from our Estonian business. Looking forward, we expect the effective corporate tax rate for SEB to stay at around 20%. If I move on to the next slide, net interest income, as you can see, year-on-year, up 42% or around SEK 14 billion. It's not -- already in the footnote that, when it comes to this increase of net interest income, only SEK 800 million or less than 6% is coming from normal Swedish households. The other part is coming from interest rates on our own [ equity ], the corporate business and the Baltic franchise. Quarter-on-quarter, net interest income is largely fast. Note that we do have a one-off here, which is, the customer compensation amounting to [ SEK 162 million ] in the quarter. And we also have a negative FX effect of SEK 113 million. So adjusted for FX in local currencies, net interest income is marginally up. But we did have rate hikes in September, which has had a positive effect this quarter. In the previous quarter, we said that, assuming that lending growth continues to be as muted as it is now and assuming that policy rates are unchanged from current levels, we expect NII to slowly drift downwards. We keep that guidance. If anything, maybe it's going to be a slower drift downwards than we expected last quarter. And that's mainly related to the fact that mortgage margins have improved slightly in the quarter and the fact that we have seen a deceleration of loan to term deposits. These [ loans ] almost stopped in November and December. We don't know whether that's a new trend or not, but that's what happened in the latter parts of Q4. Move on to Slide 10. Net fee and commission income, up 1% year-on-year, helped by FX as well. One should have in mind, quarter-on-quarter, as we typically do, we see a seasonal uptick, mainly driven by advisory fees related to our investment banking business as well as lending fees. What we can see in our business is that the card business continues to be at a good level. And we can see there's a very large difference between how the corporate card franchise is performing compared to private customer cards, where corporate cards have seen a much [ clear ] recovery post the pandemic compared to consumer cards. Moving on to Slide 11, and net financial income. We're reporting a level of SEK 2.4 billion in the quarter. We continue to see healthy activity in our FX business as well as our fixed income business. And we've continued to see a positive effect from the strategic holdings that we have in this quarter, mainly Euroclear. As you can see from the slide, the average for the last 16 quarters is SEK 2.2 billion. Our best guidance going forward is that it'll be around the historical average. We've said that, that's around SEK 2 billion. We note that, that average has gone up slightly in recent quarters. Moving on to Slide 12, and the capitalization of the bank and the capital buffers we hold. So given the proposal from the Board on the dividends and share buybacks, we stand at 440 basis points in Q4. On the share buybacks, just a few words on that. So in Q3, we had a mandate from the Swedish FSA to do share buybacks of SEK 2.5 billion. We executed on SEK 1.25 billion of that during Q4. So from that mandate, we had SEK 1.25 billion left. In January, we received a new mandate to do share buybacks of SEK 2.5 billion. So in total, we have a mandate of SEK 3.75 billion, which has been fully deducted from our common equity Tier 1 capital. And the Board has decided to execute on SEK 1.75 billion of those SEK 3.75 billion now until the AGM. So from the mandates, we have now post the execution of the current -- or the share buyback program that's going to start tomorrow, we will have another SEK 2 billion to do, if the Board decides so. Moving on to Slide 13, a few key ratios. The only one I would like to highlight is customer deposits. As you can see, it's marginally down year-on-year. Here, one should note that there's a fairly large negative FX effect of -- I think, its SEK 63 billion. So underlying, we can see that there's been an increase in deposits. We mainly see that from corporate, whereas from households, we see a marginal decline of deposits year-over-year. With that, we're going to have a few slides on the business plan update, and Johan is going to start.

Thank you, Masih. So on Page 15, and now going forward, we'll talk a little bit about the year that passed and the strategy going forward. And today, the message is, we are going to stay the course, no material or even meaningful change. Then, as a reminder, our 2030 strategy remains intact. And the headlines are, we want to expand and grow our corporate and investment banking business, both where we are and in geographies where we have previously not been as prevalent. Leverage our markets platform. These are the custody [ side ] and how we trade and sales of financial securities, and of course, a continuation in savings and investment focus across the firm together with this formidable long-term structural trend of sustainable finance where we want to play a very active role. We continue to reshape retail banking as we know it, ever becoming more digital, but also established a new private wealth management and family office a few years ago, that is progressing very fine, and use SEBx, new innovation and try to find disruptive technologies in a safe and secure manner on the sidelines in order to be more progressive than otherwise would have been the case. Partnerships. We cannot do everything. We can't be excellent at everything. Therefore, we need to be open and make sure that we build ecosystems, and that we are part of interesting, very beneficial movements and inventions out there in order to provide the best service to our clients and to the firm over time in the future. And of course, house in order, efficiency, cost control, regulatory compliance and using technology in order to become better. On the following page, we've just -- I won't go through all -- some highlights from the year that passed divided into these categories. So we've had a very good product development within savings and investments, where new offerings in thematic funds have come out to a greater extent than in the past. Sustainability linked to financial services has now increased. And the Index is at 123%. And we've reduced the fossil intensity of our loan book, the Carbon Exposure Index by 39% from the reference point end of 2019. And that's in excess of both the NGFS and the IEA's projections and recommendations in order to provide to a sustainable future. We've enhanced our digital functionalities, particularly in C&PC. And it was very encouraging that the Net Promoter Score in our retail bank was now noted in the highest level ever, where we hit around 69 in some of the areas. We've had several new partnerships established during the year. Here, we mentioned a few, PE Accounting, on the insurance side with Insurely, and also increase and enhance the digital process for entrepreneurs to start a new company with Fortnox. Since we closed the books, we've also announced a cooperation with Kivra and an investment in cooperation with Copenhagen Infrastructure Partners in Denmark. On efficiency, I'll just highlight the improved productivity, which is one simple way of measuring how it all results in some type of actionable, observable benefit when you invest as much as we do in the technology and in digital improvements. And that was noted again, just like last year, at a 5% productivity gain measured as number of transactions that we can perform per FTE. Lastly, before I hand over to the financial [ frames ] on Page 17, We'll just give the full picture on the customer satisfaction during the year in all the 8 different categories that are our headlines. And I'll just conclude that it's on a headline level looks very encouraging, although you can never be satisfied. If you do double click on these, there are definitely things that you can improve and you need to work on for the coming year. With that, I'll hand over to Masih again.

Thank you, Johan. And so, looking at Slide 19. So, one of the main mantras in the bank is to future-proof our business and we'll continue to do that during 2024. As Johan mentioned before, we will allow the cost level to increase by up to SEK 1.6 billion during the year. You can see that inflation still is a bit elevated both when it comes to salaries, but especially when it comes to other types of inflation related to, for example, premises and how much we pay vendors, for example, for different tech solutions. So up to SEK 1 billion of the cost increase during 2024 will be driven by inflation. But in addition to that, we are doing large investments. We'll continue to invest in our savings area, mainly within the Private Wealth Management & Family Office division. We'll continue to expand our large corporate business in Austria, Switzerland, Netherlands, and obviously, we'll continue to invest into sustainability. We will also do large investments in future-proofing our infrastructure. This is something all banks need to do. And it's important to do so to stay relevant in the products you already provide your customers with, and we'll do large investments in '24 in our financing systems, in our payment systems and continue to do large investments within cybersecurity and cloud. When it comes to house in order, financial crime prevention, risk and compliance, we'll continue to see a cost increase related to those areas. But the cost increase will be less in 2024 than what we've experienced in the last couple of years, especially relating to financial crime prevention where we now have invested a lot in the last few years and are reaching a higher level, but more sort of plateauing at that level. Moving on to Slide 20. We have marginally updated our financial aspirations for different divisions. This is a way for us to show and explain how we as a group try to reach the 15% return on equity aspiration and how different divisions should contribute to that. You can see that the cost income aspirations for the Baltic division has been lowered, which has led to a marginally lower cost/income ratio aspirations for the group. And the reason for these 2 changes is mainly that we've seen imposed levies being introduced during the year. And to be able to reach our return on equity aspirations, we need to have a lower cost/income ratio to be at that level. Finally, reiterating our group financial targets on Page 21. A dividend payout ratio of around 50%, a capital buffer of 100 to 300 basis points. And again, return on equity compared with peers with an aspiration of being at 15%. And I should also mention that we are at 440 basis points. The first ambition of the bank is always to reinvest as much as possible the capital we have. But when that's not possible, we do pay out dividends and do share buybacks. And the Board still has an ambition to move towards our financial targets in terms of capital buffer by the year -- by the end of this year. With that, I'll stop, and we can open up for Q&A.

[Operator Instructions] We will now go to your first question. And your first question today comes from the line of [indiscernible] from Bank of America.

Just a couple of questions, please. On your comments on the NII outlook, you mentioned that the -- you reiterate your Q3 guidance of a slow drift in NII, even you could see a slower drift than initially expected. But you started saying -- assuming that the volume remain muted and rates will remain where they are. So what would that be if -- obviously, we assume that rate cuts will start to fit through in the next months. Is that still a valid guidance? And if you can comment on the 2 moving parts in terms of volume -- sorry, deposits and lending spreads? And the second question is on the capital return. I mean, it's interesting the move you've done. So clearly here, what we can read between the lines is that you will step up the share buyback and adjust the DPS at the end of the year with [ specials ] to convert towards the -- your buffer. I mean, that implies significant [ special ] if you want to go to the higher end, the 300 basis points by 2024. So is that a good understanding? And secondly -- I mean, I am new to this -- to the region. But when you say 100 to 300 basis points, so you read 200 basis points or pressure is for you guys to stick with the higher end of the range of the CET1? I'll keep it here.

I can start. Thank you, [indiscernible], and then Masih can fit in. Now on the NII, the volume, assuming where we are now and the consensus of sharp drops, we don't guide, but I'll reason with you for a minute. What typically happens now is that, you get the balance sheet. It's a bit movement in the P&L. We have not done that much activity-based P&L as we have balance sheet-based P&L. What typically happens is now that, when rates, if they start going down, that will put the wheels of the economy going and the fee and commission part of the bank, the activity based on part of the bank, which is, of course, very significant in SEB, will start improving and often significantly. It's very difficult to see which one of these will be the stronger force. But that's always more or less how things work out over time. And it's also the purpose of monetary policy to achieve exactly those things. And for the NII -- on the margins, I would say we have extremely compressed margins on several of the loan products, not at least the mortgage book. So there is, of course, always where rates go down, the opposite theme, they have come down very dramatically as rates go up. And I must say we haven't seen a lot of margin increase on corporate lending, which is a little bit surprising. Typically, when credit spreads and economic financial conditions tightened this much, there will be also a spillover into the corporate banking sector. But if you do look over the last 18 months, it's not significant. Hence, there is a lot of protection on the margins on the lending book. On the deposit side, it's, of course, the opposite. If rates start to sharply drop, that's typically where you will have a deterioration of the margins coming from the deposit side. When it comes to step-up, I just conclude the math. As you described it on dividend and what's required to hit 300 basis points. I can just agree with it. We will sit here [ I mean ] 1 year and communicate what is then the appropriate way with all the stops we have every quarter up until then to calibrate any type of capital communication or capital plan. And the 100 to 300 basis points, I think you should just interpret it exactly like it is. In that range there are no kind of legitimate necessities to change anything dramatic. That's a very broad assessment where we think the bank is very well catered for capitalized bank. And of course, things move around with FX and loan demand and things outside our control. So I wouldn't say that you should think anything about that other than that. For now, I'll just remind everyone, why we are here is actually because of the involuntary dividend ban on SEB in COVID years. So that ended up being 800, 900 basis points of a buffer and we're still trying to adjust for those things, which, of course, now in hindsight -- with the benefit of hindsight were not necessary. However, that is, of course, a moving, call it slowly down into the range for a true normalization of the balance sheet.

Yes, I'll just -- if I can add. So on net interest income, there are a lot of static analysis you can do on how policy rate changes can impact NII. To be absolutely honest, we have several of those in-house. But they don't sort of take into account how competition changes. And we've seen that with the rate hikes that it's very difficult to predict how things will move. What I would do, myself, is actually, look at what has happened to the net interest income line, for example, in the last sort of 100 basis points rate hikes we've seen, and just assume that if you see rates being cut by 100 basis points, that the exact same effect will happen reversed. Maybe that's a good sort of base case scenario. But then it's going to be competition in the market on both lending and deposits, that dictates how things will move in reality. On capital return, I mean, I think the only color I can add is that if we decide to continue to do share buybacks in 2025, then, if those decisions are sort of made in conjunction with the Q4 results '24, then, as we've done this quarter, those potential share buybacks will be deducted from the capital base. So when you think about what can the dividend be and a special dividend, be aware that share buybacks in '25 -- if those are sort of decided on. Now we have a long way to go until then. We don't know how '24 will look like yet. But that will be something that also impacts the buffer at the year-end 2024.

We will now go to our next question. And your next question comes from the line of Piers Brown, HSBC. Unfortunately, Mr. Brown is not responding. I will go to the next question. And we will now take your next question. And your next question comes from the line of Jacob Kruse from Autonomous.

So I just had, I guess, a couple of questions. Firstly, on capital. To what extent would you -- should we consider your [ excess ] to be a bit [indiscernible] [ for ] opportunistic or strategic acquisitions over the next 12 months until the next Q4? So how much would that -- sort of optionality filtering to your decision not to bring down the CET1 ratio more aggressively today? And on the capital as well, could you say anything about what you see as the day 1 impact of Basel 4 in early 2025? And then, just on the NII side, what's your thinking around the deposit beta on the way down? Do you think it will be similarly high to what you saw on the way up? Or do you think it's going to be harder to reduce deposit rates than it was to increase deposit rates?

Yes. Thanks, Jacob. I'll start there. When it comes to our capital, as I said before, our first priority is to reinvest as much as possible in our business. We think that we can show that over time, that has created more value for customers and in the end, more value for shareholders. Right now, there is very little organic demand. And we haven't sort of closed the door completely when it comes to acquisitions. We have announced on last year with results, which we hopefully will close later this year. And if we can find something that we believe will create more value for shareholders and customers in the long-term, more than buybacks or dividends, that's definitely a priority of the bank. So yes, we are open to anything that creates more value. When it comes to Basel 4, we are not guiding for a day-1 effect yet, because the regulation is not clear yet. We have experienced from the past that these type of regulation change a lot from the day when they are announced to the day that they have been finalized. So we're going to wait for that finalization before we guide for it. I think it's still sort of clear to say that the effect -- day-1 effect is likely to be negative. But it's not going to be very material, but we'll see what the exact effect will be. NII and deposit betas, yes, as I said before, competition is going to dictate what that's going to be. But I do think that a good base case scenario is that the deposit beta will be the same on its way down as it's been on its way up. Now, it's been the highest in Sweden and Europe, on its way up. So I guess it's -- more likely it's going to be high in Sweden, on its way down as well. But again, it's all about competition.

We will now go to the next question. And your next question comes from the line of Rickard Strand from Nordea.

Regarding the NII sensitivity next year when -- or later this year when the rates are expected to peak, are there any material fixed assets on your loan books that have variable funding and that you're still repricing, that could limit the impact during the year when rates start to decline?

No. I mean, the main part of the fixed assets is really within the mortgage book. But as you probably know, most customers choose the 3-month variable mortgage. So we don't see much of that. We do have sort of longer duration in the liquidity book in treasury that typically sees a valuation increase when rates go down, but that's typically a net financial income item. So that could be an offset if rates are cut. But in terms of the NII offset, there isn't that much of that.

And then on the Swedish resolution fund fee, do you have any updates there what you expect the fees to be here now in '24, and also when the fund will be filled?

Yes. So in '24, the fee is based on the size of the balance sheet at the end of 2022. And our balance sheet grew a bit in '22 versus '21. So we think the resolution fund fee will be slightly higher in '24 compared to '23, but that's going to be offset, if you look at the Q4 imposed levies, by other things. So we expect the quarterly imposed levies in '24 to be at or slightly below the Q4 level. If you do projections on the fund itself, it should be filled during 2024. And if nothing changes with regulation, then post 2024, then the contributions to the fund should only be minimal to the extent that they expect deposits to grow. And so we're hoping that to happen. And then that will mean that the imposed levies related to resolution funds fee will be significantly lower from 2025.

We'll now go to the next question. And your next question comes from the line of Bettina Thurner from BNP Paribas.

I had a question on deposits, firstly. So you mentioned that deposit mix shift is a bit flattening out, but you're not sure whether that's a sustainable trend yet. But it would definitely be one headwind abating on the deposit side. So when it comes to other deposit headwinds that you've seen throughout the year, like increased [ amortization ] on the loan side or maybe in the future, deposit flows to competitors. What are you seeing at the moment? Are deposit headwinds in general a bit lower now than what you've seen before? And then, maybe a second question just on loan growth in general, which is very subdued at the moment. Do you think, in terms of what you're seeing in the market, is it that households still have an appetite for credit in general? Or do you think that this experience of higher rates might have triggered some sort of sustainable deleveraging cycle for Swedish household, and that it will be lower for longer, even as rates are being cut?

I can start there. On the deposit side, I mean, we think the macro driver is really quantitative tightening. And we've expected the deposit base in total to shrink. That has been the case as well in 2023. And we've done a lot of long-term funding in 2023 in anticipation of that to offset that potential effect. So to the extent that we continue to have quantitative tightening, you should see a decline of the total deposit base in Sweden in general. In terms of competition, I mean, it's -- I guess it's likely to expect that if there are expectations of rate cuts, it's going to be sort of less competition to move around your deposits, because term deposits, for example, will not pay as much, because it's going to be embedded in the interest rate on term deposits that rates are expected to be cut. So I guess, from that perspective, it is likely that you see less competition going forward. On loan growth, it's difficult to say what's going to happen. I think it's a lot about the interest rate level. It's all according to plan that loan demand is low. That's why interest rates have been hiked. Whether it's going to be a structural change in the market, I don't see any reasons why that would be. I think what we're seeing now is really completely related to the fact that the cost for lending has gone up by 3 or 4 times. And then, obviously, then the math for that product that's become so much more expensive is lower. And as soon as rates are cut, I'm pretty sure that at some point, you're going to see more demand for lending. So I don't know -- Johan. But we don't see any reasons why that would be sort of structurally different now.

No, I have nothing really to add. I'd just point out that the leverage on households is probably on average around 50% LTV. So it's a function also where house prices go and point out that household lending and demand, therefore, is a pretty small part of our bank. So the corporate side is more important.

We will now take your next question. And your next question comes from the line of Sofie Peterzens from JPMorgan.

My first question would be on the Stage 3 exposure. Those increased almost 50% or SEK 3 billion in the quarter. Could you maybe just talk about what actually drove the increase in Stage 3 exposures, the nature of those exposures? And then, my second question would be on net interest income growth in the Baltics. Given that net interest income there has always threefold in the past few years, should we expect kind of NII default in a similar magnitude when rates come down? And is it that you're over a 6-month rate that we should be tracking? And then, my last question would be just on financial crime. There had been quite a lot of stories in the local press and radio in Sweden over the past couple of months. Do you think SEK 200 million is enough to spend for getting the house in order, considering that, at least based on press articles, it seems to be quite a big systemic issue in Sweden?

Yes, I can start with the first on the financial crime [indiscernible]. So when it comes to the Stage 3 exposures, you should -- I mean, have in mind that we are starting from a very low level. So whatever happens to that sort of exposure, it goes up by a lot in percent. But it's one exposure really that drives the whole increase in Stage 3. It's the same exposure where we've taken about half of the expected credit loss reserves in the quarter. That exposure is large in itself. But the actual loss -- sort of loss magnitude of exposure is much lower than the total exposure, because a lot of exposure is guaranteed by the export -- an export guarantee. So that's the reason. It's actually the same thing for Stage 2. You can see there's a fairly large increase in Stage 2, again, starting from a low base. And that's a different exposure. It's a company that's been downgraded from the lowest level of investment grade to the highest level of noninvestment grade. And therefore, it's moved into Stage 2 and that stands for 85% of the increase in Stage 2. So it's basically [ one ] and [ one ] leading to these increases that seem high in percentages. But again, we're starting from a very low base. On net interest income, when we started to have rate hikes, in the Baltics as well, most of the deposits were on transaction accounts. And now you can see that about 25% of the deposits are in term deposits where we pay a fairly high interest rate. So I would assume that when rates are cut, the magnitude of the decline of NII will be less on its way down than on its way up because a lot of the deposits now do pay interest. That probably will be adjusted downwards when rates are cut. So I don't think you should expect the same magnitude of NII drop. And then, on financial crime, Johan?

Yes. No, I mean, this is a symptomatic situation for any society that we have the fact of criminality. And financial crime always has a particular role, of course, when it comes to financial markets and banks. I wouldn't read anything into the 2 or 3 news articles and draw such strong conclusions of systemically changing your perception of criminality in society. And we have -- of course, the SEK 200 million shouldn't be misinterpreted. It's just an incremental spend rather than thinking about the thousands of people and billions we are spending on this. So, in our opinion, it's the best calibrated investment in order to do what we need to do in the future, which is a significant increase in spend and investment and hiring around this area over the last, I would say, 5, 6 years. This is a very good challenge, and most of the articles by the way -- so this is open 3, 4, 5 years old data points that now it's finally coming to [ courts ] where we have acted. And of course, this is now something that is very topical. That said, we do have an overriding issue with increased criminality in Sweden. So, therefore, we will all have to pull our weight here.

And maybe if I -- just maybe one final question. In terms of inorganic growth opportunities, if you were to divide something else, what would you be looking for? Would it be more in the [indiscernible] banking side? Or would it be more on the corporate side? Or is something more similar to AirPlus, or you're very open?

I would say we're very open. It's not something -- we don't have a -- I worked many years. Sometimes you would have like a wishlist and you have a very clear target. That's not us. We have an organic plan today presented to you with [ cost ] -- all based on organic changes. But as you can imagine, every week I will get a proposal, Masih will get proposals all-around, of things that moves around, anything from small fintech, minority investments to large scales and the track record over the last decade is, of course, very, very few things ever gets pursued. AirPlus is an example that defies or proves that we can do things. But there's nothing -- It's more -- think about the plan. So we have the corporate investment bank, the wealth and asset management, retail digitization. So it's going to be in line with the strategic direction of the bank. That's at least the first filter we put on.

We will now take the next question. And your next question comes from the line of Namita Samtani from Barclays.

I've got 3, please. Firstly, if the Riksbank increased the pace of its bond sales, what further impact do you think this will have on your balance sheet or your P&L? Or is it just a straightforward deposit declining impact? Secondly, just wondering how you can expect lending margins to expand in large corporates, given -- I think there's quite a lot of competition from the likes of Nordea and Danske and also the international banks. And lastly, could you just give us a steer on what the 2022 cost base was there [ plus ]?

I can start. I mean the Riksbank bond sales or QT for me -- maybe Masih has more data. It's very difficult to translate into a P&L effect. I would argue, it's part of withdrawing liquidity from the system. So any tight monetary policy stance involves increase of monetary rates, and potentially then that you will have the QE. So both these -- And as all money in the financial system -- in the end, every day ends up in the accumulated volume of deposit accounts. It is only to be expected that deposit volumes as such will be drawn, go down. It's going to be very different if it's in a corporate or a household depending on what kind of financial situation one has. And that in itself has an effect on how much business one do in deposit taking or not, given margins and volumes, et cetera, will move around. On lending margins, I mean, there is stiff competition for sure. But it's also a matter of cost of capital. It's a matter of risk appetite. So, as I mentioned, we could have seen more margin expansion on corporate. If you were to look at that -- they call it the most elevated point in time, the last year, when you saw high-yield spreads widen out, investment-grade spreads widen out quite significantly. Over [ time ] -- you can see that it typically takes 18 months, 2 years for the banking sector to kind of get affected by it, because we have such a different profit function to solve than a institutional bond investor. That means that volatility is much, much lower. So whatever we see today, that will be affecting us in the next year or 2. And don't forget, the average maturity on the loan book is 3 years. So regardless, it always takes 3 years on average to put a new price, which you are currently observing the market through the loan book. So it's moving around. And of course, now we will have, hopefully, rate decreases, increasing the activity level. And with the activity level increasing, hopefully, in 2025 or the latter half of '24, you will see increased loan demand from corporates, very closely correlated with the investment appetite from our clients.

Yes. I can just add on AirPlus. I think you can call IR to get the revenues for 2022. I'll just say that it's not very relevant when it comes to the future outlook as 2022 was still impacted by the pandemic. We did say that -- when we announced the acquisition that we expect this to be EPS accretive after 1 year. So initially, you're going to have some cost related to the actual closing. But post that usual phase, this transaction will be accretive for the bank.

We will now take the next question. And your next question comes from the line of Markus Sandgren from Kepler.

I was just thinking, on the cost side, should we see the investments of around SEK 1 billion as a temporary item that will disappear in 2025? And then, secondly, on your long-term return on equity aspirations, you're now between 15% and 16%, depending on if you adjust for the tax. And then, we should see shrinking NIMs going forward and also some cost inflation. How do you see that pan out?

Yes, I can start. On the investments for 2024, I think you should see further investments in SEB as something absolutely permanent. We will continue to invest in the bank forever, basically. Whether that means that nominal cost go up or not every year, it's not the same thing. It depends on what kind of efficiencies we find, but that we'll invest in our business. It's something you can be absolutely certain about. On the return on equity, I mean, we ended 2023 at 17.9% for the full year. It is an exceptional year. We have higher net financial income than what we think we'll have in the long-term and we have low expected losses. But we do also hold a lot of excess capital during the year. So, if you just look at the operating environment we are in, which we think is much better and will continue to be better going forward than we -- what we had in -- when we had negative interest rates or rates at 0. But we were offering the bank at 13.5%, 14%. We see absolutely no reason why we shouldn't be able to operate the bank at the long-term aspiration of 15% in the environment we see for the foreseeable future.

We will now take your next question. And your next question comes from the line of Riccardo Rovere from Mediobanca.

[ 2 ] -- 3,, if I may. First of all, on NII. Masih, when you had started the call, stated that if rate -- and please correct me if I'm going wrong -- NII to [ reach ] down slowly in 2024 if rates stay flat. Are you referring to period end rate or other rates? Because there could be 2024, a big, big difference between those 2 numbers. Average rates can be flat actually in 2024 versus '23, even if rates are deeply cut by the end of 2024. The second question I have is on deposit beta. You showed a 75% in Sweden. If loan growth stays fairly weak, and I understand that, why should competition be so powerful to not allow you -- Sweden to take back the 75% or a good part of the 75% deposit beta? And the other couple of questions I have is -- correct me, if I'm wrong. You stated that if the Board decides to do so, you still have a couple of billions for additional buyback on top of the SEK 1.75 billion that you have announced yesterday. Does it mean that you are technically ramping up the quarterly buyback run rate to SEK 1.75 billion versus SEK 1.25 billion in '23? And then, I have a question on EPS. Consensus was going for 9-point-something ordinary EPS, 9.2%, maybe if I remember correctly. Your ordinary EPS is a bit lower than that. But you are adding SEK 3 of extraordinary EPS. The SEK 3 of extraordinary EPS is really extraordinary, or it's just a way to [ one ] [ off ] the dividend payout, which is something that could be correctly withdrawn, because it's flagged -- branded as extraordinary, but in the meantime, let's say the ordinary one is a bit lower than projection [ making ] by the market?

I think I'll start with the dividend. So, we don't -- we cannot start with the ordinary. And as is very clear to most of us, the coming year or 2 feels unusually difficult to predict will be higher. So when you think about it at a 50% payout ratio and you do -- around 50% and you put a filter on that we really would like to maintain or increase progressively the dividend in the long-term. So that's mainly the reason why the SEK 8.50 is there. So we can now communicate it. We're really going to make every effort in the world to keep this and have a progressive dividend over time. The SEK 3 is then more given the dividend bank from COVID time and the natural adjustment period that we are in to reach the 300 basis points, that's put in that context. Masih, do you want to add?

No, that's great. So I'll take the other 2 questions. So, when I'm talking about -- assuming unchanged rates, I'm talking about policy rates in the countries where we operate, so mainly the Swedish policy rate and the European policy rate, so just assuming those are unchanged. I know that expectations right now is that they won't be unchanged. They will be cut. But just 3 months ago, there was this expectation that they will be higher for longer. And -- So that's the guidance we can give. And I guess -- I mean, we are generally against the view that banks can dictate exactly what they do with deposit rates. It's not us dictating. It's a very competitive market. And the market dictates what happens to deposit rates. We do conclude that deposit betas in Sweden have been higher. And it's absolutely possible and may be the base case that they are higher also on its way down. But we don't take that for granted, because it's all depending on the competition. On the share buybacks, you are right. There is another SEK 2 billion in the current mandate that we have. And whether the Board decides to execute on that when we have fully concluded the SEK 1.75 billion, that's the decision for the Board probably in conjunction with the Q1 results. But obviously, as we've seen in the last couple of years, we'll have sort of asked for new mandates, whether -- if the Board wants that and can continue to do the share buybacks also post that period. So, I mean there isn't that much to say about it, other than we have decided -- the Board has decided to execute on SEK 1.75 billion. There is SEK 2 billion more left in the current mandate.

[Operator Instructions] We will now go to your next question. And your next question comes from the line of Piers Brown from HSBC.

Yes, hope you're able me hear me this time?

We can.

Just a question on -- well, actually, 2 questions on deposits. So the first one is, you made a comment about the pace of switching having dramatically slowed this quarter, switching from transaction to term. I presume -- just to clarify that, I presume you mean that includes corporate deposits, whereas I would assume that the household deposit switching remains in place. Just if you could clarify that? And then, the second question is really a question on the treasury deposits, and this is going actually to Slide 48 in the investor presentation where you give the very helpful breakdown of the various deposit categories. And I guess, the big move this quarter is obviously this SEK 200-odd billion drop in treasury deposits, which, I guess, is just cash flow management in the year-end by corporates. But if you could comment on that, I mean, what are the values of these deposits to SEB, because it just seems an incredibly volatile number? And I presume, therefore, the margin on these is wafer thin to more or less 0. So what is the value of that? And sort of tied into that, I'm just a little bit confused about the NII progression in large corporate and financial institutions, because that shows the effect of this deposit reduction in treasury, but you've actually posted a quarter-on-quarter increase in NII in that division. So it just seems -- the trend there just seems a bit confusing, given what you said also on corporate loan spreads being still under pressure. So -- sorry, there's a few questions bundled in there, but, hopefully, you can sort of work through them.

Right. Starting with the deposits. So the pace of moving deposits to term deposits, I was mainly referring to households that, that pace has slowed. On the corporate side, it has slowed as well, but it's never been as dramatic as it has been on -- from the household side in the last few quarters. So I would say that both paces have slowed, but it's -- the comment was mainly referring to households. On treasury deposits, there is no value from a liquidity standpoint. When it comes to treasury deposits, they are very short term in nature. And you don't have any real value from them in, for example, the net stable funding ratio. A lot of what we do as a bank is service to our customers. So when it comes to treasury deposits, these are customers that can place money with us as we have access to central banks and we can place the money there. This is a service we do with very low margins, but we do it because we want to have good customer relationships. At the year-end, because of the levies we pay, this service is too costly for us to do. And therefore, we don't do it over year-end, and then we start to do it again. So there is low value other than customer satisfaction, which is, obviously, the most important value we have. And the treasury deposits, as I said, very low margins and no impact on the LC&FI, net interest income. This is reported in treasury. So there's no connection between the 2.

And can I just add, Piers. I'll just take this from another question. Maybe I miscommunicated on corporate loan spreads. They are not under pressure. My point is actually the opposite. They are very stable and they are very constructive. And we have, up until now increased them. My point was, why didn't we increase them more as a marketplace. So it's a positive second derivative. They're certainly not under pressure. And I want to also -- therefore, there's very little downside compared to otherwise would have been the case when the market changes, just so that's clear.

Could I just follow up on the LC&I, so just tying on to that, but I mean, you posted a quarter-on-quarter increase in LC&I, NII despite the fact that deposit balances are down substantially. And you're saying corporate loan margin is still under pressure. So what's driven the quarter-on-quarter increase there, please?

So again -- so Johan did not say that corporate margins are under pressure. Corporate margins have not increased to the extent we thought they might in the environment we've had. The deposit effect is something that happens on the 30th or 31st of December. So it doesn't say anything about the average deposits over the full quarter, which is what decides the net interest income for that division. And the treasury deposits are not included in LC&FI's deposits. But there are deposits from financial institutions that also go down at year-end. But that's 1 or 2 days of the quarter. The remaining 90 days they are on the balance sheet and do not impact the net interest income.

We have one further question. And your next question comes from the line of Magnus Andersson from ABG SC.

Just -- first of all, a short follow-up on capital. You've been quite extensive there already. But you talked about this SEK 5 billion to SEK 10 billion range in conjunction with the Q4 '21 report. So I was just wondering whether we should still see SEK 10 billion asset cap for your buybacks or not? And secondly, also, if you're getting any potential further extra dividends, if it's necessarily the case that Q4 '24 is the first potential point in time? That's my first question.

If I start and then -- I think it's fair to say that we reassessed the cap, if you want to address it like this. I probably would say that we would expect it today to be SEK 15 billion rather than the SEK 10 billion. This is not something -- a [ measure ] we've tested. So take it for what it is. But you always need to have some type of notion about how much can you do in the market without disrupting it or having any -- it needs to be very responsible. But now we've been into this some time. And we clearly think that the SEK 10 billion is probably not the limitation anymore.

Yes. On your other question, I don't think you should expect us to call for an Extraordinary Annual General Meeting to decide on a dividend. I mean, this is again up to the Board. But I think the main sort of message we want to send is that we will move towards the 100 to 300 basis points. And exactly how that's going to work out, we don't know yet ourselves. But I guess in this quarter you've seen some sort of path towards that with the increased share buybacks and the extraordinary dividend.

And secondly, just -- I understand there'd be a lot of questions about the NII and potential trajectory and how things will fare going into '24, given that rates most likely are coming down. And Johan, you talked about net commission income being a potential offset partly with higher activity. But I was just wondering -- also Masih had talked about, and we've seen trading income consistently having been above your sort of SEK 2 billion quarterly guidance. I was just wondering whether you are positioned in any way, for example, in treasury for falling interest rates so that we could get an offset also on the trading income line when rate starts to fall?

Yes. When it comes to treasury positioning, to be honest, we're a bit more dependent on slightly longer rates than the policy rate. So 1, 2-year rates are more important because the liquidity book is -- typically has that duration. On those kinds of rates, we saw a massive decline during Q4 and that was unexpected for us that would happen so quickly and so fast. But, obviously, we keep discussing this and whether it's worthwhile putting up some kind of a hedge of some sort. You can do this organically. For example, if you see more demand for fixed rate mortgages, you can decide that the bank not to hedge against those fixed rate mortgages and allow that to be an open position and then benefit from rates coming down. But you can also take your own position. This is something we discussed. And I won't sort of comment exactly how we are positioned now. I would just say that it's going to be more dependent on slightly longer rates than the policy rates.

And I just want to add for the record, philosophy in SEB is not to have prop trading and any significant size in the market business and in treasury. So these are all for the benefit of the bank and its customers. And obviously, we do have some significant abilities, because we do warehouse a lot of financial securities. But there's a position taking and betting it's always going to be done in as wise manner as possible and very, very conservatively.

Thank you. I will now hand the call back to Johan for closing remarks.

And I will thank everyone, and we're going to -- several of us meet in the coming days. So thank you for joining and see you soon.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.