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

Good day, and thank you for standing by. Welcome to the SEB Q2 results 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 good morning, everyone for the second quarter results from SEB. And as always, you can follow the slides that we are referring to on our website. Starting with the highlights for the second quarter. We saw improved business momentum in several areas of the bank, including positive net flows in asset management that was also broad-based across divisions. We clearly saw a higher activity level within investment bank and also signs of improving credit demand, and I'll come back to this with some data points in a minute. Return on equity improved to 17.6%, and our capital buffer was remained at a solid level at 430 basis points over the regulatory minimum requirement. And we have, together with the Board, decided to increase the quarterly share buyback program now to SEK 2.5 billion in the next period, resulting in an annual pace of SEK 10 billion per annum. Flicking to the next page, just to give a few data points on the improved business momentum. So first on the net flows in asset management after some time of muted numbers. We clearly have seen a gradual improvement with a very strong Q2. This has been predominantly driven by Private Wealth Management & Family Offices, but it's also broad-based where CMPC, retail funds, et cetera, all experienced a positive development. Hopefully, and I'd say, hopefully, this is a sign of the efforts that we have put in over the last couple of years and in order to improve this very strategically important area for the bank. The investment bank has, of course, enjoyed a little bit of uptick because of expectations of falling interest rates and a fairly muted couple of years in terms of strategic and transformational transaction amongst our client base. This quarter, we noted a recovery from very low volumes last year, resulting in a 44% uptick in operating income for the investment bank. Pipeline remains strong and continues to build. However, as always, very difficult to predict how this and when this will convert into real business. On the lending side, there has been some positive signs. First, on mortgages and particularly with mortgage commitments that are up 12% year-on-year in the second quarter and, of course, positively driven by recovery of economic activity and also a quite dramatic shift over the last 4, 5 months in terms of house price expectations amongst the population. Also on the corporate side, particularly on SME and mid-corp both in the Baltics and in the -- in Sweden, there has been a marginal shift to more positive lending volumes. However, this has not been recorded for the large corp portfolio yet. Flicking to the next page, not too much to say, but looking at the second quarter, this is all about leading indicators and early signs of a different activity level that I've been talking about. But in the second quarter, all in all, we saw a sideline movement on lending and credit portfolio exposure during this quarter. And just as a final reminder, all these signs are, of course, very early stage. It's still very fragile. Uncertainty is still around. But at least the hypothesis of NII having some headwind, and that should come from lower rates, which also means higher activity in the economy, which should benefit to the [ commission ] line. We talked about this in the last quarter. It seems to still be intact, albeit early days. With that, I would like to hand over to Masih.

Thank you, Johan, and good morning, everyone. So on Slide 6, we look at the year-to-date numbers. And as you can see on this slide, income is up by almost SEK 2 billion year-to-date compared to the first half of last year and with expenses up just over SEK 1 billion. This means that the profit before expected credit losses and imposed levies up by 3%. And with continued very low expected losses and some increase in imposed levies, the operating profit was up 2% so far this year. But as the income tax expense was elevated in Q1, the net profit is marginally down. Return on equity is 17.3% so far this year and expected credit loss is at 1 basis point. If we move to the next slide, Slide #7 and look at the Q2 numbers. You can see that income is marginally down, but it is the fifth quarter in a row where we record income of about SEK 20 billion. Net interest income comes down. I will come back to that later on. Just another several comments here on net expected credit losses. As you can see, very low levels of SEK 44 million. As always, we have a few sort of new reserves for some exposures, as we always do. But this quarter, that has been offset by macro updates by our economists, leading to a more positive outlook on the macro in the next 12 months, which has led to some reserve releases as well as some reduction of the portfolio overlays in the quarter. At the same time, portfolio overlay still stand at a healthy SEK 2 billion going forward. And if the continued positive development of macro still stands, then you should see a continued gradual reduction of the portfolio overlays. However, it's difficult to say the timing and magnitude of those potential releases. On imposed levies, it did peak in Q1, and it's coming down now, and it should continue to come down in the coming quarters. And we expect imposed levies to be just below SEK 2 billion in total, the second half of 2024. On Slide 8, you can see the operating leverage slide. As you can see, so far this year, income is marginally up compared to 2023 on average on a quarterly level and with expenses marginally up as well. The profit before credit losses and imposed levels is largely flat. However, obviously, in the very long term, we've seen very good development here. Move to Slide 9 and look at net interest income, so up 1% first half of this year compared to first half of last year. But it's down marginally in Q2 versus Q1. We've seen some positive FX effects as the Swedish krona on average in the quarter was weaker compared to especially the euro, and we've seen some tailwinds on the funding side. At the same time, mainly because of the rate cuts in May in Sweden, we've seen some margin pressure on deposit margins, especially within the Corporate & Private Customers division and continued margin pressure on the mortgage side, which quarter-on-quarter has led to slightly lower mortgage margins. In the other divisions, LC&FI and the Baltics, the net interest income is largely flat. We see some positive effects in the Baltics coming from FX, and there is a one-off there that is offset by a negative effect in treasury. So together, that's pretty much neutral. We've said previously that net interest income should slowly drift downwards assuming no rate cuts, and that's been based on the fact that we've seen poor volume support and migration to savings accounts with higher yields. We now see that we do see some volume support now as we see some lending growth, especially some deposit growth, and we see no further migration to savings accounts with high yields at this point. So had we not had any rate cuts, that slow drift downwards would probably not happen going forward. But obviously, with expectation of rate cuts, there will be pressure on net interest income in the coming quarters. Let's move to Slide #10 and look at the net fee and commission income, which is up 7% year-to-date. Here in the quarter, we see positive developments across the board, mainly coming from asset management. We've seen a value increase of SEK 36 billion in the quarter when it comes to asset under management. But more importantly, we've seen SEK 63 billion of inflows. And as Johan said before, most of this is coming from Private Wealth Management & Family Offices, but we also see positive inflows within C&PC as well as the Baltics, and we can see that the monthly savings within C&PC are now increasing for the first time in 2 years. We do see a positive development within advisory fees, mainly related to investment banking as well as lending fees and payment and card fees continue to move in a positive direction. So all in all, a good development when it comes to fee and commission income. Move to Slide #11 and look at the net financial income development. We recorded an NFI number of SEK 2.7 billion in the quarter. We've seen very healthy activity in the underlying business, especially within LC&FI and especially within fixed income, but we do see solid momentum within FX and commodities as well. We've seen a more negative valuation effect on this slide this quarter compared to previous quarters, and that is mainly related to the developments in June with the elections in France leading to some spread widening, and this had a negative effect on the XVA as well as the liquidity portfolio in treasury. As you can see now, with this quarter, the average level for the last 4 years is SEK 2.4 billion per quarter, and this continues to be the best guidance we can give when it comes to this slide going forward. So the average over the last couple of -- the last 4 years. So move to Slide 12 and look at the capital development. So the capital buffer is up 10 basis points this quarter compared to Q1. We've continued to see good profit generation, adding 51 basis points after reserving half of the profit for dividend. We've deducted SEK 5 billion from the capital base because that's the level of the mandate we have from the FSA to do share buybacks for despite the fact that we're executing on half of that during Q3. And then we have some positive effects coming from FX. So all in all, capital levels are pretty stable despite the fact that we've deducted SEK 5 billion for share buybacks. And then this quarter, we have a couple of more thematic slides on equity and capital. I'm going to start on Slide 13, looking at the pension scheme surplus we have seen improved over the last few years. This is part of the equity base of the bank. It's the development when it comes to the pension scheme assets minus liabilities is reported under other comprehensive income. As you can see, mainly 2021, we saw a very positive development here as the values on the asset side increased. And as interest rates went up, the market value of the liabilities came down significantly, leading to a large increase in the surplus we report here. Today, we have about SEK 30 billion of the equity base that is within the surplus within the pension scheme, which on a reported level means that return on equity is much lower compared to in a case where we wouldn't have this surplus. Most of the surplus is not included in the Common Equity Tier 1 capital. About 2/3 is included in that. So at this point in time, we have a large surplus here and assuming that equity values continue to be stable or go up and interest rates stay where they are, this surplus will stay where it is. Over time, we are able to make compensations from the pension scheme into the parent bank. We can do that up to about SEK 3 billion on an annual basis. And if we do that, it means that the CET1 ratio of the bank will improve by an equal amount, so up to SEK 3 billion. And then obviously, if that is distributed to shareholders, it means that over time, that will have a positive effect on the return on equity. So we just wanted to highlight that there is maybe, to some extent, hidden value in the bank with this big surplus we have in the pension scheme that over time would lead to a stronger capital generation for the bank and improved -- improvement of the return on equity. And then if we move to Slide 14, a bit more focus on the capital. Obviously, as you know, we report a strong CET1 ratio of 19% in the quarter, which stood at 19.1% at year-end. This CET1 ratio is calculated based on the requirements we have in Sweden when it comes to risk weight floors and other types of requirements we have been used to working with. Here, we are trying to explain how the CET1 ratio would have looked had we've been on the same average regulation as an average European bank. So if you remove, for example, the risk weight floor on commercial real estate, on residential real estate and on mortgages, then that CET1 ratio will be 5 percentage points higher. And then more importantly, had we had the same level of conservatism as an average European bank when it comes to calculating our probability of default ratios in our IRB models, then you would see an additional improvement of 600 basis points when it comes to our CET1 ratio. And a bit more focused on that sort of conservatism in the IRB model. So on the right-hand side of the slide, you can see our probability of default ratios for different intervals and comparing that to the actual losses for those exposures over the last 5 years. For example, if you look at the interval 0 -- till 0.15% in terms of PD, we have an average PD ratio for that interval, that is 6x the observed default we've had over the last 5 years, whereas for the other Swedish banks on average and for European banks, that is actually -- the observed defaults are actually higher than the PD ratios they use. And if you look at this slide in totality, you can see that on average, we have been very conservative in calibrating the input variables in our IRB models. And based on that, if you move to the next slide. Here, we are trying to show you the total effect of the regulatory changes we can foresee for the next, let's say, 12 to 24 months. On the 1st of January 2025, we will have the introduction of Basel IV where we estimate a day 1 effect of minus -- around minus 50 basis points. This is mainly due to the fact that we will move into a non-risk-based model for operational risk compared to the risk-based model we use today, which will have a negative effect. Then at some point in time, we will have updated IRB models that will have been approved by the FSA. And given what we've calibrated in those models and given what you saw on the previous slide with the conservatism we have today in our models, we expect the net effect of these model approvals to be around 0. Today, we have a capital add-on in Pillar 2 as these models haven't been approved yet. And obviously, when they are approved, this capital add-on of around 100 basis points will be removed. And then post 2025, there will be other implementation of Basel IV, including FRTB, if that comes into force that we think will be neutral to marginally negative. So if you take all of these changes, we can foresee in totality, we'd expect it to be largely neutral. Obviously, there are some uncertainties here, both when it comes to updated IRB models as well as the further implementation of Basel IV, especially related to the Fundamental Review of the Trading Book. But nevertheless, this is the best estimate we can do today in terms of the regulatory effects on capital in the next couple of years. Final slide, Slide 16, or second final slide. Just a few key ratios. We've seen a good deposit development in the bank, especially in Q2. Some of that is seasonality. But it seems to be an underlying better development when it comes to deposits, especially for nonfinancial corporates. We have stable liquidity ratios with a net stable funding ratio at 112%. We've done about 2/3 or 70% of the funding needs for the full year already in the first half of the year. And the capital ratios, as we've discussed, are pretty stable as well. Then finally, group financial targets. 50% dividend payout ratio of EPS, capital buffer of 100 to 300 basis points. We're still committed to reaching that interval by year-end this year, and we want to have a return on equity that's competitive with peers with a long-term aspiration of 15%. That's it, and we can open up for questions.

[Operator Instructions] And your first question comes from the line of Magnus Andersson from ABG Sundal Collier.

First of all, I would like to know how you think about jaws in 2025, '26, i.e., income growth versus cost growth in an environment with falling rates and that pressure you talked about, Masih. And secondly, related to that, we are seeing that headcount continues up what we should expect there? And finally, perhaps on costs, have you taken any integration costs yet for the AirPlus deal that you have in the current cost base?

Thanks, Magnus. I can start. When it comes to jaws, so operating leverage, whether income will grow faster than cost in '25 or '26. Obviously, it's difficult to say as we don't know how much rates will be cut. What we do know at this point is that we have invested a lot in the bank in the last 5 to 7 years. And at this point, we'll come back to the cost target for '25 at the later stage of this year. But from a planning perspective, we are seeing next year as a year of consolidation. So we will not see the same kind of increase when it comes to the cost line as we have seen on average for the last 4, 5 years. So you won't see a large cost increase next year. On the income side, it's so much dependent on where rates go and to what extent we can offset a potentially falling net interest income with other lines improving as we saw in Q2. And obviously, these comments are sort of excluding the acquisition of AirPlus, which could change it to some extent. When it comes to the headcount, there is an increase of about 200 people in Q2. A large part of that is related to summer interns. So the underlying increase isn't as large as it shows. And if you compare it to last year, for example, I think the Q2 headcount increase was about 400 people. So it shows that there's been a clear slowdown in the headcount increase. And as we've said before, FTE's will increase clearly less this year if you look at the year-end numbers later on this year compared to last year. On AirPlus, there will be integration costs related to the transaction when it closes. But obviously, we've had some costs related to that transaction already, maybe in total, since it was announced, a couple of hundred million, which is more related to all the due diligence you have to do and so forth. So we have taken some costs, but there will be clearly additional integration costs when we close the transaction.

And your next question comes from the line of Jens Hallen from Carnegie Investment Bank.

I just have one very quick one and has to do with your Slide 15. When we're looking out in your estimates for 2026 to 2029, so that does also incorporate sort of the ramp-up of [indiscernible]. And you think that would be -- somehow you can negate that effect?

Yes. Thanks, Jens. No, it does not include the effect of the [indiscernible] as we see that being an effect that will have a restriction on us post-2029. At the same time, there are a lot of requirements on us as a bank when it comes to our current capital requirements, that is a sort of a Swedish Finnish in terms of systemic buffers and so forth and countercyclical buffers. And we keep hearing comments from the Swedish FSA that they believe that we are adequately capitalized at this point. So we think that those comments sort of signaled that if and when the [indiscernible] becomes restrictive for us, there could be some changes to the Swedish requirements to make sure that those [indiscernible] effects are neutralized. So at this point in time, we would like to guide on the things we are more certain about, which is the most -- sort of next 1 to 2 years rather than looking into 2029 or up until '32. But obviously, if the [indiscernible] introduced or when it's introduced, that will have a negative effect, and we'll have to see to what extent that will and can be compensated by reducing some of the capital add-ons we have today from the Swedish FSA.

Okay. Perfect. And then actually I have another question on Slide 13. Very interesting slide with the pension scheme surplus. And can I ask, for clarity, the other comprehensive income that you have here? And you also mentioned that you have the opportunity to transfer SEK 3 billion roughly per year to the parent bank. Has that been done, i.e., is this still a net after that? Or is that something that you could do in the future if you wanted to make that transfer to the parent?

Well, we have done so in the last few years, never up to that full amount that we could do. Obviously, this surplus has been built more recently. As you can see, just prior to 2021, the surplus wasn't as large. And obviously, we are a conservative bank. We always like buffers so that we feel comfortable. But given how much the buffer has increased over the last 3 years and the fact that we feel much more comfortable with the surplus we have today, it's much more likely going forward that we will do the contributions from the pension scheme to the parent bank that are sort of at the top range of what we can do, but we haven't done that in the past. We've done some contributions, but at much lower levels.

And your next question comes from Namita Samtani from Barclays.

Firstly, how should I look at your core Tier 1 go to target in 2025? Like is it 18.7% because Basel IV could be up to 100 bps? Or is it 17.7% because you expect Basel IV to be offset by the IRB model add-on? And when do you exactly expect this Pillar 2 add-on to be removed? Secondly, on AirPlus, it's basically been EBIT negative since 2018, according to the Lufthansa Annual Report. So what gives you confidence you can turn this business around once it gets integrated at SEB? And also, I think it's about EUR 250 million of revenues. But on the cost base, like even if I put extreme cost synergies in that, I get about EUR 150 million cost base. So that's like SEK 1.6 billion added to your cost base next year. Am I in the right ballpark? And lastly, you guys spoke about less competition on deposits in the Baltics versus Sweden last quarter. Is this really true given the rate cut we've just seen, it's been like 100% pass-through in Sweden, whereas in the Baltics, there's been virtually no cost on transaction accounts or savings accounts, at least in Estonia and the only Baltic country where there has been around 100% pass-through on term deposits as with Lithuania. So just curious on your thoughts there.

Okay. I can start, Namita. On the capital, so again, I think we've said this a few times. Well, I'll say it again. So the targets we have will be, being within our target interval of 100 to 300 basis points. That target stands with the Q4 report, which is -- had a cutoff date of the 31st of December 2024. So Basel IV is a day after that. So you should look at the capital comments we have at that point and add 300 basis points. So that would more sort of lead to towards your 17.7% target rather than the 18.7% target. The add-on removal will happen when the IRB models are approved. We don't know when that's going to be, but those 2 should be simultaneously happening, whether that's going to be first half of next year, second half of next year or earlier than that, we don't know at this point, but those should happen simultaneously. On AirPlus, I mean, the business case we've done on that acquisition is based on what we think we can do with that access in combination with our current card business. So it's important to say that to the extent that we see value creation, it's not just within AirPlus, it's the combined entity that would drive that value creation. And obviously, the combined entity just would have much more scale about twice the scale as we have today in our card business. So when you do your numbers and obviously, we'll come back to the exact business case, when the transaction has been closed, but you should sort of combine the 2 entities rather than to try to find income or cost synergies in one of the entities. So that's the sort of order guidance I can give at this point. But as I said, when the transaction has closed, we will come back with more guidance on the value creation from that asset going forward. And then finally on competition, I mean, I guess you were referring to deposit rate cuts with the first policy rate cut in Sweden and compare that to the ECB rate cut. The reference we have done on competition has been more in general, what it looks like. And obviously, that could differ from the effects on the first rate cut. I would just say in general that there has been more competition in Sweden. You have many more niche banks offering very competitive rates in the Swedish market than you have in the Baltic market. And because of that, there is more competition in Sweden. That's our view, but obviously, we'll see what happens in the future and what's going to happen to deposit rates in the different markets when policy rates are further to cut down the line. But yes, the number of actors, number of competitors are more in Sweden, and we've seen more competition there over the last 2 years.

And the question comes from the line of Nicolas McBeath from DNB.

So first, a question on costs. So if we annualize the cost in the first half of 2024, we end up at around SEK 29 billion, which is the cost target. And normally, the second half has higher cost than the first half. So could you please maybe explain what measures you intend to take to bring down costs in the second half to meet the cost targets? Will you roll more investments and costs into 2025?

Thanks, Nicolas. Yes, you're correct. We are slightly on the high side on the cost line. If you compare the outcome so far this year compared to our plans, I'll admit that's the case. And it's a challenging cost target, which it should be. We've seen some cost inflation in the first half of the year due to the share price going up and then some FX movements that have been negative. So we just need to repeat what we did in the first half, really the second half. And compared to the previous years, we've invested a lot. You've seen this sort of increase of the cost base, the second half versus the first half, whereas this year, we are not ramping up to the same extent as we've done in previous years. So it's a challenging target. We're obviously extremely committed to it. We've had cost targets since 2009, and we've met every one of them, and the intention is obviously to do that again. But yes, it is challenging, but that's the way it should be.

All right. And then just following up a bit more on the pension surplus slide. So if you could say anything more about the timing of the SEK 3 billion? Is that -- are those going to be taken out in any particular quarter? And also, is the SEK 3 billion, is that kind of a regulatory cap? Or is that your own assessment on how much do you think it's prudent to take out? And also just to clarify, I think you mentioned that only 1/3 of the surplus is included in your CET1. So if you take out SEK 3 billion on an annual basis, should that add SEK 2 billion or SEK 3 billion to the distributable capital?

Yes. So the potential contributions are completely discretionary. So that's going to be a decision we take on an annual basis, and it's usually more likely to happen at -- so closer to year-end than any other timing. If we do take the maximum amount, and that is based -- it's not a regulatory comments, but it's -- you can only compensate yourself for the costs you have related to pensions. And since the annual costs we have related to pensions is about SEK 3 billion, that's the total amount we can take contributions for. So that's what sort of -- that's not a self-imposed limit. It's just how the foundation works and what you're allowed to compensate yourself for. And if we would take contributions of SEK 3 billion, then that would add SEK 3 billion to the CET1 ratio.

All right. And should we think about the surplus is something you want to bring down towards 0 because you also -- as we know you minded your conservative bank, would you still like to operate with some kind of surplus? Or do you think that should go down to 0 over time?

We always like to operate with buffers and surpluses that we feel comfortable with. So no, you shouldn't expect that to come down to 0.

And your question comes from the line of Sofie Peterzens from JPMorgan.

This is Sofie from JPMorgan. I had also a couple of questions. So I think you mentioned in the presentation that there was a one-off in net interest income this quarter. Could you just clarify how much that one-off was? And then my second question would be on the Baltic net interest income. When I look in the report, it was up this quarter, even though if I look at kind of the arrival rates, they've come down from 4% to 3.6% in the past 6 months. So what drove the improvement quarter-on-quarter in the Baltic net interest income? And then the final question would be the Swedish FSA, I believe, ordered SEB and to other Swedish banks to address some of the shortcomings in the payment infrastructure end of June. How does this affect SEB at all? And what do you need to do? Does this mean any additional investments? Or should we think about any additional costs from this?

Thank you, Sofie. Yes, as I said before, there is a one-off in the Baltic division, NII, which has -- which is related to a loan repayment, but that one-off is reversed in treasury or not reversed, but it's mitigated in treasury. So there's a positive effect in the Baltics, a few tens of millions Swedish krona, but you've seen an offsetting negative effect in treasury. So on a group level, there is no effect of one-off. If anything, I would say there is a slightly lower net interest income within LC&FI in the quarter, and that is typically more volatile. So if anything, we've had a slightly negative effect on the net interest income line from so-called one-offs. And that is one of the reasons why the Baltics NII is up. So there are 2 reasons really why it's up. The first one is FX, where you've seen a weaker Swedish krona on average during the quarter, supporting the Baltic NII, and the fact that you had this one-off for them on a divisional level that was offset within treasury. The underlying development, if you exclude this loan repayment as well as the FX effect is a decline of NII. I think in local currencies, NII was down about 1%. And if you remove the loan repayment, it will be down 2% or 3%. So it is marginally coming down, obviously related to what you mentioned with EURIBOR coming down. So that is the trend in the Baltics. On the FSA, do you want to take, Johan?

Sure. So this is the wire transfer regulation, which is a technical specification, what information that needs to go from the sending payer in the infrastructure of the payment system. And the order of correction that has been issued by the FSA has come predominantly to the 3 largest banks in Sweden, but it is a little bit of a special case. This is namely not predominantly us, but it is the joint owned bank gyro. So the common owned infrastructure for payments, that needs to make some technical changes in order for the wire transfer regulation to be satisfied. It is very clear that the 3 of us, we are the main owners, and therefore, it is practical to ask us 3 as shareholders of a more significant nature of this company that we co-owned together with many others to make sure that it happens. We have a good amount of time to fix this. So we feel confident that we can do this. It didn't come with any additional type of requirements right now. But this is actually a development that will benefit all banks. So right now, no banks in Sweden are compliant with this regulation. And once we fix this, all banks will be compliant. This will not be, in my book, any meaningful cost that we need to flag about. It's going to most likely be some investments in the bank gyro. We of course contribute through equity investments in the bank or should that be the case. And they are working it through right now what is required. This has been on the agenda for some time, but it's quite a difficult thing. It sounds easy, but it's a quite difficult thing to fix. And now I think it is a -- was it, 1.5 years, 2 years that we had to fix this once and for all.

And the question comes from the line of Shrey Srivastava from Citi.

My first is relating to [indiscernible] and specifically, what sort of reaction have you seen by the large corporates to the first rate cut in most of your geographies? And secondly, on Sweden, this is a more long-term strategic question. As rates come down to presumably more normalized levels, how are you seeing the competition from the niche banks that you mentioned earlier, developing? Should this presumably be a tailwind for you relative to what we've seen in the hiking cycle with them taking share on the Nordics banks?

Let me try to repeat what I think I heard. You have a very bad line. Was the first question how large corp has reacted to the first rate cut? And the second question around competition in Sweden, particularly around niche banks? Did I understand it correctly?

Yes.

Okay. So if I start with large corporates, I think it is very welcomed. You have seen the PMIs, which are predominantly large corporates, steadily and surely recovering over the last 8, 9 months. Of course, there will be some hiccups, like last month, but it's definitely something that indicates that the relative interest rate sensitivity of the Swedish economy is also -- it's bad on the upside when rates go up, and it's pretty positive on when rates go down. However, it's early days. And large corporates tend to work a little bit with a lag. But you do see it in terms of a little bit light at the end of the tunnel. Macroeconomic indicators are pointing to the more positive tone. Rate cuts expectations are firmly anchored and that does create a little bit of confidence. So the leading indicators are good, although we haven't seen much happen yet. And that is probably easiest to think about when you look at corporate finance and corporate banking that you see that there are things moving around now, but not yet translated into hard P&L. On competition, I would argue, regardless of where rate goes, it is very fierce. So the Swedish market on retail and SMEs is kind of the one area where all the large banks wants to perform and where the niche banks that do represent something like 15%, 20% of the banking sector in Sweden. Of course, it's their home turf. So lower rates will typically mean that higher-yielding lending is more popular. That has been, of course, a struggle lately with credit quality deteriorating more visibly in smaller banks and in niche banks. And of course, that's, of course, now a little bit history, and we'll see where we end up. It was a very stark and welcomed reminder around risk to have both COVID and this sharp increase in inflation and interest rate hikes because business models have been more visibly strong or weak. You have some new information as you've seen in the last couple of years. But overall, competition is fierce, and I would not assume it to go away at all.

And the question comes from the line of Riccardo Rovere from Mediobanca. Just to advise, the line has disconnected. I will move to the next one. Your next question comes from the line of Piers Brown from HSBC.

Yes. I was a little bit late dialing in, so apologies if you've already covered this. But could you give a guide on full year '25 imposed levies? I think you said the Lithuania solidarity contribution has been extended by a year. So should we just be assuming that the delta is not just the Swedish resolution fund dropping out of the numbers in full year '25. If you could just give us a steer on what sort of number we should be looking at in totality for '25?

Yes. Thanks, Piers. We haven't guided on imposed levels for 2025. What I can say is that just because the Lithuanian solidarity tax has been extended, it doesn't mean it's going to be the same amount as in 2024. So just because of the fact that it is expected that NII in Lithuania is lower in 2025 than it's been this year, that should lead to a reduction of that imposed levy. So it depends on your estimate of net interest income, really. But there's an extension of the tax, but the normal amount will be less than '25 than it's been in 2024. So let's come back to this at later stages this year also when it comes to the resolution of fund fee because again, obviously, it depends on whether that fund is filled or not by year-end. But nevertheless, the only thing we can guide for at this point is that imposed levies for the second half of 2024 will be slightly below SEK 2 billion. That's what we know at this point.

Okay. So if I'm looking at consensus, it has about SEK 2.5 billion for full year '25. Is that a realistic number? Or you think that probably means a bit higher because it probably assumes Lithuania drops out entirely?

So Lithuania is about SEK 1 billion this year. It's going to be maybe -- we'll see depending on NII, but maybe SEK 300 million next year. So that's a SEK 700 million tailwind. And then it obviously depends on resolution fund fee, whether that's going to drop out or go up or down. And obviously, both the bank tax in Sweden as well as resolution fund fee is dependent on the balance sheet growth we have. So I can't say whether that number is too high or too low, but imposed levies, all in all, should be clearly lower in '25 than '24, then the question is how much lower, which depends on whether fund -- resolution fund is full or -- and whether the balance sheet grows or not.

And your next question comes from the line of Hugh Moorhead from Berenberg.

Two from me, please. Firstly, just circling back on to the time line for the model implementations. Do you expect the retail and corporate models to be approved sort of almost simultaneously? And adjacent to that, does the ECB have any role to play in the model approvals? Or are your Baltic models already on IRB, for example? And then secondly, on the Wealth Management, please could you just give a bit more detail about the strong net inflows this quarter? For example, are those coming from a couple of high net worth individuals? Or are you seeing more broad-based inflows and also geographically and Sweden or perhaps from some of your more recently opened offices across Europe?

Yes, thanks. I'll start with the model implementation, then I think Johan would like to take Wealth Management...

Well, I can take that too...

Okay. On the model, so what's outstanding for us is predominantly the corporate model. So our retail models have logically been approved already. So the effect we show you, it's actually a combination of both the probability of default estimates as well as the loss given default estimates largely due to the corporate exposures we have. And that's what we can sort of refer to at this point. We don't know when this will be approved. So we don't know the timing yet. We just have a sense of what the impact should be based on the numbers we've done and the applications that we send in and the ECB is definitely involved in the process of approving the models despite the fact that they're -- I mean, they don't have jurisdiction on the parent pack as such, but they are very influential in the collaborative work they do together with the Swedish FSA. On the Wealth Management, the SEK 63 billion inflows, a large part of that is coming within the Private Wealth Management & Family Office business. And obviously, that's related to a few individual customers that have transferred their savings to SEB, hopefully, because they feel that we give a good service and a good performance. We actually have had a very good performance within both our asset management division as well as private wealth management, where a large share of our mandates, discretionary mandates, beat their benchmark. So hopefully, that's been one of the reasons why we've seen these inflows. But it's broad based in the sense that we've seen about SEK 1 billion monthly so far this year of net inflows within C&PC. We see an improvement on monthly savings, and we've seen inflows in the Baltics. We don't expect the SEK 63 billion to be the new quarterly run rate. We don't sort of gear there hoping that would be the case. But obviously, when you do have client acquisitions within Private Wealth Management, and those are wealthy customers, then you could have sort of these large books of inflows, some quarters, but obviously, it won't repeat itself every quarter. And I would say at this point, the inflows are not coming from the newly established offices in needs, for example. So it's coming from the whole markets we've had previously.

[Operator Instructions] And your next question comes from the line of Bettina Thurner from BNP Paribas.

I just had 2 clarification questions, please. The first one is on your Slide 15. If I just look at the simple numbers, it's -- and you mentioned a neutral effect in the near to midterm. But shouldn't it be positive given that the removal of the Pillar 2 add-on would be 100 bps or outweighing the Basel IV day 1 impact? Or is it just because there is still a lot of uncertainty that you rather stick to the neutral effect for now? And then the second one, maybe a follow-up on the inflows into asset management and how you see that developing going forward? Also because deposit mix shift in Sweden blowing or maybe even trussing and then in the Baltics now as well, do you already see private customers thinking about or already moving money they have on savings accounts into mutual funds or more risk on kind of savings instruments?

Yes. If I start with the capital effect, I mean, yes, if you take the numbers, we actually disclosed on that slide, so around minus 50 basis points, around 0 and around plus 100. That's a positive effect. And then you have this sort of dashed box where you have a marginally negative effect. I mean it could, in the end, be a few tens of basis points positive, but we see that as largely neutral because, I mean, our capital buffer moves up and down by up to 50 basis points per quarter. So we think basically everything up to 50 basis points is pretty much neutral, especially if you relate it to the capital generation we have, which is about 400 basis points per year. So even if it sort of ends up at being slightly positive, we see that as largely neutral. So we'll see exactly how it ends up. But the message is really that in the medium term, we think that the regulatory changes we expect will be largely neutral. That means it could be marginally positive as well. On the inflows, I mean, here, you have to make a distinction between the general market development and then our performance. We can see that in terms of our performance when it comes to how our mandates are performing. We have done significant improvements in the last couple of years. So both within asset management and as well as within PD and [indiscernible]. We've seen much better performance. We've seen good product launches that attract a lot of attention and inflows. But then obviously, depending on how equity markets move, you could see more or less interest from investors, both retail as well as institutions. And then obviously, depending on when rates go, the relative attractiveness of investing in risk assets goes up and down. So that's a sort of very nonclear answer, but I would say that we are hoping and we think we're seeing a better performance for us in this part of the business finally. But then depending on equity markets, you will see more or less positive development in general. We are hoping that our relative performance will improve going forward. But in absolute terms, it's difficult to say. I mean what I could refer to before was that monthly savings have now gone up, and that's probably related to the fact that inflation is coming down significantly. So real household disposable income is improving, which means that people have more excess savings. And as rates are coming down, maybe a larger share of that will be invested in risky assets. So hopefully, that's a trend that will go on.

And your final question comes from the line of Riccardo Rovere from Mediobanca.

I don't know what happened before the line dropped. So anyway, just on capital, if I may. On capital return, you have disclosed today that your core Tier 1 goes down includes SEK 5 billion buybacks. Half of that will be executed in the third quarter. But your capital, but your common equity remains 19%. AirPlus maybe will give you "health" a little bit in solving the problem. But at the very end, if the buyback has been -- the buyback card has been played, you are -- there is only one alternative that is [ product ]. So the question here is, can you -- are you completely free to bring the payout ratio cash above 100% to bring the 19% to a number closer to 17.7? And whatever the capital requirement is going to be in '25 and '26, in your mindset, aside from financing growth, is your idea to keep, let's say, to keep the capital around that level, around the, let's say, 100, let's say, 300 basis points above whatever the requirement is going to be also in '25 and '26? And the second question -- and the second question I have, just want to be 100% sure I understood it correctly because the market on these things really, really freak out. You stated that there was a one-off in NII in the Baltic division, but positive, if I understood it correctly. But there was another one-off, not related to the same one, but another one-off more or less of similar size in the treasury department. And it's not clear to me, Masih, when you mentioned something related to LC&FI, if there is anything also that and not clear to me whether that was positive or negative, it's not clear. So if you can please clarify because we know then how the market is sensitive to anything related to NII.

Yes. Thanks, Riccardo. I understand that. So let's revisit that once again after I've taken the capital question. So we will steer towards our target interval of 100 to 300 basis points. We have a commitment to be there at year-end this year. Beyond that, that's the target interval. So we will steer towards that interval with share buybacks and dividends and depending on how much our balance sheet is growing, that then it means more or less share buybacks or dividends. So it's not more difficult than that. We will look at the requirements, we will add 100 to 300 basis points, and that sort of what we're going to steer towards. It doesn't mean that we guarantee to be at exactly 300 basis points at each point in time. We could go above that. And -- but it is we have that interval so that investors know what we are steering towards. And obviously, the commitment we have at this point in time is to be within that interval at year-end this year. That's pretty much the only guidance I can give. So on NII. So there is a one-off with a positive effect in Baltics with a corresponding negative effect in treasury. So group level, no effect, positive Baltics, negative treasury. And then historically, we have typically said whether the net interest income derived from the market business is elevated compared to the average level historically. The only reference I had there was that this quarter is actually slightly below the historical average level we've had in the markets business. I don't want to call that a one-off, but since we've discussed that previously and sometimes refer to that when we discussed NII, I just wanted to make that reference again that, if anything, the NII in LC&FI is marginally negatively affected this quarter by a reduced NII in the markets business. Hopefully, that was clear enough.

There were no further questions. I will hand the call back for closing.

Thank you very much for attending today, and we wish you a very nice summer break when times come. Thank you.

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