Svenska Handelsbanken AB (publ) (SHBA) Earnings Call Transcript & Summary

Good morning, and a warm welcome to the Handelsbanken Interim Report for Q3, 2022. We're going to begin by hearing from Carina Akerstrom , our CEO. There's a live broadcast of this presentation. You'll find the link on handelsbanken.com under Investor Relations. For English-speaking listeners, the presentation will be interpreted simultaneously, and you will find and can choose English as a language in the menu to follow in English. After the presentation, we're going to have a short break, followed by an open Q&A session in English, and you will find the information on how to connect to this session under Investor Relations, the same section on the website. Carina, please go ahead.

[Interpreted] Thank you very much, Louise. And once again, a warm welcome to all of you, and good morning. It's time to present the Q3 results for Handelsbanken. I'm going to begin, just as I usually do, by a short summary of the first 9 months of 2022. This is a good performance. It's stable and in line with expectations. For the first 9 months, just as -- under the second quarter, we saw the highest numbers so far in the history of the bank. Volumes are up. Revenue is up, and we also see that we continue to gain market shares in our savings business. Expenses are under control. C/I ratio is going in the right direction, it's dropping. And the quality of our lending portfolio remains very good, and we have an excellent capital situation. We've made a transfer of Handelsbanken over the past while in order to ensure that we are well equipped to meet an uncertain world around us. Starting with a look at quarter 3. We see a C/I ratio, which for the first time ever, in fact, for as far back as we can go, is below 40%, 39.7%. We have a profitability of 13.2% ROE. Results are up as much as 39%. The main driver of this is an excellent development in our net interest income, which, of course, is continually driven by excellent lending and volume growth. We see that we're keeping track of our net fees and commissions, a stable situation, and expenses are under control, down by 1%. Credit losses remains very low, and we see during the quarter, net recoveries. So all in all, operating profit up by 39%, revenue by 17% and expenses down by 1%. Moving on to have a look at the first 9 months of the year. We see a C/I ratio of 43.9% and 12.2% in ROE, [indiscernible] up by 12%. Income by 12%, adjusted by 7%, and we have the cost situation well under control and also ongoing credit losses, which are net recoveries. So this is clearly a quarter, which, for an accumulated 9 months shows an excellent development. Moving on to look at the overall situation in the past 3 years. We see that since 2020, we've seen income growth as we would like to see, and expenses under control of having, in fact, reduced during this period. And the C/I ratio is dropping exactly as we expected it to. Let's have a look at lending -- the lending situation, lending in our home markets. First of all, looking at lending to the public. There's a continued stable growth. We see some slowdown, at least in the mortgages market, but in Sweden, the mortgage market situation is stable over 5%, but we also see that there's an adaptation of behaviors. People are paying back on their mortgages. On the corporate segment and lending, for several quarters now, we've seen an excellent development, and we're up by as much as 12%. In fact, it's a well-balanced lending, which is both related to property and non-property lending. Looking at Sweden, for example, we see an excellent growth, 11%, which means that Sweden continues to move up its position in the area of corporate lending. In green and sustainable financing, we're moving up from relatively small volumes, but we see a continual development with extensive demand from many of our customers. Let's go back and have a look at the net interest income development in the period January through to September. We see an increase by as much as 15%. And if we look at where -- what this is due to, it's driven by an excellent volume development. Also, of course, in an environment where margins, of course, have a positive impact on the NII, but high level of activity and the contribution based on a growth in volume makes for an excellent situation. Let's have a look at the net fee and commission income development next. As I mentioned, the income is holding up well. It remains at a nice stable level, down somewhat over the first 9 months of the year, but holding up well. And if we look at the savings related fees and commission, they're holding up very well, and corresponds to almost 70% of our income, dropping somewhat, but in the market with falling stock exchanges to the tune of 30%, this remains very stable. And as the world opened up gradually, we've also seen a stable increase of the payment-related commissions, and we see nice development for the first 9 months. Let's then have a look at our expenses accumulated for January through to September. They were up by 5% compared to last year, adjusted by 2%. And we see that development expenses, as we had indicated, it would go up by 3% and underlying costs up by 2%. It's IT development and development in our business activities, which are the drivers for this increase, as we've mentioned. And we've very intentionally been speeding up the pace over the past period. There -- it's increasing where we wanted to increase, and underlying costs are impacted as we implement the efficiency improvements, and we see the results of them. Let's pause for a moment, take one step back a few years. Over the past 3 years, we have stabilized the bank. One step at a time, we have moved the market position of the bank from one location to another position. We are strengthening our position in the market. We know where we want to be. We know what we need to do, and we know how to do it. For several quarters in a row, we've seen strong increase in lending volume, good additional income in savings, and our U.K. activities are now again contributing to the profitability of the bank and our growth. For several quarters now, we've seen how we've gradually and steadily grown our IT cost, and we are now at a high level of expense and because the bank has repositioned itself over the last few years where we've implemented all the results, and the potential we see in all our home markets. The bank in the future, as we move forward, will maintain a high pace of IT development. And we do this, of course, because other costs items are under control, but it makes perfect sense based on our current positioning, the readjustment we have made and the plans to continue along these same lines. Then to our asset quality. We continue to have a stable asset quality. We have a high quality in our credit portfolio. We have basically no credit losses, just as expected, and that the credit losses of the bank have been lower than our competitors. We've talked about that many times before. Credit loss ratio is pretty much at 0, has been so over the last few years. And what has been put in reserves since 2019 has exclusively been about building general reserves linked to the pandemic, COVID, but also the uncertainties around us. And those unutilized general reserves are around SEK 600 million, and that is what they are. We have good customers with good cash flows and the good credit quality that we have in our portfolio is based on a well-established risk policy. We lend money to good customers with good cash flows. We do not select sectors. That is important. And to a large extent, the lending is also pledged. Of course, we have also looked at our portfolio with the commercial properties, and we see at this -- we look at this in different ways. We do stress test. We look at this on an annual basis and with the increased interest rates. Well, we can see that the quality is still good, and there is no reason to take action, and I feel no concern whatsoever. Looking at the portfolio, in general, in all our home markets. We have a loan-to-value that is below 50%. And when testing the commercial portfolio, we can see that we have an interest rate resilience. We can manage interest rate levels going up to 7% to 8%, which means that we are well positioned. We have good customers, and we will face the world around us together. And then, if we look at our home markets, all home markets show nice growth, as has already been said over the last 9 months in the quarters. Norway continued to grow its business with nice key ratios and continue to take market share in Norway. We have a lot of potential in private business, and we imagine that, that is where we'll be forging ahead and developing in the future also to meet that customer group in Norway. Then looking at the Netherlands, we have seen over several quarters that we have a positive development with a growing business, growing volumes, and key ratios also tell us that we have stability and improvements. Then looking at Sweden and the U.K. more in detail. We have a couple of good strengths. The Swedish activities have been moving, and we have made some changes to the positioning in the market, and we go from strength to strength from quarter-to-quarter, and we continue to have nice growth in household lending. I've already mentioned that it's stable at 5%, and we see that corporate lending is growing with 11%. And in total growth, the 7% accumulated 9 months, and a very nice rate and the key ratios continue to show strong numbers over the quarter. In Sweden, we have seen profitability of 17%. On the C/I ratio that, as a matter of fact, is below 30%. So we have a very stable situation, which is very gratifying. Then looking at the activities in the U.K., I have to say that this is where we see the major change in trends over the year. Income is up, costs are down, and our key ratios -- the C/I ratio is falling, and we end up with below 60%. And operating profit is up, of course, and as you can see on the slide, up 1%. And this means that underlying in the U.K., we see nice lending growth. And in addition, in the U.K., just as in Sweden, we see changes in behaviors, not least households, where one amortizes, is using savings to reduce debt. But we have underlying growth also in the corporate side, and we have stepped out of some exposures, but we have a positive underlying growth also in the U.K. We have a capital position that is good, nice, which means that we have the capacity to support our customers and at the same time, grow our business. CET1 ratio, 19% compared to regulatory requirements, 14.1%. And then, if we were to summarize the first 9 months, just as I've said, this is a turbulent market with a lot of security, but we are strong. We're well equipped and well positioned. And that was also what we said, Q2 as a matter of fact we have good results. We have a growing bank, good volume growth for households and companies alike, and we have margins that are recovering, and NII is also contributing in this quarter in a very nice way. Fee and commission income stable, costs under control, credit losses continue to be low. So all in all, we're well positioned for continued growth and improvement profit in the bank. And last but not least, throughout this journey, we have seen that we have had customers with us in all our home markets. We have customer satisfaction that is above the average for our sector. And in Sweden this year, the Swedish activities has also been named as the Business bank of this year. And for the year 11, we now have Handelsbanken being the small business bank of the year. Well, I'll stop there.

Thank you, Carina. And then, we'll have a short break, and then we'll have Peter Grabe, Investor Relations, with a Q&A session, and that will be held in English, and instructions on how to ask questions, you'll find that under Investor Relations, handelsbanken.com. Welcome in a few moments. [Break]

Hello, everyone, and welcome back. Before entering into the Q&A session, our CFO, Carl Cederschiold, will make some opening remarks.

Thanks, Peter, and welcome, everyone. So please go to Slide 28 for a deeper understanding of our exposures to property management. First, our strict credit underwriting policy has been proven for decades and has resulted in very low historical credit losses. The outstanding history is based on a firm belief in decentralized credit granting and accountability. We believe this is superior to centralized diversified portfolio thinking. We have been practicing this method for decades. The consequence is that we lend to good customers, not to pre-decided portfolio weightings to various sectors or geographies. The first pillar of our underwriting policy is based on risk for financial strain. We make an overall assessment of the repayment capacity, i.e., a cash flow-oriented approach based on a forward-looking stress assessment of risk to the business model and to cash flows. Our view is that a bad cash flow outlook can never be offset with collateral. The second pillar of our underwriting policy is based on financial resilience. We make an overall assessment of the client's ability to manage a situation with financial strain. Are there unencumbered assets available, are there unused cash reserves? Can liquidity be generated quickly in other ways? A good client for us also has a strong ownership profile. Can the owners live with the projects being put on hold? Are the owners committed to the exposures? And do they have the financial capacity and the education to inject capital, if needed? As a last line of defense, we also won collateral backing up the loan. Often, the top quality collateral is found in real estate business. Our experience tells us that credit losses often can be avoided if there is collateral that in the worst-case scenario can be ceased, restructured and eventually sold off. In terms of the share of lending that is backed up by collateral, we stand out versus peers with a significant higher proportion. The outcome of our strict credit underwriting policy is a portfolio of good and proven asset quality. Now to give some harder facts on the property management portfolio. Please look at Slide 28. You can see we have SEK 394 billion exposure to residential real estate, making up 17% of total lending. With a break-even interest rate of 8.5%, a loan to value average of 49% and 99.7% of total volumes below 75% in loan to value. We have SEK 224 billion exposure to retail offices and hotels, making up 10% of total lending, with a break-even interest rate of 8.1 percentage points, loan to value average of 48% and 99.7% of volumes below 75% in loan to values. And lastly, we have SEK 34 billion exposure to logistics and industrials, making up 1% of total lending, with a break-even interest rate of 9.5%, a loan to value average of 46% and 99.5% of volumes below 75% loan to value. So a really good starting point when we go into tougher times. If you look on the right side of the slide, we disclosed the stress of our exposures to the 30 largest property management companies. The portfolio has an interest coverage ratio of 4.4x. In the stress, in the slide, we increased rates by 3.5 percentage points on all debt maturing until end of 2023. And a small but not irrelevant remark, we make no changes to the operating net in the stress. In the stress, the average ICR goes to 2.2x, and there is no client with an ICR below 1x. If we instead look at the LTV side for the third largest exposures, the average LTV is 44%. If prices dropped 20%, the LTV will increase to 55%. So in sum, our portfolio has a strong quality and a high resilience to stress. We're adding a very strong capital and liquidity position to the picture. We believe we are in a really good position to find business opportunities in a challenging market. We see good flow back potential of good customers moving from capital market financing to funding in the bank instead. We will continue to focus on supporting good clients and see opportunities to build long-lasting relations with our clients base during the crisis.

Thank you, Carl. With that, we're ready to open up for questions. So operator, could we please have the first question, please?

[Operator Instructions] And your first question comes from the line of Hakansson from Danske Bank.

So first question on your NII. That was, of course, exceptionally strong in the quarter. Could you tell us a little bit -- I don't think you want to give us a sensitivity to rising rates in the future. But could you tell us how do you expect the benefits going to be on the next 100, 200 basis points rate hike compared to the first 100? When do you expect that you will be starting to pay a better deposit rates? When will you compete more on mortgages, if at all? Could you just elaborate a little bit about the moving parts on NII, please? That's the first question.

Well, as you say, no, we won't guide on the future path of the NIM. But having said that, I mean, first of all, one has to realize that the further away we go from the 0 interest rate level, the less deposits income will be placed in the bank and the more will come to the clients. So that's the first step. On the other hand, we haven't actually seen the benefit in Norway as of yet, because we have [Foreign Language] or notice periods in English. So that effect will come later on. Then, as you point out, I think that the experience from the past is that, when we see rapid increases in rates, the competitive landscape adapts quite fiercely and not intuitively in all the times. So we expect to see quite a lot changes between lending margins and deposit margins. So it is very tough to actually guide on what the total sum of that will be. But having said that, I mean, if we keep on having a rate environment now, which is separated from the 0 point level, which we expect at least -- this is obviously a beneficial margin climate. I think the banks will stand in a better position vis-a-vis the disruptors. We will fund ourselves via deposits partly, so that will be beneficial. And I think that Handelsbanken usually stands out quite nicely in terms of the competitive landscape when things turn tougher. So all in all, I think this should be a beneficial margin on climate, but very tough to put a figure on it.

And then, back to your commercial real estate exposure. I don't have a problem with the slide . I'm more thinking about the business potential from it. And we saw that in Sweden, you increased CRE by 5% in the quarter. Could you tell us what the margins doing in that area at the moment, given that the wholesale market is basically shut for those companies? So what would you expect in terms of volume growth and the margin development in that area, please?

I think, first of all, I mean -- yes, of course, when the bond market financing dries up and they don't have the possibilities there and they turn to the banking, that's a positive climate for margins. But having said that, I mean, we -- this is the time where we really want to be there for our clients as well and support them for the long term and build a relationship which could really last for 10 years. So having -- so we -- so I think it will be really interesting to look for the exact margins going forward. And we can't really put an estimate on that one. But the -- most of the structural factors in the market points towards increased margins. But having said that, I mean, we will play both angles here. So we want to be there for our clients and support them as well.

And your next question comes from the line of Magnus Andersson from ABGSC. As there is no response from Magnus's line, I will go to the next question. And your next question comes from the line of Maths Liljedahl from SEB.

A follow-up on Andreas' question here on corporates, and perhaps not related so much to CRE and all the corporates, how do you see demand here going forward? How much was FX related? And how do you see margins developing in general for the corporate segment? That is the first question.

No. As we say, I mean, we're likely to see a positive margin environment for the corporates in general. And the -- all of our home markets has a positive growth in local currencies. So if I put the numbers on your -- on the quarterly change, Q2 versus Q3, we have -- the lending to corporates in Sweden is plus 3%, and these are local currencies. In U.K., they are negative too , but as Carina was highlighting, we've off-boarded some clients, and we've also seen an unusually high proportion of amortizations actually. But the underlying growth trends of new clients, but also volume growth from existing clients, looks really, really promising. In Norway, we have seen -- Hold on for a sec, I'll have to calculate that actually because I haven't put -- and in Netherlands, we are plus 2%. So in Norway, we have 1.5 percentage points in the last quarter of growth. So I would say, in local currency it's definitely solid growth.

Perhaps a more detailed question. I look at very strong trading income. And also, I noted that derivatives on the asset side increased derivative instruments in the balance sheet through, I guess, the highest level I've seen for years. Could I read anything into that? Are clients using more derivatives to hedge themselves, preparing for higher rates FX? Or could I read anything into the change in derivative instruments?

No, you shouldn't read anything. On Slide 26, we have a breakdown on NFT. And as we were highlighting the last quarter, we had a negative -- Q2, we had a negative impact on the NFT line. And as we were highlighting then, being a bank where we actually hedge quite a lot of our exposures, both the liquidity reserves but also the lending portfolio, we hedge a lot via derivatives. And when you have so big movements in the market, you can see discrepancies between the lines, and that hit us quite a lot in Q2. And we were guiding you then that we didn't see any structural change. So we would expect that to bounce back to more normal state. And that's what we're seeing right now. So it is actually -- if you compare the 2 lines with -- the last quarter and this quarter, I don't think you see that big change actually. So it's good that what we think and what we plan to happen is actually being shown now in the third quarter. So no major obstacles there.

And your next question comes from the line of Magnus Andersson from ABG.

Just 2 follow-ups then on Andreas' questions to get the feeling for NII there. If I look at the fact book on Page 37, where you split up your deposits, could you tell us on what share of the household and corporate deposits, respectively, you paid interest on in Q3 to get the feeling for the deposit [ beta ] and how it could change, and what you think will happen there in Q4?

Yes. What we can say is that the deposit -- the total deposit volumes consist of a few components. First of all, it is the transaction accounts, and they are roughly 35% of the total volumes. And on these kind of accounts, we pay 0. Then you have the other accounts which have both the tendency -- They can shift from how many times can you bring out money, how -- for how long time do you actually commit the money to be on the account. And in the other end, we have fixed deposits. So -- and the more gradually you move up this ladder, the higher rates we pay, is the general conclusion. So 35% of the total lending or the total deposits are in transaction accounts. And so far, we pay 0 there.

Sorry, just -- is that both on -- I mean, on the households, the SEK 500 billion, for example?

This is the households, yes.

On what share of the SEK 500 billion did you pay a rate at all in Q3? Can you say that?

65%, because 35% is made up of transaction accounts. But then it is various -- it is different rates depending on the flexibility the client has.

And on the corporate side, the SEK 381 million?

No, we don't disclose that.

Okay. Secondly then, can you tell us -- since you had a rate hike from the Swedish Central Bank very late in the quarter, could you tell us what -- how much of the full impact we've seen so far in Q3 from the rate hike we had in Q3? I.e., if nothing more would happen, all else equal, what would the uplift be in Q4 relative to Q3?

I think it's difficult to provide a detailed answer on that. But generally speaking, our funding is not based on the repo rate. We are basing our funding on the market rates. The market rates obviously factor in forthcoming rate hikes by the central bank. So that's also the reason why you see that we change our -- both lending rates and deposit rates every now and then. Sometimes, they correlate with the Central Bank hikes, sometimes they don't.

Okay. We'll have to wait and see then And finally, just on volumes then, a follow-up on the commercial real estate, where the growth rate has increased quite significantly since Q1, really. Now it's up 13% year-on-year in the strongest growing segment in Sweden. Could you tell us, are you lending primarily to your -- or only to your existing clients? Or are you also taking on new clients in this environment?

I mean -- in a general sense, I mean we like good clients. Of course, we like existing good clients, and we like new good clients. So -- and as we've highlighted, we think we're in a really good position to help good clients to weather these storms in the bond market. So we won't disclose how we -- the lending has come from, but we're in a good situation.

And finally, just on U.K., where you continue to highlight the strong volume growth while the book is actually shrinking in local currencies, primarily due to the corporate side there. And you said that you were phasing out some clients and amortizations increase. Do you think that this will change anytime soon, because so far, since -- like it's primarily the rate that has driven NII rather than volumes?

You're correct in the observation, Magnus . I think -- to be fair, I mean, many times we go through cycles like this, and when markets reprice quite rapidly, if you have a really strong client base, they might take their -- actually, their balances they have on the account and pay off loans. And that's actually what we've seen on some magnitude now. I think that's obviously negative for growth, but it's also a good sign of the quality of the client base. But having said that, when we look into the gross figures and the -- because we've gone through this restructuring ourselves and come out with a higher actually client satisfaction than we've had, we've increased the distance to the runners up. And what we can see is that we attract the same size of new clients now, which we did in 2018. And we're actually attracting the same gross volume growth as well. So I would say that the structural underlying trend do look really positive. But having said that, I mean, if we're entering a phase with credit contraction, of course, our client base would amortize as well to a high magnitude.

[Operator Instructions] And your next question comes from the line of Maria Semikhatova from Citi.

2 questions, both on costs. First of all, you mentioned that you think that IT costs will remain elevated. I believe previously, there were around SEK 500 million of additional IT spend allocated for this year. How much of this you spent? And is it now going to be a recurring IT expense in the coming years? Or if I ask differently, what do you think now the run rate for development costs? And the second question, on the other side of the cost, we've seen that head count increase across all home markets, including 3% in Sweden, 2% in the U.K. I just wanted to hear your thoughts, if that's -- there's any temporary seasonal effect? And what do you think how the head count will develop given the volume outlook?

Now as Carina was pointing out in -- when she was talking about the journey we made, I mean, looking back, we really made a thorough analysis of the bank in 2019, 2020. And we started focusing on the bank where we think we've come quite far in that. We are in 4 good home markets. We're well positioned. We have an offering where we're really strong at. We're investing quite heavily in increasing the distribution capacity, and we're also bringing up the efficiency of the bank. And in the position we are in, we really like to be here. We think we have ample of room to actually strengthen our footprint in these markets, and we definitely have the ambition to do so. And that was the reason as well that in the last quarters you heard us playing down the absolute cost level and moving more towards the cost-to-income steering, and that's what we will do in the future as well. So yes, you shouldn't expect the SEK 500 million to run off. You should expect us to keep on investing at the high IT level in order to gain these possibilities. But having said that, I mean, we really expect to run the bank below 45% in cost-to-income levels. And yes, as you highlight, the FTE levels has gone up in the last quarter as well. And we have been in a good position where clients, first of all, really appreciate what we do. So we -- what we've done in the Swedish business, we've actually added some of the resources to the branch network, but primarily as well, you can see that, that's a consequence of people working on the summer time as well -- temporary employees.

Just a quick follow-up on the IT and development costs. Let's say, the level that we've seen over the last 4 quarters, now that's the appropriate run rate going forward given your investment plan?

Sorry, if that's a relevant figure going forward -- I mean, we won't guide on the correct figure. We will guide on -- we want to run the bank below 45% in cost-to-income levels. And we will try to adapt the IT figure. We will see in the end what it turns out to be. But we are in a really good position, and we want to keep the high IT spending level.

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

My first question would also be a follow-up on commercial real estate. I guess -- I mean, you say you lend to the best companies, [indiscernible] companies in Sweden, but I wonder which these are? I mean, if I look, just this morning, you had one company being potentially downgraded to junk. You had another one writing 5% off of its value. You had one who is stepping up for a margin call last week. You had one of the largest one, where the CEO was selling 12% of the shares in the company. Most CRE companies have kind of fallen 50% to 90% year-to-date. So I was just wondering kind of what your -- which kind of good CRE companies you are lending into Sweden? But maybe related to that, if you could just talk a little bit about the interest rate stress that you're doing for some of these property management and real estate companies. You say that you stressed the new funding at 350 basis points. Is that versus the back book? Because my understanding is that some of these commercial real estate companies, their back book funding in Sweden is somewhere around 1%. So if you add 350 basis points, that would be broadly in line how much you got to charge for a mortgage? Or do you kind of take where new funding is done and then you add 350 basis points to that? . And then, also if you could just clarify the also stress revenues given that we're also seeing some of the large retailers in Sweden kind of closing shops? And do you assume that they potentially also might use some of the revenue? So if you could just give a little bit more detail around your stress?

Well, please fill in when Carina and Peter. But first of all, I think it's up to you to decide which CRE companies are good or bad in your view. I mean we -- as we've highlighted, the way we do the credit granting and the credit policy has been tested for ages. And we -- and as we highlight in the pack, the average of our client base can live with interest rates at 8 to 9.5 percentage points. So we think that's a good starting point. But obviously, as you say, you will have to guide yourself on who's the good or bad clients. We're happy with the asset quality we have. Then second, yes, the starting point for the 3.5 percentage points in stress is the -- for the public companies, it is the second quarter report. And for the non-public companies, it is actually the 2021 yearly report. So that's the outcome of it. And then, we haven't actually stressed the revenue side. What we saw in the banking crisis in the '90s, was actually that the revenue side of it was increased. But then, on the other hand, obviously, as we've highlighted before, the vacancies is the really important key metric to have in mind as well. But obviously, the market is in stress, and the equity market has definitely highlighted that in the valuations. But we think we're in a good situation, and we keep on being the credit -- doing the same credit process as has been proven in the past.

And just on the kind of mortgage side, if I look at your kind of mortgage rates now, the cheapest one is [ 4.29% ], I think it's the 3-month rate for a mortgage. In the past, when you did the stress, that -- you would -- got a 4%, 5% stress interest on top of that, do you still do the same approach?

I don't know if you're asking for the lowest level the consumer should be able to weather. And on the absolute majority of the portfolio, that stress is based on 7.5 percentage points. We lowered that during the last summer, but that is reviewed again now. But the majority of the book is -- the stress is made on 7.5 percentage points.

So total interest of 7.5%, or 7.5% above the kind of interest that they [indiscernible]?

Total.

And then if I could just have a quick follow-up. I guess based on the earlier question, you don't disclose deposit [ beta ] , but do you -- can you give kind of a range how we should think about the deposit [ beta ] going forward?

I think I'll just keep reiterating my answer I made to Andreas earlier on. Then -- I mean, it is tough to guide on that one. It will be a slower [ beta ] or a lower [ beta ] the further you go from 0 interest rates. On the other hand, we haven't seen the positive impact yet in Norway and Netherlands. It will be a moving client competitive landscape. When rates were increased in the past, you saw lending margins dropped quite a lot, and you saw deposit margins moving up. So I think we're in a good situation, but we can't guide on the number on -- going forward.

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

So first, a question on the property management exposures where you disclose your average loan to value on the commercial real estate. That was down 2 percentage points quarter-on-quarter. So is this because of lower loan to values in the new volumes you've taken in? Or have you increased valuations of the collateral, or have customers amortized more, or anything else? What's driving that decline, please?

Sorry, Nicolas, can you take that question again? Are you basing it on the fact book now?

No. In the presentation you put out the slides on the average loan to value across different property management segments.

Sorry, and your question was?

So if you look at the average loan to value in the property portfolio on the left-hand chart on Slide #...

29, I think.

Yes, exactly. So that's down to 47% now, and I think it was 49% in the previous quarter. So if there is anything in your underwriting or in the portfolio that's changed there in the quarter?

No. I mean -- as you can see, I mean, the capital level moving up as well. I mean, they -- all the time, every quarter, as we've been highlighting many times in the past, that portfolio changes. We work quite a lot with the portfolio. So in these instances, it is a mix. And you can actually find it on Slide 25 in the fact book. You can see a breakdown of the trends here. And as you highlighted, yes, they've gone down from -- a year ago, they were at 50%, and now they're down to 47%. And you can see the composition there around the various loan to value levels.

And second question, please, on asset quality as well. So you previously talked about your loan losses not being very correlated to economic growth and being more of an idiosyncratic nature. So do you still think about asset quality in this way as we might set into recession next year? Or do you see any renewed reason for why we should think that your loan losses are at greater risk of increasing, going into the next year from the current levels?

No. We think our credit process has been tested for many decades. So now we keep on believing the same correlation, or the same dependencies hold. So -- but obviously, we're humble going into recession. We will have to wait and see what happens. But no, no news on that one.

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

So firstly, on net interest income, again, just to try and get to the bottom of it. On your basic savings account in Sweden, you're now paying 50 basis points, you were paying 0 at the beginning of the year. When did the increase happen, to give us some idea of the deposit cost changes? And secondly, just on the commercial real estate side. Could you give us some idea of what the basic covenants look like in the CRE lending that you do?

Let's start with the first question. It was the 30th of September we started paying on the savings account. And sorry, I didn't grasp the second question. Can you take it again?

On the -- yes, of course. On the commercial real estate side, what are the kind of standard set of covenants that you impose on your clients? I'm assuming it will be something on interest coverage and something on leverage. But if you can just let us know what the kind of basic criteria would be, so we can understand what the risks are of potential covenant breaches, et cetera?

No, we won't disclose the covenants we use for the lending. But I mean, they're not materially different to the official rating system.

And just a follow-up on -- is it fair to assume that the basic savings account is where the majority of the 65% of household deposits that are not transaction accounts sit?

No. They -- well, it's a matter of -- we have a few accounts which you could, in a generalized wording call savings account. So we have -- and then we have -- on a floating perspective, we have roughly 50%. And then we have a lower proportion -- or a very, very low proportion, which have a fixed maturities on it. Roughly, you can say -- you're right, but it is different between different accounts. You find them on our homepage, the various ones.

And your next question comes from the line of Omar Keenan from Credit Suisse.

I have 2 questions. So firstly, on the net interest income and rate sensitivity in Sweden. Thank you for all the helpful comments on the retail deposit mix and costs. I was hoping you could help us a little bit on the third quarter movements. When we look at the close to SEK 1.2 billion margin benefit that we had in the third quarter, would you be able to split that out a little bit between the benefit from deposit margins, and what impact on some lending margin pressure there might have been in the quarter? And just give us an idea on where the front versus back book on the lending margin is? And my second question is on the property management stress scenario. Thank you for the helpful color in the slides. I was wondering if you could help us think about how the fall in asset price values -- and the change -- maybe migration from stage 1 to stage 2 flows through the risk weights and provisioning requirements in '23, just from a rating migration perspective rather than any companies defaulting?

Let's start with the first question. As I've been highlighting quite a lot, I think we ourselves in the bank, we have really -- we are not in a position to actually have a good view of what the future margins in lending vis-a-vis deposits will be. When we've gone through these kind of phases in the past, we've seen quite a lot changes to the normal behavior between lending margins and deposit margins. But the total sum of it stays much more constant. So I don't think one should judge that much the various compositions. I mean we -- as a bank, we are in a good situation. We will definitely want to attract and keep our good clients, and we want to help them through tough times. So it could be that for some time now, when total margins are high, we support our clients by lower lending margins. That could happen. I'm not saying it will. So I think it's a very tough time to actually compare them. And that also makes the question around front versus back book margins tough also to guide on. I mean we will -- we keep on seeing quite pressure on lending margins, but we obviously have increased deposit margins quite a lot. So I think you have to see them in total.

And in terms of your second question, I'm not sure if I captured it 100%, but -- generally speaking, should we see migrations from an ECL perspective, that's one thing. But when we look at the migrations on the capital side, it's another thing, given that we have floors on the majority of exposures. So it's not necessarily so that we will see an increased capital requirement should we see migrations in lending, that currently is running with risk weight floors.

Could you give us a sense of that at all? So I guess the point of my question was exactly as you said. So on the provisions, if we have -- if we look at the stress case scenario, if you have funding costs go up by 350 basis points, then the average interest cover ratio would be 2x. I guess presumably, there'd be quite a significant migration from Stage 1 to Stage 2 that requires some levels of provisioning. And then, on the capital migration on the risk weights, I guess if there's a 20% reduction in collateral value, I would expect that should be handled within the risk weight floor. So is that a correct assumption? But what's the sensitivity to [ PV ], for example?

Yes. I mean, we've been guiding in earlier quarters that we can live with 25% drop in prices before risk floors are being challenged. But I think you're very correct in the dynamics of the puzzle. So of course, if we see prices drop -- and they need to drop more than 25% actually to be challenging the risk weight floors. But as you say, in a climate where rates increased 3.5 percentage points, we most likely will see negative credit migration as well. So that will flow through. But we don't disclose on the impact of it.

And then, as we highlight also when doing the stress it's -- you can call it a simplified stress in the sense that it's pretty much an all else equal scenario. We hiked the interest rates by 350 basis points on the maturities until end of next year, but we don't do anything to operating that, for example. And obviously, should we see such a scenario, is highly likely that there will be other factors changing and affecting the final outcome. So you should see the stress test as sort of a static calculation, not taking into various -- taking into account various other items.

And your next question comes from the line of Jacob Kruse from Autonomous.

So just 2 questions on the commercial real estate. Firstly, on the stress test, the ICR question. You do it until end '23. How much further do you drop in 2024 of interest coverage? And I appreciate you say [ that is ] simplified calculation. But would you just -- you can go from 4.42% to around 1.5% in the following year? And then secondly, just a follow-up on the LTV question in the property portfolio. The decline that has been seen in the last few quarters-- I guess my question is, have your property collateral values on how --So just quickly then. Number one, what will be the ICR in 2024 on your analysis in that stress test given the role? And secondly, did you increase the collateral valuation in the last quarter in the property portfolio?

Let me take the first question, Jacob. I mean why we stressed just the 2023 is because, we know that for the coming year, the real estate companies, they funded the complete need of their balance sheet. If we were to look further ahead, we would see a drop off in their -- they haven't already funded everything. So this should be seen as a binary stress test where we actually increased the rates by 3.5 percentage points for the total portfolio immediately. So your question isn't actually relevant in that sense. We've already stressed the total component. - And please ask a follow-up question if it's hard to understand what I'm saying here, but...

Yes. So just to be clear, you say in your presentation that this refers towards this up until 2023for that. But now you're saying it's actually the entirety of the…?

No, if you think about how you build -- how you finance your business, you will obviously have some -- when we move forward time, you will need to go out and finance more in the future. So you will always have a decreasing portfolio maturity profile more or less. And the reason when we want to stress the total outcome if rates were to increase, we want to look at a time perspective where they actually funded the complete asset need. And that's the reason why we have been focusing on the first year, because then we know that they've actually borrowed the amount of money they need. If we look further ahead, you can see that they haven't yet funded these kind of needs.

But if we talk about a property management company with a fixed asset that is not doing a project work, isn't that portfolio pretty static in terms of what they are looking for? And is it the funding profile of that relatively long term with not most of it maturing in 2023?

Well, I think the method we've chosen is for ourselves the best way actually to get the full dynamics into it. So that's been our ambition. But please, if you call IR afterwards, they might be able to answer this a bit more easily.

And just on the LTVs. Can I just ask, did collateral values go up for you in your valuation models?

No, I wouldn't say so. No. The relevance -- if you look at Slide 25 in the fact book, you can see the components -- where we have the components of the portfolio between various segments of the loan to values. And it could be multiple factors behind the outcome here. But one thing we always do is obviously work on the quality of our portfolio and trying to -- we're trying to increase the ratios of really strong clients with low loan to values. And we -- most often, we try to work with the ones with worse numbers. So I can't say the -- it's not one factor, and we're not disclosing the factors behind the movement.

And the last question for today comes from the line of Nick Davey from BNP Paribas.

2 questions, please. Firstly, on the Finnish disposal. I think it's now been 12 months since you announced the intention. Is there any update to give us? And is there any level of interest rates or margin expansion which gets the profitability of that unit up to an acceptable level where you'd choose to keep it? And the second question is back to Swedish margins, please. On your website, it seems like the gap between the list price for a 3-month mortgage and the agreed rate is enormous, certainly compared to history. So my question would be, why do you think that's happening? Is it purely a lag effect and you'd expect the gap to close? Or you think at a branch level, your branch managers are happy to decouple that amount from the overall list price? Just trying to understand the dynamic at work, if it's temporary or permanent?

Please fill in, Peter and Carina, if you want First of all, the Finnish -- . No, we don't have any news to give you on the Finnish disposal. And yes, of course, on the margin, we should see the rate levels will benefit the Finnish business as well. But we haven't changed anything in our strategic view on our Finnish business. On the second one, yes, of course, there are lagging effects, and it is difference between the list and agreed price, and it is all the time. But yes, as you say, they're on a high level right now. And in these kind of moving markets, they tend to be quite volatile, these effects. But having said that, once again, I keep reiterating that, if you sit at a branch and if you work with clients, it is actually the total profitability of the relationship, which is the really important factor here. And so it could be a case where we actually -- if we have strong deposits margins as well, it could be a case that we're actually lowering the margins on the lending. So the total NIM is what I would think -- My -- I would urge you to focus on the total NIM.

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

Yes. Thank you, everyone, for participating today. And as always, you know that you can easily reach out to the Investor Relations department for any follow-up questions. So with that, we wish you all a good day. Thank you.

Thank you very much.

Thank you all. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]