Svenska Handelsbanken AB (publ)

Good morning and a warm welcome to the Handelsbanken presentation for the Q1 result. Our president and CEO, Carina Åkerström, will begin by giving a presentation which is broadcast live. The link can be found under handelsbanken.com under investor relations.

You will find the presentation simultaneously translated by choosing English in the menu.

After the presentation, there will be a short break, and then we will have an English language Q&A session via the phone link service. And you will find the link with instructions in the same place on our website. Over to you, Carina. Thank you very much. And once again, good morning and a warm welcome to this Q1 results presentation for Handelsbanken Q1 2023. We continue to show a performance where income is up on all the important lines. They're also up more rapidly than our costs. We have good cost control, and the costs which are rising are good ones, development costs in particular. And the basis, as you can see in the report, which you would have seen, are strong and resilient finances. Let's start by having a look at the quarter and comparing overall with Q1 2022. We have a good capital and liquidity situation. This lays the basis for long-term flexibility required to support our customers as well as long-term stability. We support our customers and grow our business and we make investments to strengthen the profitability and our customer offering regardless of what's happening in the world around us. Liquidity risks are managed with well-conceived liquidity buffers, and as always, these are evaluated by the market, and we're interested risks exist. They are limited. Using derivatives funding risks are dealt with by ensuring that lending is funded with a surplus of stable and long-term financing sources, and their capital position is good. CET1 ratio during the quarter amounted to 19.4, which means a buffer of 4% above regulatory requirement, including the pre-announced raises of contracyclical buffer requirements. Asset quality remains stable. And we're once again showing low levels of credit losses. The customers in the bank have good order in their finances and resilient cash flows also in periods of stress. Lending, as you know, is always based on the customer cash flow and as an extra stimulus. The overwhelming majority of the bank's lending, as much as 92%, is secured with the setup of LTV ratios that are secured. And the rising interest rate environment has created some turbulence in the market on increasing funding costs in the real estate sector when it's time to refinance outstanding assets. loans. In the current and ongoing review in the Bank of Exposures to property companies, we see that credit quality remains solid. The income over the first quarter reached the highest level seen so far also in all of our home markets, in fact. The CI ratio improved and is now at the lowest level we've seen in decades, at least as far back as we are able to identify. We have good asset quality and costs are stable overall, whilst At the same time, we're investing at a higher pace, as I mentioned, for growth and stability, generating IT and business development. The underlying profit is up by 57% compared to last year, and the ROE is at a level of 15%. Let's have a look then at the first quarter compared to the fourth quarter of 2022. We see an improvement of the CI ratio. It's now at 38.5% and the credit loss ratio is still at low level. We're currently at 0.01%. Profitability, 15%, as I mentioned. Underlying total income up by 4%, net interest income. up by 5%, and this is driven by continued recovered margins. The net fee and commission income also rose during the quarter by 3%. The increase is explained mainly by increased market values in our savings business, but also continued strengthening of the bank's position in the savings During the first quarter, as much as 45% of our entire net inflow in the Swedish mutual funds market went to the Handelsbank and mutual funds. Expenses were down by 1%, and at the same time, the development level is maintained at a higher level than one year ago, and it's entirely in line with what we communicated during the fourth quarter. All in all, the underlying operating performance was up by 8%, adjusted for items earlier. which impact comparability. And then if we take the quarter and compare it to the same quarter, 2022, the result was up by 57% adjusted for items affecting comparability. Underlying income up by 34% and expenses by 10%. Revenue is driven by a rise and increase in business volume and recovering interest rate margins. The cost increase, on the one hand, explained by our increased pace in investing in IT and business development, but also by inflation, which has had an impact on both wages and costs generally. And we are a number of countries. A number more employees than used to be in the Swedish operation. CI ratio was improved to below 30% and operating performance up by 49%. As previously mentioned, we're moving our positions forward both in lending and savings in our Swedish business. In the UK, we've seen a very considerable improvement of our performance with a result which is up by 167% compared to last year. Income up by 56%. At the same time, costs are up by 6%. So the CI ratio has improved steadily during the quarter. It's now at 46%. This is the lowest so far. It has to be compared with 68%. The CI ratio one year ago in Norway, costs were up as a result of our increased spending in IT and business development. But nevertheless, we still saw an improvement of our performance by 21%. And in the Netherlands as well, we saw a considerable increase of our performance up by 69%. Hello, Ms.

Gaiman. The financial slowdown is becoming very clear with a dampening of lending growth. We see that both in household and corporate business. The trend with higher mortgage amortization rates that we saw this summer is continuing, which means that we see that on both the lending and the funding. But at the same time, we continue to strengthen our market positions. We're the biggest bank in corporate lending. We have a market share of 22% and we attracted 43% of net inflows during the first two months of the year. The market share And the net inflow has recovered, even if the volume growth, as I've mentioned, has slowed down significantly in the market as such during the last few months. Volumes go up and down during business cycles. We've seen that many times before. And our business is built on long-term thinking and long-term relationships with our customers, which creates a long, stable growth and growth. a stable increasing shareholder value over time. Then looking at the net interest income during Q1, comparing to previous quarter, we reported an 8% increase with underlying 5% adjusting for items affecting comparability, and we saw a recovery in increasing margins. Looking at expenses for the quarter, they are down 1%. And items affecting comparability are balancing out each other. Development costs are now relatively stable at a higher level compared to previous years. Same thing we communicated last quarter. And they contributed with 1% to the increase in costs for the quarter. Remaining underlying costs are down 2%, which is explained by fluctuations due to seasonal fluctuations and also lower pension costs and the annual deficit. Salary revision, CI ratio is now down to 38.5% for the quarter compared to the underlying level at 46% a year ago. And at the same time, we've seen that we have increased the development expenses significantly the last few years. And how do we spend that money for those development investments? Well, the strategy is very clear for the bank. We want to continue to be the leading bank in customer meetings. We want to enable investments and savings, and we want to have competitive, simple solutions that should be developed for our customers. We invest in technology. so that we can have value-creating data and innovation and in such a way support the digitalization of the bank. The objective with these investments are to offer the most personalized advisory meetings and leading digital experience, but also to enable customers so that they seamlessly can move between branches and digital meeting places. It should be simple for customers. It should be easy to meet with the bank regardless of when and how you want to do that. The local branches continue to be the backbone of the bank and that is where we have the responsibility for the overall business of the customer. And it's also at the branches that we can give more qualified, advanced advisory services, asset management, private banking, for example, through a physical meeting or a virtual meeting. And to provide a high level of service 24-7, that is something that is obvious to us. And we are there also office hours with distance advisory services. And we have the digital channels. And we want to make it easy for customers to manage everyday services and also to get the relevant and best possible digital advisory services when visiting the bank. In Sweden, for example, we have a focus on development of making it easier for customers to avail themselves of the offerings of the bank, for example, through a digitalized process having to do with mortgages and savings. In Norway, we invest significantly in enhancing our capacity to grow within the private household sector by increasing our digital availability and mobility. The objective is to create the best customer experience in the market with digital customer meetings and also, of course, enhanced advisory services in our branches. In the United Kingdom, we create opportunities to grow significantly by upgrading the core banking system. At the same time, we develop the digital customer meetings. The same thing goes for the Netherlands, where it is about improving the digital customer meetings and also to look at the visits at a branch for funding, lending, and for saving. And to conclude, the bank is very stable and we're well positioned. Our way to work and manage risk is always the same, and this is reflected in the best credit rating overall in the world, and we also see this in our low credit losses and the most... stable earnings generation in the sector. And this is also underlined by the strongest capital position. We eliminate risk, which means that we have a flexibility. We can develop the bank and we can grow with new business and with new customers regardless of what's happening in the world around us. And that is how we create increasing and lasting shareholder value over time in Handelsbanken. And that being said, I want to say thank you for having listened. And I hand back to you. Well, thank you. break for a few minutes and then we will continue with our Q&A session where Peter Grave, our Manager of Investor Relations, will be available for questions and you have the instructions as to how to connect to that conference under Hanses Bank and Investor Relations. Welcome back. Music Music © transcript Emily Beynon Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

Hello, everyone, and welcome back. We will shortly commence the Q&A session, and we will kindly ask you all to ask a maximum of one question per person, and after that, step back in line for any follow-up questions. But before entering into the Q&A, some brief remarks from our CFO, Carl Sederskjöld.

Thank you, Peter. I will continue where Carina finished off. The superior rating, lower variation in earnings, and very low credit losses we believe is a consequence of a consistent business model. So please go to slide 11 for a breakdown of our asset side. Let's start with an obvious rule of thumb. A bank is never better than their client base. Therefore, we strive to lend money to good clients. As you know, our credit policy is built to avoid credit losses, not as other banks trying to optimize risk and reward. We want to avoid credit losses. The process is therefore based on understanding the client's business or cash flow outlook, as well as understanding the financial resilience of the business and the owners of the credit. On top of this, we prefer collateralized lending. It is a sequential hierarchy in the sense that a strong collateral can never make up for a bad cash flow outlook. A superior client base leads to a lower proportion of problem loans, as you can see to the left. Having a low proportion of clients going into default is by far the most important factor leading to low credit losses. To the right, you see the ratio of assets being collateralized. Once again, we are more conservative, with a level of more than 90% of loans being collateralized. As you can see, the range of uncollateralized lending range from 8% to 35% amongst the Nordic peers. Even though we proved to have a very small fraction of problem loans, we do prepare for the worst, and you can't overrule there will be property management companies facing challenges given the new rate environment. Will that mean credit losses for the bank? Well, not necessarily. Let's think about the steps that have to be surpassed before a collateralized property management exposure with low LTV translates into an actual credit loss. First, if the situation deteriorates, some loans will be at risk of breaching of covenants, be it from the LTV or interest rate coverage perspective. The bank always initiates a close dialogue with the customer well ahead of a breach taking place, making sure that active measures are taken by the owners. This could involve adding collateral, sale of assets, adding equity, or change of funding source, to name a few. Having close local connection and being close to the customer is highly relevant in order to detect problems at an early stage. Second, if necessary actions by the owners are not enough, and if there is no realistic solution at hand to restore the finances, the bank can call the loan. Third, if the customer in such a scenario is unable to refinance the loan through other sources of funding, then the bank, as a last measure, can cease the collateral and get repaid by selling the asset in the market. In this perspective, a starting point with a low LTV is, of course, very important. Fourth, In an extreme scenario where the estimated value of the collateral being lower than the value of the loan, the bank has the option to retain the asset and divest it at a later stage, when the market stress has eased. This happened 30 years ago in Sweden. The losses booked in the midst of the 90s crisis were eventually turned into net profits during the following years. It should, however, be stressed that the starting point this time around is more resilient with LTV starting at a much lower level than the ones before the 1990 crisis. Also, LTV in a stressed situation is all about quality of the underlying property. Handelsbanken has proved to have a superior ability to assess credits historically, and our local presence puts us in a position to reassess the cash flows that the underlying asset can produce in the specific local environment. So, yes, our bank has a large exposure to real estate as a consequence of being a risk-conservative bank in Sweden where home ownership is a common feature. The exposure do consist of customers showing healthy and durable cash flows and low probability of default, strong owners capable of acting early if necessary, and collateral below LTVs. We think all of these steps explain the difference in historic credit loss history. On slide 12, we make an update of our lending to property management. Our total exposure to property management is 687 billion Swedish, i.e. 30% of the loans in our home markets. To the left, you can see a breakdown of volumes, breakeven interest rate, and LTV distribution. The largest component is residential real estate with 348 billion Swedish, a breakeven interest rate of 7.7 percentage points, and an average LTV of 48. The second largest component is retail offices and hotels, with 302 billion Swedish, a breakeven interest rate of 8.1 percentage points, and an average LTV of 44. Lastly, logistics and industrials accumulate to 37 billion, with a breakeven interest rate of 14.1%, and an average LTV of 41%. We think this points to good resilience to higher rates and drop in asset value before larger sums of defaults occur. To the right, we made a deep dive into the 30 largest property management exposures. These exposures accumulate to roughly 20% of our exposures to property management. For these clients, the average ICR in 2022 was 3.5 times, i.e. the net EBITDA can cover the interest rate expenses three and a half times, and the average LTV was 46%. Second, we have assumed that all debt maturing in 2023 is refinanced at 5% in Sweden or 6% for Norway and UK, and that all interest rate cost is increased from 1st of January 2023. We have not included any possible increase in income coming from rent decreases nor any balance sheet actions in order to cut leverage. With these assumptions, the average ICR drops to two times, and none of the companies included go below one time. Please go to slide 13. As of now, asset quality still stays very robust. we see few early indications of stress. We see some that contain negative credit migrations, but it should be stressed that it is mostly high-quality credits being downgraded to normal risk rather than normal risk customers being high risk. We might see some indications that clients use a larger proportion of proceeds to pay monthly payments rather than save or amortize, and we have seen an increase in amortization holidays. though still at very low levels. We have approximately 3,000 mortgage loans with amortization holidays, and we have seen a two-, three-fold increase in the number of granted holidays per month. That represents approximately half a percent of the mortgage book, and most holidays are granted based on ordinary reasons, such as parental leave, higher education, or separation. Only a minor part, less than 0.2 of the holidays, has been given a forbearance, which means that they should struggle to pay the rents without the amortization holiday. As you can see, we have a very low level of credit losses in Q1, with only one basis point, continuing the streak of low losses in other quarters. Please go to slide 14. We have a very robust capital situation, closing the quarter with a C to 1 ratio of 19.4, being 4.8 percentage points above the regulatory demand, and as of now, 4 percentage points, i.e. roughly 33 billion Swedish, above the level the Swedish FSA has indicated for Q1 2024, including another 0.8 percentage points of average counter-cyclical buffers. As you know, we keep a very conservative stance on the capital level, which we think puts us in a very good situation with ample flexibility. In highly uncertain times, flexibility will be valued either to catch growth opportunities or prove safe and sound in tough times. We are certain that this is a key component of creating superior risk-adjusted returns over time. During the quarter, we've updated our PD models for our retail IRB models. The net effect, taking into consideration the opposing effect from risk-weight floors, is a negative 0.1 percentage point. We see two outstanding regulatory topics on the capital side, corporate IRB overhaul and structural effects. The two will offset each other, but to what extent, we can't say at this stage. Of course, we will come back as soon as we have something to say. Last but not least, in the wake of the American banking crisis, please go to slide 15. Most banks do not go bust due to asset quality nor capital levels, but liquidity strains. Our business model have a low complexity, which leads to an easily understood balance sheet. Besides a large component of cash and high-quality liquid bonds, all mark-to-market, lending is a large part of our business. Loans to household and corporates are illiquid assets, and lending is a core business we strive to pursue in good or bad markets. Therefore, we apply a match funding strategy. First, as you can see, we have 1,890 billion Swedish in loans with a maturity over one year. These loans are financed by a balanced mix of equity, long-term bonds, and stable deposits, accumulating to 2,400 billion Swedish. The balanced mix of funding sources and maturities, which come with a cost to NIM, make us less vulnerable to stress in either bond markets or deposit markets. We see this as a core component in keeping continuity in our core business. Second, we have short-term assets accumulated to 1,450 billion Swedish, including our liquidity reserve of 765 billion. The sum of our short-term assets are 1.7 times the sum of our short-term liabilities. On top of a balance sheet with low complexity and a funding strategy making it easily decomposable in times of stress, as well as large liquidity reserves, we have unutilized collateral on the back of our mortgage loans to the magnitude of another $700 billion. So if financing proves challenging short-term, we use the liquidity reserve to fill the financing gap. And if we see a more prolonged stress or crisis, we can use the possibility to issue covered bonds on the back of unutilized collateral. And with that, let me thank you all for listening and open up for questions.

That's all, Preeti. Could we have the first question, please?

Yes, the first question is from Andreas Atkinson of Danske Bank. Please go ahead.

Thanks, and good morning, everyone. So a question on the NII. I'm thinking about how Swedish households or guest households across your business are are reacting on the deposit side. What trends do you see? Do you see any risks that you are going to be forced to start to pay interest on your transaction accounts? And how do you big movements do you see between your different accounts? Is it still a big flow from transaction accounts to savings accounts? Or have that stopped? Could you tell us about that? And since I only can ask one question, it's just a clarification. the movement in the liquidity portfolio from Finland to Holland, that was flagged before, right? And was the size, the 295, was that as expected or was it somewhat larger? Thanks.

Well, let me start with the first one. The development of Swedish household deposits, then, yes, we have obviously seen a movement from transaction accounts into term deposits. And the level of the household deposits are now down to 30 percent on transaction accounts. And if we go back historically and look at the behavior of clients vis-à-vis the rate levels, this actually follows the historic trends. And if the historic trends were to be followed even further, one shouldn't overrule banks starting paying on transaction accounts quite soon. So I think the fair situation is to say that Obviously, the level of deposit beta has... Obviously, we pass away more money to the clients nowadays. And we have, during the last year, actually increased term deposit rates as much as we have on mortgage rates. And we think, obviously... taking into account the monetary conditions now being more restrictive, both in the rate levels, but also wish to go at least to passive QT and perhaps active QT. That gives us some headwind to deposit growth in the banking system as such. So you can't overrule that banks will follow the historic trends.

And then, Andreas, in terms of your question regarding the liquidity portfolio, are you referring to the activities in the first half of last year?

No, I mean, you moved. I mean, on the NR bridge, you talk about the 295, where you moved liquidity in the end of last year from Finland to Holland, right? ECB-related.

No, no. What we've done is... As you know, we have a central treasury department within the bank. So when we fund our Finnish operation in the capital markets, we issue euro bonds. The way we've been accounting that up until this quarter is that the interest income for the client business in Finland has ended up in the Finnish business. whilst the cost for financing the bonds, the euro bonds on that one, has ended up in the central treasury and then in the continuing operations. So that's the change we've made. What happened in the first quarter now was that when rate increased so much, these figures were starting being quite high. the discontinued operation line wasn't reflecting the true status anymore. And that was the reason why we changed the accounting method. So it doesn't have anything to do with the liquidity reserves, but rather the funding of the NII business. Okay, thanks.

The next question is from Matt Lickledale of SCB. please go ahead.

Yes, good morning. Just looking at slide 27 in your pack on lending to the public, it looks like, I mean, books are shrinking queue on queue on the corporate side, also on households. I'm just wondering if this is a demand question or have you scaled down further on the corporate side or what should I read into this? And And also, if you can comment, if you would have this picture for CRE, how would that look on the corporate side? Thank you.

No, I mean, as we show in the numbers, volumes contracted somewhat more or less across the board. So it followed the development overall in the market. But at the same time, we strengthened our position in the market despite of that. When it comes to the deposits, obviously, I mean, the numbers you referred to relate to our home markets. And it's correct that they declined somewhat during the quarter. And could I please ask you to state your other question again, please?

No, it was on the loan side, on slide 27 rather than 28. So it was on the corporate side here, it looks like. your book is shrinking. So if you would post that picture for only the commercial real estate, how would that look?

No, we still, first of all, yes, it's correct, obviously, that we see slowing growth, but we still see good growth actually in corporate loans. So if we would state that on property management, which I guess you can see on on, at least in the fact books, we can get back to the figure, actually, that, and tell you the percentage difference.

Actually, you see numbers in the fact book on slide 34, page 34, where you can see the, I'm sorry, that's the, yeah, on slide 34, you have a breakdown where it shows the property management growth, not only on aggregate, but also in the different countries.

Yeah, thank you. I'll dig into that.

And the next question is from Magnus Andersson of ABG. Please go ahead.

Yes, good morning. Just continuing there on deposits, follow-up to Andrea's question. Look, you touched upon it yourself just on corporate deposits and QT, and we can see that, at least in Sweden, Deposits are down both quarter on quarter and year on year, and then you have another item going up, saving it quarter on quarter. How do you foresee this developing going forward, given QT? Should we expect to continue a quite sharp drawdown throughout the year? And secondly, I think you mentioned that 30% of your deposits were on transaction accounts now. are you still paying zero rate? I think last quarter you also mentioned what portion of your corporate deposits are still paying zero interest rate.

Yes, first of all, the second question, 25% is the ratio of the corporate deposits paying zero percent, so the transaction account there. Okay, thanks. Second, I think, or your first question is around what we should expect. I think it's very hard to say, obviously. The way we've been reasoning in the past, if we move from the deposit base of the Swedish banking system has correlated quite well with QE and the monetary base. So if we see, first of all, we see a rate level which is obviously dampening the credit growth, but we also see passive QT or even active QT. One should expect mathematically actually the monetary base to contract. If that will happen, we will most likely see slow to negative loan growth as well as deposit-based shrinking. So it's a lot of assumptions around this perspective. As you highlighted, And we were obviously answering the last quarter that we saw outflows in corporate deposits, which were from non-core corporate deposits. And we see inflows in that. And, yes, we have a slight negative trend in deposits. I think it's very many uncertainties now around the QE, QT perspective. So I guess we will have to wait and see the development over time.

And on the household side in Sweden, it's fairly stable, you can say. And you talked about savings versus transaction accounts. Are you also seeing flows into other types of savings products?

We obviously see into term deposits. We obviously have a good market share of flows into funds. But I can't say we see... on any magnitude flows into other savings products, no. Okay, thank you. Other parts than amortization levels being quite high, which is saving in a sense. Yeah, okay, thanks.

The next question is from Richard Friend of Nordia. Please go ahead.

Hi and good morning. Following on on the deposit theme, just want to ask what sort of differences you see in the various countries in terms of competition for deposits. Noting, for instance, in your UK operations, retail deposits seems to be down 5% Q1Q. So adding some flavor there on the regional development.

Thanks. Yes, thanks for that question. And that's actually quite a good question and something we should perhaps proactively talk about. The UK development, as you know, we've been highlighting for quite a long time now that we have a superior rating vis-à-vis the country UK. So we do attract a lot of a deposit and it has continued on the corporate side this quarter on date on the house outside we have a contraction in deposit the nominal this quarter but that's actually due to the the in in our in our retail perspective we have quite a few people owning houses and they get the tax to be paid in the first quarter so if you look at the see from in the seasonality development going back you will see that the deposit base normally shrinks in the first quarter when they pay this tax, and then it becomes a growth. It comes back to growing. So I wouldn't put that much value on the shrinkage of the UK household deposits.

Okay, thanks. And a brief follow-on to that is sort of where you see some reduction besides the systemality. Is it more to clients sort of taking down their overall balance sheets or is it that you see outflows to competitors in terms of that sort of offers higher deposit rates?

Well, in Sweden, we obviously, we don't have the March figures as of yet, but we've obviously seen SBAB taking quite a lot of market shares, whilst we might perform slight better than the banking system, but the banking system moves fairly correlated. So in that sense, that might be the competitive perspective on it. Otherwise, it correlates quite well with the with the household lending. So if we will see slow growth in mortgage business, most likely we will see slow growth as well in deposit growth.

Okay, thank you very much.

The next question is from Maria Sinikatova of Citi. Please go ahead.

Yes, hello. Thank you for the presentation. I have a question on your property management exposure. Well, first of all, thank you for updating the stress test and providing additional details. I hear your arguments that you're focusing on cash flows and low LTVs. I just wanted to get a better understanding on your, let's say, provisioning policy for this and the coming year. If I look at the stage two loans for property management companies, specifically in Sweden, they increased 47% over the quarter to around 4.5% of total exposure. So I just wanted to check what was driving that and do you see the need to to, let's say, create some cushion against this increasing stage two property exposure, even though you're considering that you're well covered and the final losses, you don't expect any major, let's say, stage three losses.

Thanks for the question, Maria. No, yes, that's correct, obviously. When we see negative credit migration, we will see a flow from stage one to stage two. And that since we are a bank with very high or very good credit loss history, the percentage movements can actually be quite high, even though the figures are relatively small. And as you say, yes, if we see If we see prices drop quite with a magnitude, which will obviously impact LTVs, etc., that will have a consequence of ratings going forward. And if we see negative migration, we will continue seeing an increase in provisions in stage one and stage two. So that will happen. We don't see a reason for us pre-provisioning that. Rather, the model is actually... are well suited to catch these kind of dynamics.

So you don't see the need to, let's say, similar to other players, create post-model adjustments or some kind of overlay for this property, given your historical performance?

No. We think the models follow our development goals.

Okay, thank you. The next question is from Sophie Petersens of J.P. Morgan.

Yeah, hi. Here is Sophie from J.P. Morgan. I just had a follow-up question on the deposits. So if I look at your total amount of deposits, they increased 9% quarter-in-quarter, but when I look in the divisional data, they are all down. Deposits are down in all the core divisions, quarter and quarter. So could you explain where this 9% quarter and quarter increase in deposits came from? And if it's U.S. money market deposits, could you also quantify what the level of these deposits are? And then... Just another quick follow-up. Your net interest income, if you adjust for the 295 million change in accounting, it was up only 1% quarter-in-quarter. Should we expect net interest income to have peaked and be flat or down going forward? Thank you.

Okay. Yes, hi, Sophie. When it comes to the deposits, I think the easiest way to look at the dynamics is to look at slide 37 in the fact book. And what we show there is the development in the whole market as well as in capital markets and other units. And in the other units, you primarily have the central treasure department. And as you can see in that table, in Q4, this table shows you the year or the period end number, so it's not the average number. And there you can see that the period end number on December 31st each year tends to shrink quite sharply, obviously due to the year end effects when we want to trim the balance sheet. And if you look at that table, you can see clearly that the growth that we have in deposits relates to capital markets as well as in central treasury. And, I mean, it goes without saying that if you have this type of volatile volumes, then obviously those volumes are not used for funding the business. They're obviously also treated very short term on the asset side of the balance sheet. So from that perspective, we're not talking about sort of core business volumes or core funding. It's more of sort of short-term deposits mirrored in short-term assets on the balance sheet.

And your second question around the consequence of the Finnish movement. Well, I wouldn't put an equal sign on what we've done accounting-wise with the Finnish figures. vis-à-vis the trend in NII. I mean, the trend in NII, as we've been highlighting, it has a lot of moving components in it. And yes, the first order effects, perhaps the NII will have a positive impact from another increase from the central bank. But as we've been highlighting, we're getting closer and closer to some sort of peak. Have we passed it? I don't know. So we obviously have elevated margin levels as of today. I think there's a lot of points pointing to a higher competition amongst fighting for the deposits, et cetera. And obviously the financing cost in general will have increased. On the contrary, one might expect that mortgage margins and perhaps corporate margins actually do have a tendency to move up going forward. So we don't guide on what we think about it, and your guess is as good as mine if we picked or not.

And perhaps to add also, Sofie, I mean, if you look on page 7 in the fact book, you also have the quarterly numbers when it comes to the adjustments that we make for the funding costs relating to Finland in the NIIF. So there clearly, I mean, you can just deduct or add those numbers to the reported NII and then you have a correct figure for the underlying NII going back to 2021 actually on a quarterly basis.

Okay, that's very helpful. But basically you think that net interest income could be not too far from the peak?

I'm saying your guess. You can guess yourself. We won't guide on NII. We're pleased with the levels we have, and we're pleased with the development we do in the business. The exact number of NIM, we will have to wait and see where it ends up. Okay.

Thank you. That's clear.

The next question is from Namita Samtani of Barclays. Please go ahead. Hi.

Morning, and thanks for taking my question. Just on commercial real estate, please. So in the second quarter of 2020, the LTV disclosed by yourselves was 50.5%. And in the first quarter of 2023, it's now 45%. So can you explain to us how LTV has actually decreased given commercial real estate companies are increasing their disclosed LTVs? So for example, Castellum today, Are you updating commercial real estate valuations frequently? And if so, how frequently? Thanks.

No, you're correct in the sense that it has dropped, obviously, and that's not a reflection of where we think the market is. We do update the values on commercial real estate twice a year, and we definitely do update it with the quarterly results that they show. And as you say, yeah, Castellum printed just the results today, and I think they wrote down their values nearly 4%. So we agree with you. Our LTVs, in practice, they're higher than we print them in the report. But this is just to go on the transactions which has happened. That's what we can move on and judge on. But what we have been guiding on, if we have, if we're on the property management portfolio, if we have $700 billion of loans then, And if we have, on that perspective, we have more or less 100% collateralized lending. And if we, let's say we're at 50 now then, or even higher, then we have a collateral value of $1,400 billion. So obviously prices can drop quite a lot on the collateral values before the collaterals are not worth more than the loans. So that's the... That's the situation we're in.

Okay, cool. So I just want to understand the disclosed LTVs in the presentation, that's based on what transactions you see in the market?

And the transparency in their reports as well. We've obviously included their Q4 reports in this analysis. Okay, that's helpful. Thank you.

And perhaps, Namita, just to add also, as you see on slide 12, the share of property management exposures with LTVs above 75% is more or less nothing. So it also tells you a bit about the kind of headroom we have before we even get close to 100.

Yeah, that's perfect. Thank you.

The next question is from Pierce Brown of HSBC. Please go ahead. Mr. Brown, your line is open.

Yeah, good morning, everybody. Just a question on refinancing app sites in the property management sector. So if I go back to page 34 of the fact book, I can see there that the volumes are up 3% quarter on quarter, and they're up 18% year over year. So it feels like you're still happy with the creditworthiness of these borrowers and still more or less open for business in terms of taking on new risk. So just to confirm that you're happy to continue building that book at this point in the cycle. And are you seeing any indications at all that these property management clients are in any meaningful timeframe going to have access again to debt capital markets, which might take some of the financing risk off your plate. Thanks.

Thanks, Piers. Yes, it's true that we haven't changed our behavior. We will continue offering finance to good clients, not general to the CRE. And as you highlight, yes, we still see growth in that area. I think it's worth the highlight on the slide where you see our capital bridge. In a second, we give you the slide number. You can actually see that the portfolio, even though we have a negative migration, it is slide 40 in the pack, where we have negative credit migration in the risk exposure assets. we actually have a positive impact from that the new clients we pull in has a better rating vis-à-vis the portfolio as such. So I'd like to slightly tilt your answer to that. Yes, we're open for business and we will continue being that, but we will lend to good clients in that sense. So that's our ambition. And yes, as you say, there might be slight improvement in the bond markets for some of the corporates, which is positive in a sense, but still a really good growth opportunity for us, I think.

The next question is from Jacob Hasselbeck of SCB. Please go ahead.

Good morning. My question is on your capital situation. I mean, on slide 14, we can see that your CT1 ratio is now at 19.4%. It's still well above the target range and you are trading below book. Would it not make a lot of sense to actually start a buyback program?

Thanks, Jacob, for the question. A quite leading question, I must say. No, I mean, as Carina has been alluding to and myself many, many times, I mean, if you look into the risk-adjusted return on equity we've created for many years, that's proven to be extremely competitive vis-à-vis our peers, even our Nordic peers, which is obviously a really good part of the banking sector. We've been doing that based on creating the structure for a very stable business model. And in that sense, we tend to be conservative when it comes to financing capital, credit risk, etc. Yes. If you just look on when you distribute capital, of course, if we trade below book, it's a good choice to buy back shares. Having said that, I mean, we definitely think this is a good timing to play it conservative. And that's what we will keep on doing for the foreseeable time right now. But as Karina has been saying as well, we haven't changed our long-term target. It's still one to three percentage points above our regulatory demand. Thank you.

Thanks. The next question is from Jacob Cruz of Bernstein. Please go ahead.

Hi. Thank you for taking the question. Could I just ask first on the CRE, on your stress test that you're doing. So just to be clear, you're doing a stress test on the funding that expires in 2023 and you take everything there on January 1st and then you get to two times ICR ratio. Do you know what happens in 2024 when those volumes roll over? Do you get a further reduction? How do we think about that? Thank you.

Thank you, Jacob. And that's a really good question. The methodology we've used is that We need to separate on the funding perspective and the rate risk perspective. We've actually taken the hedging into consideration. So what we've done is that all rate hedging, which we know will reset through variable rates, we have increased the rate to 5% and 6% in Norway and UK on these perspectives. And that actually nearly half of the book volume. So we know that in rate hedging terms, quite a bit is actually resetting this year. So that's already taking into account. When it comes to the funding perspective, it's a much more stable perspective. Roughly 20% of refinancing is happening yearly. So that's another issue, but the rate cost is coming from the hedging perspective. So nearly half of the book is resetting this year and then included in the updated ICR here. Going further forward, it's a much lower component, and it's only actually 10% in 2024. So we think actually this stress is is quite meaningful and we think it buys quite a bit of time for the CREs to adapt.

And could I just follow up? What confuses me a little bit is just you're having all these stress tests, you've spent quite a lot of your initial remarks on how you can deal with issues and foreclosures or all the stages before that. But despite that kind of cautious or at least that outlook, your loan losses is still just one basis point. Is there not a forward-looking element here to your loan loss realizations that seems to be missing a little bit?

I think that's a really good question of yours, actually. Our message is rather that in order to realize losses in the end, very many steps need to be passed. And the long outlay I did before the Q&A was actually to be very transparent around all of these steps. And if you start with very low level of problem loans in your book, that's a really good starting point, and I think that's a high conviction of the future credit losses. And if you then move to the second step of the collateral level, having as high collateral as we do is another step which has a high conviction of very low credit losses in the end. And then thirdly, even if we end up with a collateral in our lap and we need to sell it off, We've proven historically that we can do that not with a loss, but rather with a profit. So the methodology is rather actually for us to convey our trust in our system and in our credit process. So I wouldn't say that that should be similar to actually expecting higher credit losses, rather the contrary, actually.

Thank you.

The next question is from Andreas Hackensohn of Danske Bank. Please go ahead.

Yeah, hi. So back to my second question, and it's following up on Jacob's question on capital. I mean, I agree with Jacob. I mean, you look significantly overcapitalized, but I mean, having written, I don't know how many reports about Basel IV over the last 15 years, you guys always come out the most badly impacted, given that you have the highest quality as a quality and the lowest risk with assets as a result. You haven't yet given us a number of how Basel IV will impact you. Is that anything related to how cautious you want to be in captive? And when will you start to give us some details on how the first impact is going to be?

No, I think we've actually said over the last quarter that we expect Basel IV not to have a meaningful impact on our captive situation. Obviously, there are uncertainties still around, so we'll have to take that into consideration when they come. But, no, we don't foresee a meaningful impact of that. So the capital level isn't that we go waiting for something to pop up. It is a view of that if you're not only focused on absolute return on equity, and being quite short-sighted there and paying out cash to your shareholders. If you rather look for a long-term shareholder base, which is actually valuing a bank which is standing independent on their own foot, able to survive through ups and downs and able to keep consistent in the perspective vis-à-vis the client, then you really value being conservative. And that's the reason why we play it like this today, not uncertainty around the regulatory regimes.

But in a way, 100 to 300 bps management buffer, one could believe that up to 300 bps is quite a conservative move already if you want to be on the top end of that. But now, of course, you're significantly above. So I would have assumed that the conservativeness that we appreciate would have been captured in the 300 bps. And then when we see your comments on asset quality, which I agree with, then it doesn't seem like you need to be that conservative.

I want to argue in that sense, definitely. We argue in the other sense that we believe that the long-term success of our business model is based on being conservative, and that's the reason why we run the way we do right now. Okay, thanks. Thank you.

Next question is from Sophie Patterson, JP Morgan.

Yeah, hi, here is Sophie from JP Morgan again. So also my second question. So on slide 11, and you also initially started with the probability of default, which is only 0.4%. I mean, I guess if you look at Sweden, last time you had a downturn in Sweden, which was like significant was over 30 years ago. I assume when you calculate your probability of default, you don't take into consideration any historic downturns, or do you adjust your scenario analysis for... kind of severe downturns, similar to what we have seen in Spain or Ireland or in Sweden in the early 1990s. So if you could maybe give a little bit more details on how you arrive at the 0.4% probability default of the group and kind of what adjustments, if any, or if you just look at the past 30 years when there was no downturn in Sweden. And then the second question would be, I saw that you took some IRB overhaul impacts on the retail portfolio. Should we expect more IRB overhaul impacts or this is it? Thank you.

Well, thanks, Sophie. Peter, please fill in if you think I'm... misreading this question. But first of all, obviously, if I start with the second question, because I think that leads into the first question, actually. The IRB retail overhaul, yes, what we've done now is we've adapted and including to a larger extent the inclusion of the 90s banking crisis within our figure. So even though we proved to have very low credit losses during that time, we've actually included, based on the guidance of the Swedish FSA, we've included more components of the downturn of the 90s crisis. So that's the consequence then of the IRB retail overhaul. So that might also be the answer to your first question, that of course we do include the historics from other banks rather than the historics from our bank, actually, which was much better during the 19th crisis. So the PDs do reflect the general downturns. And then, obviously, as we highlighted, yes, we do think there's a risk of a negative consequence from the IRB overhaul on corporates. We do, on the contrary, foresee to have a positive impact on the structural effects capital level. The magnitude of the two separate ones are still uncertain. I don't know if that was... If that was the question.

Well, if I actually have the table up with your losses in the early 1990s. So in 1990, you had 40 basis points. 91, you have 160. 92, 406 basis points. And 93, 343 basis points. So what you're saying is that your IRB overhaul takes into consideration over 400 basis points of cost of risk. Because that's the one you had in 1992.

Well, that's a very detailed question, and we need to answer that one from a very detailed person, so I don't answer this wrong. But in principle, yes, we do include the 19th century. But I can't confirm you're correct in that sense or wrong. So let's get back to that one, and we'll try to answer that question.

And then, of course, Sophie, just to remind you that our balance sheet was structured in a slightly different way in the early 90s. We acquired stocks in the late 90s, meaning that we got a much bigger tilt towards mortgage lending as opposed to the situation in the early 90s. So that obviously on a group level affects numbers. But maybe we can go into more detail after this call and dig deeper if that's okay with you.

Yeah, sure. That would be great. Thank you.

The last question is from Jacob Cruz, Perth. Please go ahead.

Hi, thank you. Just a follow-up, really, to Sophie's question on the IRB overhaul. The thing that you did now was retail. And I guess my question was just, have you done... Does that include the Housing Association book and on the corporate side... I know you have a lot of floors there as well, but on the non-floor bit, should we think about the magnitude as similar to what the potential benefit will be on this FX structural hedge issue? Thank you.

I think that's too early to tell. We're just saying that we foresee a positive impact from structural FX. and we foresee a negative impact from corporate IRB overhaul. We will have to wait and see the gross numbers of the two.

Yeah. And the housing association, was that done or is that yet to come?

We will have to get back and confirm that. I'm actually, I don't know the answer to that question, but let us get back to you on that one.

Okay, super. Thank you very much.

At the moment, we don't have any other questions.

Have a very nice day. Thank you. Thank you.

Ladies and gentlemen, thank you for joining the conference. It's now over. You may now disconnect your telephones. Thank you.