Svenska Handelsbanken AB (publ)

Very welcome to the presentation of Q2 for Handelsbanken. Our president and CEO, Carina Åkerström, will begin together with Carl C. de Scheldt, CFO. They will present the report. There's a direct broadcast, and Handelsbanken.com Investor Relations will get you to the right link.

Find the presentation translated simultaneously by choosing English in the menu.

After the presentation, we will have a short break, and then there will be a Q&A session in English, and instructions for how to connect can be found on the same website. There you go, Carina. Thank you very much, Louise, and good morning, and welcome to this presentation of the performance for Handelsbanken for the first six months of the year, and for Q2. Let's start by looking at a more general level. Handelsbanken is in a strong, stable position in a world which continues to be characterized by a great deal of uncertainty. Interest rates are high, also against the backdrop of the inflation, which persists. and the result is a macro financial uncertainty, which is visible in all the home markets of the bank. For just over four years ago, we stated that we will focus, simplify, and clarify the bank's direction towards financing, savings, and asset management. And in keeping with our customers and general development, we also said that we would speed up and increase our investments in IT and data, broaden our digital accessibility, make efficiency improvements to a lot of the manual tasks in our branches and of course also on future proofing our customer relations and future potential revenue generation. The performance for the bank six months is strong and it's stable. The operating profit up by 46% for the first six months and if we adjust for items affecting comparability, The operating profit is up by 60%. This is entirely in line with expectations, and we continue to do what we have set out to do. And we're doing it, and you can see through the way we focus our business, we develop and improve the business. You can see it in the performance, in profitability, income growing more rapidly than our expenses, and not least important, in all of our home markets. Customer satisfaction exceeds the industry average in our region. So income is increasing more rapidly than cost. CI ratio for the first six months is now down to 37.8. And the degree of activity amongst our customers, both in households and the corporate business during a large part of 2022 and going into 2023 has been high. But during Q2, we see a slowdown, a calmer period that we expect. Now, leave behind us one. We're currently operating at a slower pace, both for households and companies, but we're doing the business we want to do. And our fees and commission income is keeping up well. The good savings business is developing with us, the band of management is continuing to develop well. ROE... is at a solid 15.6 for the first six months. That's the highest level we've seen in a while. It was a little bit higher still during the quarter, 16.2. And credit losses, once again, at a low level. The strength and stability of the bank were reflected at the end of the quarter and at the beginning of July also in the fact that the three leading rating institutes, Moody's, S&P and Fitch, confirmed their short- and long-term credit ratings for the bank. No other privately owned bank in the world has a higher rating combined from those three leading rating institutes. Moody's also upgraded its rating to the bank's senior non-preferred debt instrument, and this is very rewarding since this suggests that there is a comfort in the credit risk and stability of the bank. the bank's strong and robust credit procedures, skilled employees, good order in the finances of our customers, large buffers in terms of collateral, a strong capital position, and sustainable and high levels of profitability. We continue to be very confident in terms of the quality of our credit portfolio. Lending to real estate companies, nothing new. This is something we've worked with for a long time and over the longer perspective this is something we regard positively. Low LTVs and cash flows, good long-standing relationships with the owners who can support their own companies, local entrenched, and it's possible for us to take out collateral. That means that out of the total lending in the bank, about 90% of our lending is secured with real estate collateral and with LTV ratios at approximately 50% in addition. The basis for stability and the long-term perspective remains financial strength and stability. And we have this CET1 ratio now amounts to 19.8%. This is self-evident to us in these times, which have to continually be considered to be uncertain. We see this as a prerequisite for a long-term approach, regardless of the global situation. We need the flexibility to give support to the bank's customers and also have the possibility to continue to invest and develop our operations. Let's have a look at the second quarter, comparing it to the first quarter in 2023. I mentioned earlier that the CI ratio is further improved to the lowest level ever, amounting to 37.1%. The profitability was up during the quarter to 16.2%, in spite of the fact that we have more capital buffers, larger capital buffers than in many years, and whilst maintaining a higher continuous pace of investment than in previous years. The underlying income remained stable and were basically unchanged between the quarters. Costs were down by 2%. The underlying relatively flat and credit losses remains, as I mentioned, at low levels also in absolute numbers. So all in all, we see an increase in the reported operating profit by 4% and marginally underlying result down a very stable quarter once again. All in all, if we look at the accumulating result for the first six months comparing it to last year we see all in all that for the key ratios there are more or less the same as for the second quarter the underlying operating profit is up by just over sixty percent compared to last year and income is up by thirty five percent underlying as a result of relatively high level of activity we had in twenty twenty two and coming into twenty twenty three but still a high interest rate situation and an increased net interest income as a result of recovered margins. Costs are up compared to last year, underlying by 9%. The costs are impacted. during the spring by the overall inflation situation in all of our home markets. It impacts salaries and our costs generally and we continue to invest to counteract financial criminality and we continue to invest in cyber security which is so very important. As we've communicated over the past few quarters we continue to develop our development capacity And we are stable in terms of development investments for the third quarter in a row, entirely in line with what we've communicated before. The current pace we're keeping in IT and development of operations is making it possible for us to develop our meeting places, making the bank's offering much more available on a broader scale, making it easier for customers to meet the bank, to strengthen our offering to our customers. and improve the efficiency of our operations wherever we can. Customer benefit, income generation enhanced, efficiency and satisfied customers, and credit losses more or less increased. non-existent, we have good order in our credit portfolio. When we look a little bit closer also at how we develop what we call our core business in financing and savings, very important to us, we see that we've moved our positions forward. It is rewarding to note because we can see continuous improvements in the digital meeting places, but also an enhanced efficiency in advisory services in our branches. It can be seen in the stability in the lending to households and corporate lending stable increased market positions and net inflows in our asset management positive development development in our private banking activities with more customers and larger volumes we're strengthening our customer relations and we're making it possible to have an increase in income if you look all in all for sweden Overall, we are the biggest lending bank in Sweden if you look at households and corporates jointly. And it is also the fact that we are the bank which has had the largest net inflow in Sweden over time into mutual funds is Handelsbanken. decade and if we look a little bit at lending volume the trend since last summer with a higher pace of amortization is still present today when we look at both household and corporate lending in total if we look at household lending the overall slowdown in the market is obviously having an impact with a lower expected growth but we're keeping our ground and our market position Growth levelling out, amortisation taking place to a greater extent, but we see some recovery in the second quarter and we are doing the business we wish to do, as I mentioned earlier. We continue to assist our customers to more sustainable financing. Green mortgages remain a small part of total volume, but it is on the increase. And if we look at lending to corporates, the pattern is a little bit different based on our core business. We're still growing at a stable pace and yet again we see a positive growth in the past quarter with some leveling out or slowdown, it makes perfect sense. And we also see that sustainability linked volumes to our corporate customers are gradually increasing. So all in all, in our home markets, we see that volumes at the end of the quarter are up both on the private side for households and corporates.

Then looking at deposits here as well, we keep our stable market share. Household deposits are leveling out, but up somewhat in the quarter. Corporate deposits down somewhat since last summer, but overall I would say that it's stable. There is a clear link between deposit volumes and the increased amortization that we see from households and corporate alike. We think that this development is expected and natural, and we're doing well also when it comes to deposits. Then looking at the savings business in Sweden, I've mentioned already that we have for decades seen a positive trend, and it continues. We have net flows into the mutual funds in Sweden with a positive trend. We have a market share with an outstanding volume that amounts to 12%, but since 2010, 2010, we have had a market share of around 25% of net inflows in the market. And during the first six months, about 29% of all net inflow came to the Handelsbank and mutual funds. And this is something that builds value over time. Since 2010, the assets under management and what we have under management has more than quadrupled and increased significantly. with around 50% of accumulated net inflows into the bank. And, of course, this is due to good performance, our accessibility in the branches digitally, and the customers appreciating our sustainability focus, where 95% of the volumes are in the two highest volumes. levels, according to the EU Sustainability Financial Disclosure Regulations. We're building a value, and this is something that customers are appreciating. And here I would like to stop and hand over to the CFO of the bank, Carl Sederskjöld, who is going to go into some more detail. Well, thank you, Carina. Let's switch focus and look at the net interest income development of the bank. You can see on the slide that it was up in the quarter with 2%. And to the left, you see that we have a recovery in interest margins that had a positive impact, but then we had somewhat lower volumes in contributions that counteracted that. And underlying adjusted NII is relatively flat over this quarter. And we see a slower expansion, but a stable NII in the quarter. Then the costs. Here we see that the costs are down with 2% over the quarter. But here as well, we see that we have adjustments for one-offs. And then we had a stable development. And this is a quarter where we see usually that we have fluctuations and strong developments. Then net credit losses. Low net credit losses, 58 million. And Handelsbanken, as you know, is driven locally. We have individual credit decisions that are being made in the branches. We work a long time. We have no incentives for short-term risk-taking. And we are convinced that that is the business model that... has given us this amazing history. Behind the 58 million, well, there are three factors that should be highlighted. First of all, new credit losses of level three are counteracted by provisions that have previously been made. That is the first thing. And then we see previous credit losses and recoveries that cover what we see in negative developments in the branches. There's a strong development there as well. And thirdly, we have an unchanged overall provision, which means that we have a strong development and that the system works the way we want it to work. And then the next component. And now I can't get my slide to move, and I might need some help from the technicians so that we can continue talking about capital. Thank you. The capital position and the finances. Well, our finances are very strong. We have high profits and we generate money. And we closed the quarter at 19.8%, 4.6% above the regulatory requirements. And we're well aware of the fact that we will have new contra-cyclical buffer requirements amounting to 0.3 percentage points end of 2023. And our forecast is that we'll be 4.3% above. Very, very strong development. We have this quarter seen that again we have an exemption for our structural capital positions and that amounts to 0.4% and at the same time we have a negative impact due to what has been mentioned before the negative credit risk migration development. We also have a decision this quarter, a preliminary final decision will be made in September. But the preliminary evaluation is that we'll have a neutral impact, which means that we grow and we have capital. That means that we can continue with our stable business model where we're close to customers. We can help them and we can build long term relationships. And the future looks very bright. To conclude, let me mention the stability of the bank, and I would like to show you that with a number of slides. You know the bank, and you know that we have a focus on having stable finances. If you have stable finances with a business model where you work with branches, closeness to customers, high level of accessibility, where... We are where customers wanted to meet us. Well, that is where we build loyalty over time. And what you see is the outcome. You see that we have stable finances. And for us, and Carina has already talked about that, that is that we have overall the highest credit rating in the world with the lowest credit losses. We have the highest capital buffers overall. looking at historical credit losses, and we also have a very stable generation of value, which means that we're well positioned to work generating profit for customers over time. And that being said, I hand back to Carina again. Well, thank you. And then I would like to say thank you to everyone for listening. And I hand over to Louise. And that concludes this presentation. We'll have a short break. And then after that break, Peter Grabe, in charge of investor relations, will have a Q&A session in English. And you'll find information about that if you go to handelsbanken.com, investor relations. Welcome. . . you do do you do do Thank you.

It's still five seconds left.

Hello, everyone, and welcome back to the Q&A session. Before starting, let us just remind you all that we prefer you to ask one question only, and for any follow-up questions, please get back in the line. So, operator, with those words, we're ready to take on the first question, please.

Ladies and gentlemen, if you wish to ask a question, please press star 11 on your telephone. We are now taking the first question. Please stand by. And the first question from Magnus Andersson from ABGC. Please go ahead. Your line is open.

Yes, good morning. Sorry for being a bit provocative, but since you boasted about the capital position there, Karl, I'm just wondering, since you don't have any volume growth that consumes capital, how does it benefit shareholders that you sell away earning streams, hoard cash, and don't make any add-on acquisitions? And in relation to the last point there, could you say if you were interested in Danske's Norwegian business, if you have looked at it, and if so, what made you abstain from it? Thanks.

Thank you, Magnus. I don't think you're provocative. It's definitely a valid question. I think looking at the history we have as a bank and our view of running the business model is obviously that we form the basis of the bank with a really stable balance sheet and really strong finances. And we definitely do think that over time this plays out in a really good shareholder value. And right now, obviously, if you look at risk-adjusted return on equity, we definitely think we produce a really good value for our shareholders. So we are adamant that it's really good for us to stick to a really strong situation at the prevailing time. And that will benefit both our clients and build long-term relations and also our shareholders. We won't comment on Danske specifically, but what we can say is that we obviously are investing quite a bit in our Norwegian business model in order to strengthen our digital capabilities. And we've also signed just an agreement with a large union in Norway. So we definitely aim to strengthen our business model vis-à-vis the retail segment in Norway. Thanks.

Okay, thank you. If I just may follow up, does it mean then that for as long as the economic outlook is uncertain, we should expect the CET1 ratio to just continue to increase?

I think that's a question for the board, obviously, the decisions in the end. I'm just saying that we don't see it as a problem as such to have a really strong balance sheet. That creates a lot of opportunities for us. And we still stick to the target range of one to three percentage points above.

Okay. And also the volumes you get in. in Norway from the union deal, I guess it's fair to assume that they have relatively low margin compared to the rest of your business.

I mean, Norway as such today, the mortgage business as such, has low margins at the time being, and that's partly due to varselfrister or notice periods. So that's the situation of the Norwegian mortgage market.

Okay, thank you. Thank you for your question. We are now taking the next question. Please stand by. And the next question from Andrea Hackerson from Danske Bank. Please go ahead. Your line is open.

Thank you and good morning, everyone. Carina, question for you. You were the first one to start to offer rates on transaction accounts in Sweden. And that announcement cost your shareholders about $9 billion on the day. And I guess I understand, what do you think you gain from offering 25 pips, which isn't really any money for your clients, given that the niche banks are offering significantly more and your peer group now offering the same? So what did you really gain by doing that quite costly move? And actually, I would also ask you, who in the organization takes such a decision? Is it down in the operations that don't have a view on what's happening with profitability and the share price of the bank? Or is it you guys on top management? Thanks.

Thank you very much, Andreas, for that question. I think that if you look overall and what we have seen for the last couple of months anyway, and we have seen the increase in net interest, I think that it has been prudent and very... If you're going to keep a really good customer relationship, you... finally have to make sure that you have a really good offer to provide the customer and make sure that we can continue to be the really good bank for our customers. And we have done that in terms of the savings accounts and so on. And I think that looking ahead, I think it was the right time to do this. At least we have been talking about that for quite some time. And I think that it was time to do that and to take a step forward in that direction, just considering what is happening around us and to have a really good offer and to make sure that we can continue to compete with our peers. And yes, we was the first bank to do that. But then the other followed.

So what did you really gain from it? Because from a client point of view, if you have less than 100,000, 25,000, it isn't really going to make any difference. And your competitive offer didn't really change because you forced everyone to follow you and the niche banks are paying significant more. So I just stayed to see what was clever about doing it.

I don't think that I forced everyone else to do that. I think everyone takes their own decision and we did that as well. And it was a good time for us to do that and to make sure that we have a good offer and to make sure that we can have a really good dialogue with our customers. So that's the reason behind it. So, I mean, if you've been out there meeting customers for 30 years, I think it's always a balance to feel and to see when it is time to do something that continue to increase the customer audience. satisfaction and again to make sure that we can continue to have the right customers with us I think that was the argument behind that decision and that's what we did and the decision is taking place between a lot of us not least from the business line so to speak when they meet the customers what are the discussions where do they take place and finally we decided together that this is a prudent time to do that so that's what we did Okay, thank you

Thank you for your question. We are now taking the next question. And the next question from Jacob Esselvik from SEB. Please go ahead.

Good morning, everyone, and thank you. So sticking to just one question, could you give any more call on what are the strategic options for Handelsbanken in Norway going forward, given the poor profitability versus the rest of the group?

Yes, Jacob, thanks for the question. I mean, in Norway, as we've said in the past, we have a really strong corporate offering there. We are pursuing a strategy to balance that up with a better offering towards the retail segment. with also an aim to improve our savings business. We think there's ample of room to do that and mirroring our success in Sweden in the savings business. So yes, it is true that right now we have a lower return on equity in Norway vis-à-vis our group. That's partly due to notice periods, which we've already mentioned. So we are investing quite a bit in the digital capabilities, and we're also obviously increasing the client base on the retail side.

Just to follow up, you said it's due to the notice period. So should we expect NII to then come with a lag effect into Q3 and Q4 this year as well, because it's down 6% quarter over quarter and just up 1% year over year?

Correct. You should expect when Norris Bank stop hiking, you should expect to have a positive tailwind going into next year. I don't know when they stop hike, but once they've done.

All right. Thank you.

Thank you for your question. We are now taking the next question. Please stand by. And the next question from from . Please go ahead. Your line is open.

Hi, and good morning. Continuing on the NII, in the UK, the net interest margin is up Q and Q, but much less compared to previous quarters, despite the market rates continuing up. Is there any temporary effect holding back the NIM development here, or has the dynamics changed in the UK market as rates are now at a more elevated level compared to previously?

There's no structural changes underlying the development. As we've said, I think if you look at more or less all the banks, when rates are approaching five or even higher, I mean, you will have a lower impact by increasing rates. No, we definitely like what we see in UK. We turned around it over the last years and we're working a lot to improve actually the volume development as well, but no structural dependencies.

Okay, thanks. Thank you for your question. We are now taking the next question. And the next question from Piers Brown from HSBC. Please go ahead. Your line is up.

Yeah, good morning. It's just a follow-up question on deposit pricing. We saw yesterday's statements from the finance minister along the lines of, you know, being willing to intervene in the banking sector given how much margins have expanded. The question really is just if you're feeling any additional pressure from either regulators or politicians in terms of what you're doing on the profit pricing, if you could maybe just comment on that. Thanks.

Yes, I can continue to comment on that. Yes, there's a lot in the media for the moment and a lot of authorities and governments are talking about this. And no, I would say it's not a pressure from the government. We take our own decisions. And as I said before to Andreas during his question, so I would say no, of course not. So I think that it's more looking into our own results and what we can do as I said, to keep a really good customer relationship. So that is why we did what we did. But there is a lot of discussion going around, but I can't say that there is a kind of pressure on us doing things we don't want to do.

Thank you for your question. We are now taking the next question. And the next question from Riccardo Rovere from Mediobanca. Let's go ahead. Your line is open.

Thanks for taking my question. Quick one. At some point a couple of years ago or more, Handel decided to steer the business model from bank-centric to, let's say, more digitalized. you haven't been investing quite a lot over the past couple of years. Now, just to have an idea, how much more time is needed for you maybe to recover the ground lost given that you decided to become more and more digital only two, maybe maximum three years ago? Because investments in IT seems to be seems to be still elevated, and it's not clear, at least to me, when this will kind of start to fade or at least stabilize. Thanks.

Thank you, Ricardo. I think it's worth to highlight a few words on the IT development. As you say, yes, we've obviously complemented, and this is obviously based on the behavior of the clients. The clients want to meet the bank quite a bit in the physical presence, but also digitally. We don't think we're trailing at all in that sense. As Carina highlighted on the slide where she showed the financing and savings business, I think it's slide five. In the middle of it, you can see that we've actually had the highest rating on the app for many years now in the banking sector. So we think we have a strong development there. Having said that, then, what we've done is we've obviously increased the rate of investments quite a lot. And let me highlight a few of the issues we do there. First of all, obviously, in running the bank, which has been one of the dimensions. We are now improving exchange in the UK core system that will prolong for a few years. We're also improving the IRB models group wide and we do a lot of lifecycle management. When it comes to creating a more efficient bank and improve the cost to income levels in general, We have invested in a client platform, CRM. We have moved into Microsoft 365 and an AI supported working tool. We have moved over to Teams to increase the collaboration in the bank. We moved over to cloud-based IT strategy where we move into Azure and get the benefit of SaaS services, PAS services and IAS services. We've also done a lot of optimization and robotization of processes both towards clients but also internal processes. And we've obviously spent a lot of time in creating the carve-outs for the Danish and the Finnish business. When it comes to the business development, we've done quite a bit on the digital meeting with the client. We moved over to Apple Pay. We've created digital onboarding. We made a lot of the processes digitalized. We have digitalized the mortgage process. We now have the The various blankets and paperwork is done digitally nowadays. And on the savings business we've improved the offering when it comes to a premium offering and also going over to saving goals. As I've already mentioned, we're investing quite a lot in Norway on our digital capabilities, especially towards the retail and the savings sector. And we've invested quite a lot on the digital capabilities in the UK. So I think it's fair to say that we're actually transforming the bank and the value offer. And being then in the situation where we are close to the client, we are locally based, But we have the leading offer, both if clients want to meet us in present, but also digital. That's a really tough offer to beat. So I don't think you shouldn't view the IT cost as such as something which necessarily going to drop. But you should see the cost to income levels performing nicely.

I think, again, it's fair to say what Carl said, that it's from time to time we're going to see that a lot of those things are really ongoing. And that is very much income generating business that we are developing. putting our costs in. And in Norway, for example, what we do there, we know that we're going to be up and running in the first part of 2024, for example, and that will make sure that we have an income generating really good digital offer to the Norwegian retail business, just for example. So, of course, we aim to see that we have an income generating investing business, so to speak.

Thanks. Thank you very much.

Thank you for your question. We are now taking the next question. And the next question from Jacob Cruz from Autonomous. Please go ahead. Your line is open.

Hi. Thank you. I missed a couple minutes at the beginning, so if this has been answered, just But could I just ask on the asset quality side, you had a big increase in stage two loans in both the property portfolio and the overall portfolio in the quarter, but still very low loan losses. So could you just discuss a little bit what these movements are into the stage two and why they are not impacting or having such a very minor impact on your loan loss levels a little bit? And then my second question was just on Octagon, and you're not making allocations this quarter. Is Octagon still a functioning tool for employee retention and employee motivation? It seems like you're not really paying very much through this mechanism for quite some time. Thank you.

Thank you, Jacob. Well, first, let's dig into the asset quality in the credit losses. As I said earlier on today, first of all, yes, we have negative credit migrations or rating migrations. This is obviously the way the process works in Handelsbanken. We have the local responsibility over the credit exposure. So they really do update the ratings on the branch levels. And the consequence from that one in this quarter is that, yes, with Handelsbanken Ice, we've seen quite a high negative rating migration. that increased the credit loss line with roughly 170 million. So that's quite a bit of the proportion of the real estate companies which has had a lower rating. Having said that then, we had the opposite movement. And this really, I think, shows the beauty of the Hannes Banking way of doing it. First of all, we had new credit losses in stage three. They were met by old reservations in stage three. Then we had actually getting back money from old stage three reservations. And they actually took away quite a bit of the movement in stage two. And I would expect now, obviously, we've also updated the stress test this quarter. And obviously, when rates have moved up, yes, the cash flow metrics for a real estate company obviously becomes a bit more impacted. And that should definitely correlate with a consequence on the rating level. So I would actually think that this is quite strong metrics in the sense that the system performs as it should do and we're working with the progress of all the real estate companies. And sorry, octagonal, yes. No, you are correct in the sense that we still have octagonal. What we do every quarter is that we just reserve a metric quite based on... a quantitative approach, and that's based on the performance with the quarterly lag. So you shouldn't put too much signal value in that we don't reserve anything. In the end, it is a decision for the board to take. And we still view Octogonen as a valid, definitely motivational perspective of the bank. Besides also having, I think, the biggest benefit of motivational perspective is the local mandate you get in the bank and the decentralization.

Okay, thank you very much.

Thank you for your question. We are now taking the next question. And the next question from Magnus Andersson from ABGC. Please go ahead. Your line is open.

Yes, hi again. Just on a bit more technical note on your net margin and funding effects quarter on quarter, that was quite small, both from an absolute and a relative perspective. It's just that When I add the business areas, I end up at more than 300 million. And then you have some central funding or costs allocated to business areas, so minus 27. But still, it's around 300 million when I look at the business areas, but the net effect is 170. So what's the difference there? Why is the group effect only half the business area impact, roughly?

I think that the way you should assess the NII is really to look at the NII bridge we have in the presentation material on slide number nine. Because, I mean, obviously there is a distribution of the funding costs that do arise in central treasury to the business areas. And in between quarters, there could be some different allocations for different reasons. Overall, over a long time, it should be fairly stable, though. But I think in order to assess the groups, I think you have the key pieces of the puzzle on slide nine. So that's more relevant than looking on a segmental basis, I would say.

And to add to that one, Magnus, if you look between third quarter 2020 and second quarter 2022, the group always had a positive impact of NII. Now we've had four quarters with a negative impact. So over time, this cancels out. So I really agree with Peter. Look at the bridge.

Okay, it was just a larger difference than it usually is. So that's why I asked. Okay, thank you.

But I think perhaps, Magnus, also to add, that there are no speculative issues arising in the other department. We're talking about core funding. And then how that's distributed in between the quarters to the business segment, it could vary somewhat in between quarters. But you should not read anything into this difference that you're alluding to.

But I think it is one thing to highlight when touching on this subject is obviously, yes, we're obviously really focused on creating a bank with a really stable financing and balance sheet. So we've actually, as we said before, we've also increased the level of capital market funding and increased also the liquidity reserve. So we are a bank really where we try to have a matched funding between the asset and the liability side. And you could definitely see different behaviors now where you could start fund yourself in one currency and use it in another. And we try to really base it on matched funding. So that's the way you should read the key figures of our bank.

It seems like the difference is in the home markets outside Sweden, primarily. So has that anything to do with it?

No. I mean, obviously, we borrow in euro to some extent. So that might have an impact on the other segment. But I mean, I would say it's a fairly normal level, actually. During the last four quarters, we've had Negative 160 to this quarter, negative 50 last quarter, negative 195, negative 175. And the previous ones were positive at an even higher magnitude. So I don't think there's any strange in that figure.

Okay, it's just that the 170 looked quite low quarter to quarter. But okay, thanks.

Thank you for your question. We are now taking the next question. And the next question from Nicholas Macbeth from DMB. Please go ahead.

Your line is open. Thank you. Good morning. So, first a question on your ROE target. So, the long-term goal has been to have a return on equity above the average of your competitors in the whole market. And I recall your recent quarters have indicated that you might also take risk into account. So could you please elaborate on how you see this currently? Are you still targeting higher ROE than the average of the peers, or are you also integrating some kind of risk-adjusted metric that you target rather than just looking at the ROE?

Thanks, Nick. No, you are correct. We obviously have the corporate goal is a relative ROI target vis-à-vis our peers in our home markets. Having said that, then obviously, even though there's a lot of Swedish banks within the peer group, Some of their businesses might come from areas or countries where we're not present. And obviously, it is impressive development in these countries now where we're not there. So when we make the comparisons and we evaluate ourselves from an octagonal and corporate goal performance, we will obviously look at the businesses within the segments we're in. not the other one. So that's the first thing. The other thing with the risk adjusted is rather a principal thing that we really want to steer our bank in long-term perspectives. And we understand that it will come good times and it will come bad times. Right now, you have a lot of metrics in banking which are at fairly extreme levels. So over time, we believe that Definitely our business model will generate a superior ROE, but you have to compare apples and apples there.

Okay, thank you. And then a question on capital and the news you sent out yesterday evening. So it seems like your temporary Pillar 2 requirement add-on for the IRB review was larger than for peers. Could you please explain how that is calculated and also when you expect the review to be done so you could see a relief from that add-on?

Well, first of all, I mean, we've been commenting for a while now that we see fairly neutral stance on the capital demand going forward. And I think this confirms it. We got obviously once again an approval for the FX hedging. We have the IRB metrics here and we obviously got the benefit of the P2G as well downside. So I think it's hard to say when we, first of all, obviously, we will get the definitive SREP for the next year, the 30th of September. But the approvals for the IRB models, they will, that date we don't know as of yet. So we can't comment on that one.

Okay. And then... Just finally on asset quality and your movements into stage two, could you say explicitly what triggered those movements? What kind of metrics are you using in your models that drove the increase in stage two loans in the quarter? And whether we should expect these movements to continue in the next three quarters?

Yes. Well, let me start then with, because that's an example of it more or less. We've obviously updated the stress of the 30th largest exposures in property. And what we've done is that all the new rate settings, when their rate cost is reset during the next 12 months, we've increased the rate from 5% to 6% and from 6% to 7% in Norway and U.K., We've also included the positive impact from higher rental income, etc. And the outcome of this is that we still see the same effect. We still have ICRs under these conditions dropping to two on average and no companies below one. So that's an example then of That's an example then of the kind of stress which our branches do on every property exposure they have. And therefore they obviously will need to rate the financial impact of that one. And obviously when rates are increased, the cash flow, forward-looking cash flow impact will be negatively impacted. and that should have an that should have an impact on rating so that's the consequence as you see as we've highlighted before we've we actually have had have quite front loaded rate setting and then we move into period of of lower rate setting movements so so i don't know we will have to wait and see the the rating impact the coming quarters but um But quite a bit is re-rated now. So that's quite good, I would say.

So is it the stress test that triggered the movement from stage one to stage two and a quarter?

No, it is individual assessment of various exposures. And they have then dropped one or two risk classes in rating.

Because of higher interest rates?

Yes, most likely could be other things.

Okay, thank you.

Thank you for your question. We are now taking the next question. And the next question from Martin Letijep from Goldman Sachs. Please go ahead. Your line is open.

Good morning. I just wanted to follow up with regard to net interest income. And I was just wondering if you could comment on the migration you have seen from transaction account into savings account during the quarter. And, you know, what is your assessment here going forward? Are we mostly down in terms of that migration or is there still more to come? Thank you.

Thank you, Martin. First of all, we have deposits from households in Sweden of 490 billion. Of that, 30% are on transaction accounts and they are down from 35% last quarter. Of the 30% still on transaction accounts, 40% of these volumes we pay interest on. The other 60% have more volume than we pay interest on. And if we look back, in historical terms when rates were at these levels. We are at roughly the same magnitude as we've seen before. So it's hard to guide on the coming quarters. We will have to wait and see. But of course, people will need to have some money on their salary or transaction account, and they won't move all the money over to savings account. And we've already seen quite a hefty movement over to term accounts. I might comment as well. In other countries, in Norway, we have paid partly on transactions account for quite a long time. And in UK, we've done it partly as well. So, I mean, I don't think there's any, there's not a digital or binary decision on or off if you pay on transaction account. But the majority of volume there have zero rate on it.

Thank you very much.

Thank you for your question. And we are now taking the next question. And the next question from Namita Santani from Barclays. Please go ahead. Your line is open.

Good morning. Thanks for taking my question. Why do you increase the commercial paper funding quarter on quarter? Aren't you paying sort of above 5% for this type of funding? Could you explain the rationale here? And why is the commercial paper funding as a percentage of total funding a lot larger at Handles Banking than it is at Peers Bank?

Well, I think we can make a generalized answer here. I mean, our funding mix is based on the principle of match funding. The consequence of that one is that we have illiquid assets on the asset side, i.e. the lending to society. They are funded by stable funding sources. That stable funding sources are mixed up of both stable deposits and also capital market financing. On top of that one we have the short term financing and they are met by a short term asset side. So the whole principle with our balance sheet is that it should be decomposable if needed. We should be able to bring both the asset and liability side down in tandem. And obviously then if the commercial paper funding has increased, at least in generalised terms, that's based on that the short-term borrowing from clients has also increased. So I think that's the generalised answer. And I think really there is some... analysis to be done here. I really think that we talked a lot about risk adjusted returns, but I do think one should view the balance sheet composition from a risk and return perspective. We really do believe that If we have a business model based on lending firstly, then obviously we need to build a balanced funding side. And we really believe that's a composition of both bond or capital market financing, but also deposits.

Thank you.

Thank you for your question. We are now taking the next question. Please stand by. And the next question from Richard from Northea. Please go ahead. Your line is open.

Hi again. Another question then on IT spending. You touched upon that you're doing work on your core banking platform in the UK. Just wanted to hear if there's any similar work happening on the core banking platforms in your other home markets, and also if there is any sort of group-wide initiatives to try to synchronize your different platforms in any way. I'm under the impression that you run on different platforms in your various home markets, if that's true.

Well, first of all, yes, we obviously do a lot of core system and I generalize that under the term life cycle management. So obviously, if you look at the IT investments we do in Sweden, obviously a very valid component is life cycle management, i.e. improving the core system. You are correct in the sense that we don't have one system for all our home markets and for all our products offering, but we definitely have synergies and similarities between them. And if I may generalize, we think that it's easy to find synergies in the way we digitalize the bank and the way we create the offering, even if the interfaces might look different in various markets. It's a bit tougher to reap the benefits from having synergies the same core system in all our markets.

Okay, thanks. Thank you for your question. We are now taking the next question. And the next question from Andreas Axon from Deutsche Bank. Please go ahead. Your line is open.

Yeah, hi again. We talk a lot about commercial real estate in Sweden, but you have quite a big book outside Sweden as well, of course. And we see that you've been growing CRE quite a bit in Norway in the last quarter. Ludia showed the data the other day about ICRs being lower in Norway and LTVs being higher. Could you just tell us a little bit about your Norwegian CRE book? That would be helpful. Thanks.

I didn't really follow your analogy with Nordea, but let me start and you can ask if we approach your wish list. I mean, first of all, yes, you are true that we've increased in Norway our CRE business. We have a good standing towards corporates and especially towards real estate companies in Norway. So we're happy to see the benefit there. And I would say that, as you know, we don't do lending from top down, from portfolio thinking, these kind of metrics. Some of our peers might do that. We rather work from the position and really like the good clients which we can find. So I think... I didn't follow your saying around the Nordea, but I don't think there's that much similarities between us.

Yeah, Nordea showed ICR by country and LTVs by country. And then on that matrix, Norway actually looks the most vulnerable. And I was wondering if you see the same in your book that ICRs are lower in Norway or if that's not the same for you.

First of all, on slide 31 in the pack, you have the LTVs. And yes, in some sense, you can say that Norway, we have 52 on loan to value. So they are obviously higher than you have in Sweden, UK and Netherlands. So that might hold true to some extent. ICRs, we don't see any difference in Norway vis-à-vis our other home markets. And just to highlight, in Norway, we have a very low proportion of LTVs above 75. So that's also, we think that Norway is fairly similar to the rest of the group.

Okay, that's good. Thank you.

Thank you for your question. We are now taking the next question. And the next question from Piers Brown from HSBC. Please go ahead. Your line is open.

Yeah, thanks for taking a follow-up. It's just coming back to the discussion on migration between the various stages of the learning portfolio. Just looking at slide 27, I mean, you've had a reduction in the expected loss on stage three, despite the fact that stage three balances are up, I think about 10% quarter and quarter. So I don't know if you can, it's a bit of a technical question, but if you could just explain how the expected loss on that part of the portfolio would be declining whilst the balances are going up, that would be helpful. And also, if you can, I don't know whether you have a number in terms of what the RWA impact this quarter is from the various negative ratings migration you've seen across the book.

Thanks. Yes, thanks, Piers. Well, yeah, no, I think that's quite a good question, actually. Yes, as you say, we've obviously seen the volume in stage three increasing, and that's due to the expert ratings down at the branches. Then, on the other hand, when... When we look at these exposures and you get the central credit department involved in it, etc., you include the consequence from the collateral. And that's why, even though we have higher volumes in stage 3, we're actually reserving a lower reservation degree. Because we think we have ample room for collateral to actually... contradict the other movement. When it comes to risk-weighted assets, you actually have it on slide 33, the impact of the negative credit migrations on the risk exposure asset side and on the right side. You have an increase of 19 billion. And that impact, I think, negatively 0.5 percentage percent. Yeah, you have it on the left side there. So that's the consequence in this quarter. But as you know, the Swedish FSA, they produced the capital demand yearly, and they will update this in Q3. So when the impact is then... when they match the impact with the risk weight floors, we're likely to see a tailwind of the capital levels in next quarter as well. So we don't know the exact impact of it, but it wouldn't be a surprise if the majority of the negative 0.5 impact in this quarter will be neglected or reversed next quarter.

Can I just ask, why would the branches be increasing their assessment of collateral values when property prices are falling?

They don't. They don't increase the assessment of the property values. They decrease their expectation of the cash flow going forward. But once the central credit department takes into consideration the collateral value, we still think we have ample room for collateral in order to against the decrease in cash flow prognosis. So this is really the expert decision we make in the bank. And we've been during now the rating discussions during COVID and Ukraine and now obviously the real estate. I think they've been really impressed by the knowledge and the transparency and the granularity we have on exposure by exposure. So we're really...

satisfied and and and safe in the assessments we do okay thank you very much thank you for your question there are no further questions at the moment i will land back the conference over to the management thank you very much all of you for taking the time and um well continue to have a really good summer thank you and goodbye thank you