Swedbank AB (publ)

Good morning, everybody. It's a bright and sunny morning here in Stockholm, so I wish everybody a very warm welcome to Swedbank's second quarter 2022 results presentation. I'm Annie Ho, Investor Relations, and in the room with me today is Jens Henriksson, our CEO, Anders Karlsson, our CFO, and Rolf Marquardt, our CRO. As per usual, we'll start with a presentation and then have Q&A. So without further ado, Jens, please.

Thank you, Annie. And let me also wish everybody a warm welcome to this presentation of our results for the second quarter 2022. A quarter where we once again deliver a strong result in turbulent times. You all know that there are four major events that are shaping our time. The war, the pandemic, inflation and climate change. And they are all interconnected. The quarter was dominated by high and rising inflation, turbulence on the financial markets with increasing rates and falling stock markets and a weaker economic development. Estonia, Latvia, Lithuania and Sweden, all our home markets are affected by the situation with lower growth and rising inflation. But low public debts, public finances in world class, high household savings and profitable companies creates a strong resilience. Looking forward, we see continued rate hikes by Federal Reserve and the Riksbank. The European Central Bank is expected to follow suit later this month. And this sends a clear signal to households and corporates that the central banks will act forcefully to bring back inflation to sustainable levels. Economic growth is expected to slow down during the fall and then stabilize on lower levels coming years. The rate-raising cycle is expected to be aggressive but not long-lasting. The Riksbank forecast their own policy rate to peak at around 2%. In this situation, we are supporting our customers and contributing to the transition as they adapt their business models, energy sourcing and household budgets. In this time, I feel confidence from the fact that we for a long time have had conservative credit origination standards and prepared our customers for higher rates. The new rate environment affects the bank's business and is positive for net interest income. for quite some time with lost money on the large inflow of deposits. Now it turned into earnings. A part of this is shared with our customers as we have reinstated interest in all savings accounts in Sweden. We see a good and stable growth in lending in the segments where we are strong and where we want to grow. And that goes for both corporates and mortgages. Swedbank's profit increased during the quarter to 4.7 billion kronor. Net interest income was 7.1 billion kroner, which is the second highest in the history of the bank. Commission income remains stable and declining income from asset management fees is being offset by higher card income. Net gains and losses are down due to a one-off sale of Danish mortgages. But the underlying level is on par with last quarter's low level due to the continued turbulence in the debt markets. Expenses were according to plan, and the cost cap for the current year of 20.5 billion kroner and 500 million for the U.S. investigations remain unchanged. Credit quality is strong, which is reflected in low credit impairments, slightly lower than the previous quarter. And our exposure to Swedish property management companies is in line with our strategy and risk appetite. The equity market's valuation of these companies have dropped as interest rates have risen. But we are confident in our conservative credit origination standards that during a long time has focused on our customers' cash flow, debt service tolerance, business models, and good collateral. Our liquidity position is strong and we have a significant buffer of 4.6 percentage points relative to the Swedish Financial Supervisory Authority's capital requirement. Return on equity increased in the quarter to 12%. And, as I have announced previously, I will before the year end host an investor day to present our plan on how we can reach 15% return on equity. The focus on internal controls and governance during the last three years is continuously producing results. Fitch upgraded our rating to AA-, noting that we have addressed our historical shortcomings and implemented broad-based changes in our corporate culture, compliance, organization, and risk control. and we continued to invest in infrastructure and availability for our customers was good in the second quarter. Nevertheless, we did have a serious IT incident in Sweden that affected our customers. To make sure this does not happen again, we are improving our IT change management. The geopolitical situation has raised the cyber threat level in all our four home markets. We are cooperating with relevant authorities and are allocating extensive resources to keep our systems resilient and resistant. We shall be there for our customers 24 hours a day, seven days a week. The mortgage business remained strong, and we are the market leader in all our four home markets. We had the conservative and thorough credit process, and the group grew by 11.9 billion kroner in the quarter. But with higher interest rates and increased uncertainty in the housing market, it takes longer for buyers and sellers to agree on a market price. House prices in the Swedish market have dropped during the quarter from high levels with around 2% between March and May. And we expect a continued slowdown during the year. In the Baltic, house prices have continued to rise. As a leading digital bank with physical presence, we continue step by step to adopt secure and established cloud solutions, where we are building flexible services that makes our customers' financial life easier. This quarter, the first functionalities in our new savings platform are being run as a pilot with a group of customers in Sweden. And we continue to develop a comprehensive offering. In Sweden, expense control has been launched for young customers. In the Baltics, children can now be onboarded digitally. And so far this year, we have onboarded more than 30,000 customers digitally. And more than 70% of digital bank visits are now made through the app. And customers rating in the app store kept us on top. the National Debt Office in Sweden has once again entrusted Swedbank to manage a large share of the Swedish state's payment through an effective and proven solution. Our green asset portfolio grew by 14% during the quarter and now holds 53 billion kronor, including new and existing loans that have been reclassified. And ahead of the new sustainability regulation that takes effect in August, we have trained 3,900 advisors to help our customers to understand how their personal choice of investments impacts and contributes to sustainable society. And our focus on sustainability is noted by both our customers and stakeholders at large. Fair Finance Guide's policy report ranked Swedbank as number one among the large banks in Sweden. And Swedbank has reached the highest level diamond in the National Sustainability Index of Latvia. Standard and Poor raised our sustainability rating based on an updated evaluation of the anti-money laundering governance in Swedbank. In Estonia, Latvia and Lithuania, both inflation and activity remained high in the quarter. A transition is underway to adapt to high energy prices, commodity shortages and broken supply chains. And we are supporting this transition by financing the liquefied gas to replace deliveries from Russia. At the same time, we're seeing individuals invest in renovations and solar panels to a growing extent. In the Baltic countries, lending for solar panels was three times higher in May than the same month in 2021. And also, we see that demand for insurance and fund savings is going up. We are proud to be the leading bank in all our four home markets, Estonia, Latvia, Lithuania, and Sweden. And we are focusing. During the quarter, we have entered into a strategic partnership in Norway with the largest savings banks, SR Bank. And with this change, we can give a sharper imprint at a lower cost and a stronger comprehensive offering to our corporate customers. Our focus is our home markets. And with that, I give the floor to our CFO, Anders. The floor is yours.

Thank you, Jens. And now let's go into the details of the quarterly result, beginning with lending and deposits. The total loan portfolio increased by 33 billion this quarter, excluding a positive FX impact of 10 billion. Corporate lending performed well, having contributed with 19 billion to this increase. This was mainly driven by higher volumes in the property management and food retail sectors. Five billion of this were revolving credit facility drawdowns, and the rest were in the form of traditional lending. Swedish mortgages grew by 11 billion, where we continue to be the market leader. Baltic banking lending volumes grew by 3.5 billion, supported by robust new business in private mortgages. Customer deposits were stable overall, having decreased this quarter by 6 billion, excluding a positive FX effect of 14 billion. Private deposits increased by 9 billion, while corporate deposits decreased by 15 billion. Now looking at the revenue lines, starting off with net interest income, which increased substantially and was the second highest quarterly NII ever. The increase was driven by higher volumes and higher deposit margins. which more than mitigated the impact from decreased lending margins and higher funding costs. As I mentioned last quarter, when it comes to NII's sensitivity to interest rate movements, we benefit from higher rates over time. The magnitude of the positive NII impact is dependent on the level of pass-through to administratively priced lending and deposits. And here, we will strive to achieve the right balance between business opportunities, given the economic outlook, and the overall impact on profitability, given our balance sheet composition. When it comes to business dynamics, we have seen a slight decrease in the Swedish housing prices and in the number of transactions. We remain confident that there will be continued growth in Swedish mortgage volumes, but most likely at a lower pace, as there are elements of the underlying housing market dynamics that are still supportive. over to net commission income, which was stable. Card commissions were higher from a COVID restriction free quarter, along with an increase in travel expenditure and higher volume per transactions due to inflation. This, along with increases in corporate finance and securities business, helped to offset the negative impact in asset management from continued adverse market conditions. Turning to net gains and losses, which had another challenging quarter. Sales and trading in both fixed income and FX contributed positively, as did Group Treasury's covered bond buyback activity. However, market rates increased and we saw continued widening of credit spreads negatively impacting the bond inventory in large corporate and institutions and Treasury's liquidity portfolio, reminding you that Treasury's liquidity portfolio will pull to par. and there was a one-off of 54 million from the sale of the Danish mortgage portfolio during the quarter. Other income decreased by 100 million, but please note that Q1 included a provision release of 115 million in the insurance business. A few words on expenses before I hand over to Rolf. Expenses were higher quarter on quarter due to seasonality, higher number of FTEs and the impact of the annual salary review in the Baltics. AML investigation costs for the quarter was 92 million. Our 20.5 billion cost cap and an estimate of 0.5 billion AML investigation costs for 2022 still stands. Any excess FX volatility over the year would not cause us to deviate from our business and investment strategy, as a weakening Swedish krona is positive for our net profit bottom line. I will now hand over to Rolf to talk about asset quality and credit impairments. Thank you, Anders.

During the second quarter, we have seen continued growth in all four home markets. We have also seen signs of a slowdown and adjusted macro forecasts on the back of the recent development that Jens highlighted. Despite this, the base case expectation is still continued economic growth, but at a lower level than we had previously anticipated. In this situation, we conclude that our credit quality remains strong as demonstrated by the 40 million in credit impairments for this quarter. Before I go into the details about credit impairments, I wanted to briefly describe Swedbank's approach to property management and mortgage lending. To start with property management then. Swedbank's origination standards and lending strategy has for a long time been focusing on cash flows and on collateral. The main factor is debt service tolerance, or what is often referred to as debt yield requirement. which is to make sure that our customers are able to withstand significantly increased interest rates and vacancy rates, and still be able to service debt and amortizations. Our criterion is that the customer should have a debt service tolerance of six to eight percent, depending on the property or the type of property. This kind of stress of net operating income is part of the normal approval process as well as the annual review of each customer. The average debt service tolerance ratio for our 15 largest property management customers is close to 8%. On top of that, we have collateral with low LTV levels. For the total portfolio, LTV ranges from 39 to 54% in the different countries. The average LTV for commercial real estate is 52% and 55% for residential real estate. These principles are applied across the bank and in the Baltic countries, the debt service tolerance requirements are even stricter. We are also active in low-risk segments in geographical areas with a growing population and stable demand. Our portfolio is well diversified, focused on residential office and logistic properties. We have for many years been more cautious with retail and hotel properties. A very significant part of the credit risk exposure is collateralized through pledged on property. So against this background, the bank is well positioned also under stressed conditions. Then on to mortgage lending, where the approach is similar. When granting mortgages, the approach is based on household affordability, taking into account a stressed interest rate of 6%. We review the stress interest rate level and the cost levels included in the affordability calculation on an annual basis. This makes sure that the private mortgage customers have margins to cope with increasing interest rates and increasing costs. The average LTV ratio is 51%, and as you can see from the distribution, the resilience to price corrections is strong. Regulatory requirements of maximum LTV of 85% since 2010, and amortization requirements are also supportive. As you know, the historical loss levels have been very low in this portfolio, also in stressed periods. Our assessment is therefore that the credit quality is strong. Let's now turn to asset quality and credit impairments in the second quarter. Credit risk indicators like past due loans for different sectors and geographies, credit migrations and impairments continue to be at low and stable levels. Total credit impairments ended at 40 million, of which 147 in Swedish banking and with recoveries in large corporate and institutions of 115 and 2 million in Baltic banking. Going into the details, updated macroeconomic forecasts increased provisions by 252 million. Rating and stage migrations increased provisions by 150. A majority of this is related to the customers we mentioned last quarter, which are directly impacted by the geopolitical crisis. Some of these customers have now been downgraded, increasing stage two provisions. At the same time, a corresponding release has been made of the expert portfolio adjustment. A small recovery has also been made related to the oil and offshore portfolio, which totals to release of 101 million. The total expert portfolio adjustment now amounts to 1.7 billion. Individual assessments improved by 105 million on the back of divestments and revaluations in the oil and offshore portfolio. Other factors contributed with the release of 156 million, mainly explained by amortizations on loans with increased level of risk. So with that, I toss the ball back to you, Anders.

Thank you, Rolf. Let's now turn to capital. our capital position remains strong, with the CET1 capital ratio 18.3%, meaning a buffer of 460 basis points above the minimum regulatory requirements. The capital target range of 100 to 300 basis points still stands, and risk exposure amount increased by 19 billion to 744 billion. Regarding expected future capital requirements in the near term, the counter-cyclical buffer will be raised to 1% next quarter and 2% in the second quarter of 2023. We are still awaiting approvals for our updated IRB models from our regulators. With that, I hand over to you Jens to conclude.

Thank you Anders. Let me now summarize. During the quarter our profit increased to 4.7 billion kronor and with the second highest net interest income in the history of the bank. We have a stable lending growth to both corporates and households and we are well positioned for coming interest rate increases. Costs are under control, credit quality is strong, and we have low provisions. Return on equity increased to 12%. We have a strong capital and liquidity position, we have conservative credit origination standards, and we are there for our customers with advice and lending. The economic outlook in our home markets have deteriorated during the quarter with rising inflation. And in this environment, Swedbank stands strong. Our customers' future, that is our focus. Thank you for listening. And with that, I give the floor back to you, Annie.

Thank you very much. I'll pass it on to the operator. Could you please open the lines?

Thank you. And we will now begin the question and answer session. If you have a question, please press 0, then 1 on your touchtone phone. If you wish to be removed from the queue, please press 0, then 2. And if you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. And please limit yourselves to two questions at a time. So the first question comes from the line of Mats Liljeden from SEB. Please go ahead.

Yes, good morning and thank you. First on NII sensitivity then, if there's been any changes to your sensitivity, if you could disclose a number, especially as we see the ECB being more positive. And I noticed a huge increase in derivatives in the balance sheet. Is that affecting the NII sensitivity in any way? That is the first question. And the second on commercial real estate, if you could comment on the loan growth in LC&I, how big share of this commercial real estate, because I haven't really heard the same comments from the other banks. Do you believe you increase your market share in the commercial real estate segment? Thank you.

Thank you. On your first question, there is a slight uptick on the sensitivity on the 50 basis point from 3 to 3.3 approximately, but I view that as a fairly theoretical number, and if you look at what has happened in the quarter, that will probably give you more of a sense of what's coming in the future. But let's come back to that. On the commercial real estate, I hand over to Jens.

Thank you, Anders. We have a property management exposure in the lending book of 230 billion kronor in Sweden. and that is the lowest among the three large banks in Sweden. And our exposure to this sector is in line with our strategy and our risk appetite. We are confident that we for a long time have had good credit origination standards and a focus on our customers' debt service tolerance and cash flow. And as Rolf said in his introduction, The average debt service tolerance ratio for our 15 largest property management customers is over 7%. And on top of this, we have collateral. So looking forward, we are ready to support our core customers further if it is in line with our strategy, risk appetite, and leads to well-balanced growth.

Okay, thank you. And the increase in derivatives in the balance sheet, should I read anything into that?

No, you shouldn't.

Okay, okay. Thank you.

And the next question comes from the line of Manus Andersson from ABG. Please go ahead.

Yes, good morning. Just continuing on NII there, and As you said, Anders, we saw that the corporate lending growth was primarily driven by property management and food and retail. Just wondering if you could say anything about the sustainability of this given bond maturities that we have in 2023-24, for example. How you look at that? And secondly, where do you think... the spread widening in the bond market could have an impact on your corporate lending margins within that segment. And finally, perhaps, if you could say anything on the competitive, potential future competitive situation on the deposit side, how high do you think rates can go before you have to pay any interest on your transaction accounts? Thanks.

Thank you, Magnus. That was three questions. I probably forgot the first one. But if you look at the potential for increased margins on corporates, Especially where you have seen that the credit spreads are widening dramatically in the corporate bond market. Logically, it should be there. We haven't seen much of that expansion in the margins yet. On the new lending, it has picked up a little bit. But if you remember, most of the RCFs have been negotiated before the invasion of Ukraine and the inflation and hikes. I think it is a little bit too early to say on that, and competition is actually quite high in the corporate segment. Coming back to Jen's answer, when there is a bond maturity coming up, if it fits our risk appetite, And our strategy, and it's a core customer and good business, we will definitely be there for our customers. On your question on the savings or the deposit side, I think that there is a distinct difference between transaction accounts and savings accounts, as you have seen in the quarter. It has always been an important funding source for us. It is now very attractive. What I do foresee is if rate hikes continue from the Riksbank that there will be a certain amount of competition and that is something that we are following on a daily basis it's about a balancing act between net interest margin expansion and outflows and that is what we are following as far as the transaction accounts come The price elasticity is quite low. I will not give you a level as one of the competitors did, but the rates need to increase further definitely before that is even something we would consider.

Could I follow up on you, Anders, and sort of look from the customer side? From the customer side, we have now reinstated interest rates on all savings accounts in Sweden, and that's something that when I meet customers, they like a lot. And if they want to have higher rates, they're welcome to come into us, and they can make on fixed and locked terms, and we can deliver a competitive offering.

Okay. Thank you, Medjast. Just follow up on the corporate lending there on a more detailed note. Is it still the case that the part of the book with administratively set rates is around 60, 70 billion?

Yes, but that also includes consumer loans. So the sum of corporates and consumer credits that are set at administrative rates is around 70 billion, if I remember it correctly, Magnus.

Okay, thank you.

The next question comes from the line of Andreas Haakonsson from Danske Bank. Please go ahead.

Thanks and good morning, everyone. I'm afraid I'm going to have to go back to the net interest income. If we just look at the mortgage side, you've seen a 66 billion reduction in your outstanding cover bonds in the quarter. And you're now down to only 34% of your mortgages funded with cover bonds. So huge deposit funding there. You have been increasing your prices in line with everyone else in the market. But given that the funding structure has changed, could we really say that mortgage margins are expanding at the moment, or was it doing that?

thank you andreas i think it is a you are right we are funding our retail mortgages with more deposits than than usual than in the past on your second observation yes we have done five increases this year And we have done that along the curve. And we did it in the large changes was made in April, mid-June and early July. So the margin development, I think this will be sort of rolled into the book. during this quarter. So the full repricing effect from mortgages will not be seen until September. So I think there is, as far as I know and see, since we are sort of raising rates after market rates have been moving, there has been a certain margin compression on one hand. On the other hand, the repricing of the three months in particular is coming during the quarter.

But another way of looking at it, if you take deposits that were previously un-euthanized, that give you zero, and all of a sudden you get a rate of, I don't know the margin exactly, but say 140 bps. I mean, that's a very meaningful pickup, right?

Correct. And that's what I meant with the focusing on net interest margin expansion in my answer to Magnus.

And on that cover bonds, I mean, you're down to the lowest level I've seen in a very long time. I don't have all the history here, but would you expect that the cover bonds to continue to shrink or will you start to issue more in the second half?

I would say that it will be on the same level. We don't need it, as you know. But on the other hand, you need to serve your investors to a certain extent to keep up a liquid curve. But we are using the covered bonds as sort of the mechanism between deposits and senior. And as you know, the latter we need to issue on the back of regulation.

And then finally, just in the port again, Euribor has, of course, moved up ahead of a potential ECB rate hike. Did we see any benefits of the port again at some higher rates, or is that to come in Q3 and Q4?

I would say that the majority of the effect will come in the coming quarters.

Okay. That's all from me. Thank you.

Thank you.

And the next question comes from the line of Sophia Pedersen from J.V. Morgan. Please go ahead.

Yes, thank you very much. It's Sophie from JP Morgan here. Just a quick follow-up on the presentation. Could you just elaborate a little bit more what you mean with the debt service tolerance? Is it the kind of stress interest rate or borrowing cost, or kind of how the debt service tolerance goes for the property management companies is calculated. And related to that, you also have the 6% interest rate stress level for private mortgages in Sweden. Today, there is headlines in the local press that SBAB thinks Swedish mortgage rates could potentially go to 5% every time in Sweden. Swedish mortgage rates go to 5%, does it mean that the stress interest rate would increase by 5%? So basically, is it on top of the current mortgage rate, or is it a fixed kind of 6%? So that would be my first question. Then my second question would be around the costs. I know you're kind of reiterating your 21 billion of costs, including AML costs. But how should we think about the potential cost pick-up that we have seen in recent years in the fourth quarter? Should we expect this year to be less of cost inflation in the fourth quarter? And what makes you so confident that you will deliver on the 21 billion of costs? Thank you.

Thank you, Sophie. It's Rolf here. So regarding debt service tolerance, what we do then is we look at net operating income and how much that could carry on service in terms of interest rates payments and amortization payments. And so if you have, as we have, the average for the 15 largest companies, the debt service tolerance ratio which also is often referred to as debt yield, that is close to 8%. So if you have 8% to pay interest rates and amortize for, and then you have a funding cost today that is on average like 2% or something, you realize that you have a quite decent margin before you start to... get close to what you could manage as a property management company. But that's the way it's been done. So it's a kind of an affordability calculation, if you will, and it contains margins where we are now. And I also think that when you look at this and the development you've seen for property management companies when it comes to credit spreads and bond funding and so on, you also need to take into account, first of all, that they have managed their interest rate risk. So they will have time to adjust. It will take time before this starts to feed into their net operating income and before it starts to impact them. And the bond maturities are also being spread out over time, so they will have time to adjust.

Sorry, just to clarify, so in your example then, if the debt yield is close to 8% and the funding cost is 2%, does it mean that it has a 6% buffer? Or does it mean that it's 8% above the 2%?

No, it means that there is a buffer between the two. Okay. And then move on to your second question about the 6% stress rate, interest rate for mortgages. So today we apply a 6% stress rate, but that is something we review on an annual basis, and When interest rates are moving upwards, that is something we review and stand ready to adjust if we come to that point. And that's the way we also have done it in the past. So that's the method we apply.

Okay.

Great. And what about the cost?

Yes, Sophie, hi, it's Anders. On the cost side, first of all, the way you should view the second half of this year is that it will be more similar to the second half of the year 2020 rather than the 2021. So that's the first answer to your question. When it comes to inflation creeping into our cost base, I think there are a couple of elements for you to know about. One is that the larger external contracts we have are fixed price during this year and in many cases during the next year. The salary review has already been done, both in Sweden and the Baltics. So from that perspective, I think the combination of those two things is the reason why we are reiterating the cost cap of 20.5%. And then please remember that any excess FX volatility will not be taken into consideration as far as I am concerned, since it's positive for net profit bottom line.

That's very clear.

Thank you. And the next question comes from the line of Namita Santani from Barclays. Please go ahead.

Hi. I've just got one question, please. So it looks like mortgage market share grew in the quarter in Sweden. So I'm just wondering where did Swedbank pick up this market share within Sweden? Like is it the larger cities or is it the suburbs?

Thanks. It's Rolf here. It is actually spread across the country. So no specific out of the ordinary location in Sweden.

Thanks very much. The next question comes from the line of Rikard Strand from Nordea. Please go ahead.

Hi, good morning. Two questions on costs from my side. Starting with the FDI growth that continues to be up 2% year over year and also growing sequentially. Wanted to hear how you see that developing going forward for the second half of the year, but also into next year.

Thank you. I think that you get the same answers I gave in the previous quarter. We are investing in competence, but at a much, much slower pace than you have seen in the previous years. And on top of that, you will expect that to be on a lower level going forward. And secondly, which is actually not helping anyone. The attrition rate is coming up to much higher levels than you saw during the COVID.

Okay, thank you. And then also, I noticed the Baltic inflation is around 20% currently in the June numbers. Just... wanted to hear how you see that impacting your cost base, if that's taken into account for the rest of the year, or if you think that will sort of impact the cost development for next year, rather.

Thank you. As I said, most of our contracts with external suppliers of any magnitude are fixed for this year. And the salary review has already taken place in the Baltic countries. When it comes to the next year, I will not guide on that. It's too early. We will come back on that.

Okay, thank you.

And the next question comes from the line of Omar Keenan from Credit Suisse. Please go ahead.

Good morning, everybody. Thank you for taking the questions. I had a question on the net interest income outlook, and then a second question on the IRB overhaul. So firstly, on the NI outlook, you know, the rate sensitivity is is clearly very attractive, especially with the growth in the deposit base over the past couple of years. I just wanted to understand some of the possible headwinds so I can size the net benefit to NRI going forward. I just wondered if you could perhaps comment on the mortgages and where you see the front versus back book on the fixed and variable books. once the current pricing changes are fully loaded. And just on the Treasury NII, is there any outlook you can give us there? Because it did look like it went backwards in the quarter. I know that there were certain positions there in the past that dampened the year one rate sensitivity. So I wondered if you could perhaps comment on Treasury and maybe NGL there. Secondly, just on the IRB overhaul, noted your comment that it's likely to be delayed. Is there any ballpark figure for the size of the potential impact, or could you perhaps point us in the right direction of where to look, where risk weights might go up? Thank you.

Thank you, Omar. You are mastering combining four questions into two. I will try to see if I can manage all of them. When it comes to the headwind on NII, as you asked about, I mean, the The headwind we know about is the necessity to issue senior preferred and senior non-preferred. That has become more expensive, but that's something we have to do. Other than that, I don't see any specifics on that part when it comes to You are correct that the balance sheet composition of the bank is attractive in an increasing rate environment, and that is why I talked about focusing on the net interest margin expansion. Secondly, when it comes to treasury, you shouldn't read too much into that. As you know, treasury are in between the business areas on the liability and the asset side. And when we change the FTP, it immediately transforms into the deposit side while it takes time to roll in on the asset side. As far as the NGL in Treasury comes, it's in the quarter primarily coming from the fact that we are holding a liquidity reserve in government bonds or covered bonds. That is something we need to have. From an NII perspective, it's positive, but since it is... And valued at fair value, we have the NGL volatility. The important thing to remember when it comes to treasuries that it will pull to par. It's not something we are trading. And on your last question on mortgages, I think the back book has a 35% floating, 65% fixed. But what we have seen lately, if we include the rollovers, it's 75% choosing floating at this point.

Hi, Oberg Rolf here. And then to comment on IB overall. So the plan, the Swedish FSA plan is to finish this work during 2022. We filed the first application two years ago, the last application a year ago, and that's the plan. And then it will take some time before it's implemented technically. But if that time plan holds, it should be be in the figures the first half of next year. And when it comes to the impact of that exercise, we haven't communicated that, and we need to get further in the approval process before we can really know about the impact. But it means increased capital requirements to a certain degree, but more stable ones. That's as far as we can go at this point.

Okay, thank you very much.

And the next question comes from the line of Ricardo Rovere from Mediabanca. Please go ahead.

Thank you for taking my questions. Two, if I may. Just to have a clarification on what you stated before with regard to deposit betas. You stated that with the inflows you have seen over the past months and years, and given the level of liquidity in the system, without giving a number, if I understood it correctly, you stated that you do not expect any particular deposit beta when rates do go up. So clients, at least in the beginning, will not or should not get much on transaction accounts, if I understand it correctly. Without giving a number, it doesn't matter. The second question I have is on asset quality. Today, you're telling us that the LTV on the mortgage and commercial real estate is about 50% or so. So you would need a collapse in real estate prices to see any impact on LGDs. And you're also telling us that you are stressing... using or stressing the portfolio with 6%, 7%, 8% rate for the debt service. Also, the PD should not dramatically increase unless unemployment goes to the roof, which doesn't seem to be the case. What would you need to see a sharp deterioration of credit quality in the group? Have you ever run any kind of sensitivity if gas had to stop flowing to Germany from Russia? Thanks.

Okay. Thank you, Ricardo. If we start off with your first question, again, there is a clear distinction when it comes to price elasticity between transaction accounts and savings accounts, and that has been a fact since as long as I can remember. What I said is that on the transaction accounts the rates need to move higher than they are today in order for us to consider paying on the transaction accounts. On the savings accounts it's much more of a balancing act. It's a very attractive funding source. And that's why I said it is a balancing act between net interest margin expansion and flows in the books. If you look at the quarter, the pass through on savings is 7%. If rates increases, I think it will be more difficult to keep a pass through at that very, very low level. But that is what it's all about.

Okay, Ricardo Rolf here. So about the LGD and PD related question you asked. So yes, it would actually take a quite significant change, drop in asset values or property management, property values to really make a change when it comes to RWA inflation. And that's for a couple of reasons. The first one when it comes to LGD, those would gradually improve, but then we have the risk-weight floors for commercial and residential real estate. and also mortgages that sort of impacts here. So it takes a significant drop. And in the new models we are discussing with the Swedish FSA, they will be more stable, meaning that, and calibrated across the cycle, meaning that PDs will also be stable across the cycle. So it takes a quite significant drop. And to understand why or what it really takes to start to see changes, that is something we can't sort of exactly guide. But when you look at the different kinds of stress tests that we have, communicate externally also, and when you look at our LTV distribution that we also publish, you can realize that and see that sort of the first 30% will actually, of price change, will not lead to any significant changes. It's when you pass that point where you start naturally to see changes.

And with regard to just Russia... Well, I could say a few words on that.

So what I said today was that we expect growth to slow down, but we do not expect a recession. And, of course, if we would see dramatic changes in the gas distribution to Germany, that will, of course, lead to worsening economic development. But we feel confident that we stand strong. We have, as Wolf clearly demonstrated today, good credit origination standards and good collateral if something would happen.

Okay, thanks. Thank you.

And we have time for one more question. So the last question will be from Martin Leitgeb from Goldman Sachs. Please go ahead.

Yes, good morning. Could I have two questions, please, on commercial real estate? And the first one, I was just wondering if you could clarify how indexation works. are the majority of leases in the commercial real estate book in Sweden indexed, and would they expect this indexation to hold, so the ability of borrowers to pass on higher rent to their tenants? And secondly, I was just wondering, I mean, the loan book split is really helpful on slide 18 in terms of commercial real estate. I was just wondering what percentage of it would you call is speculative in a form or development loans in a way, whether it's a speculative risk in terms of tenancies or leases. Thank you.

So about indexation, when it comes to commercial real estate, normal agreements includes indexation related to inflation. And the period that you're looking at is from October to September, and then it starts to apply the following year. So that's the meaning that inflation could be passed on to customers. When it comes to residential real estate in Sweden that is being regulated so there and negotiation need to take place expectation is of course that it will at least partly be passed on but it depends on the outcome of that kind of of negotiation and then could you please repeat your second question I couldn't hear it clearly

yeah no no worries um i was just wondering in terms of the commercial real estate book how much is if development finance so whether that's you know classical development of buildings and then then the borrower need to find the tenant or whether there's some speculative risk in terms of of tenancies that um you know there might be vacancies or stuff okay well uh that's very very limited in that part of the book perfect thank you very much

Well, then I take the chance to say thank you to everybody for calling in and asking, as always, difficult and informed questions. We at Swedbank are very proud that we once again delivered a strong result in turbulent times. And with that, I wish you all a great summer, not too warm, I hope. Looking forward to seeing you again. Take care. Bye-bye.