Swedbank AB (publ)

Good morning, everybody, and thank you for dialing in to Swedbank's second quarter 2023 results presentation. My name is Annie Ho, Head of Investor Relations, and in the room with me today is Jens Henriksson, our CEO, Anders Felsen, our CFO, and Rolf Marquardt, our CRO. Let's start with our usual presentation at the beginning and then follow up with questions. With that, Jens, I hand over to you.

Thank you, Annie. And a warm welcome to everybody this summer day to the presentation of Swedbank's results for the second quarter of 2023. Swedbank stands strong. We have strong liquidity, strong capitalization and high profitability. And our proven business model delivers. A sustainable bank is a profitable bank that makes it possible for the many people and businesses to create a better future. And we are here for both people and businesses in tough economic times. Inflation has continued to trend lower in our home markets, but it remains at high levels. Although central banks are tightening, the global economy remains resilient. The International Monetary Fund stresses that it is vital to stay the course on monetary policy until inflation is durably brought down to the targets. And that means that fiscal policy must play its part by being restrictive, which implies that interest rates are expected to remain high for longer. Swedbank's profit for the quarter was up to 9.1 billion kronor, mainly driven by NII that increased by 7%. Lending margins on mortgages continue to decrease in this quarter by six basis points, but deposit margins continue to increase, although at a slower pace. Total cost was down compared to last quarter, since costs related to investigations by authorities decreased. The underlying expense increased according to plan due to mainly higher IT costs and marketing. Our cost-to-income ratio was down to 0.31. All in all, our return on equity during the quarter was 20.4%. Our credit quality is solid, and we have confidence in our thorough and conservative origination standards. Total credit impairments decreased and amounted to 188 million. The impairments are mainly model-driven, and if one looks at the provision for individual exposures, they amounted to around 30 million. Our expert adjustments beyond what the model shows is now 1.7 billion kronor. Our liquidity and capital position is strong. And the increased counter-cyclical requirements in Sweden reduced our capital buffers by 70 basis points. But this was partly balanced by our profit net of expected dividends. Our capital buffer is thus 3.5% above the requirement from the Swedish FSA. Our exposure to everything property related is in line with the bank's strategy and risk appetite. And we see that our customers have and continue to adapt to the economic conditions. Corporate business is the cornerstone of our operations because we are the bank for the many corporates in all our home markets. In Sweden, the new organization for corporate institutions, CNI, has begun to have an impact with a clear focus on profitability. Corporate lending was stable while deposit decreased. In Estonia, Latvia and Lithuania, investor sentiment was positive with a strong demand in the energy sectors. Private customers use Swedbank for their savings, and their deposits increased in all markets. In June, we decided to increase rates for all our private customers with deposits in Swedish krona. By that, we give interest on all private accounts for the full amount. Mortgage rates were raised on par. Altogether, Swedbank has a competitive full service offering. In Sweden, the mortgage market was cautious, though housing prices rose slightly. The trend among our private customers holds, and that is they continue to save by amortizing on a broad basis. And we have also sharpened our focus on customer contacts and saw increased volumes at the end of the quarter. In Baltic banking, our green mortgages grew by a little over 40%. And mortgage is a highly competitive business in all our home markets. And we maintain our leading positions. We want to make our customers' financial life easier. And we do that by meeting them where they want. Investments in availability and efficiency is ongoing and great results. For example, the rollout of the cloud-based communication platform in all home market. It is now in place in Latvia, Estonia and Lithuania and in Sweden work is underway. We also see that the digital availability was very good in the quarter. At the same time, we focus to improve availability in the Swedish customer center. And one action is that we have a new customer center site in Umeå. Swedbank's climate position is aligned with the Paris Agreement's 1.5 degree goal. As a bank, we have responsibility and good opportunities to contribute to the climate transition. And we focus on advice and financing to our customers in all our home markets. On the corporate side, demand is growing for loans for sustainable investments, and especially in the Baltic markets. And the financing to build three new large solar energy parks in Estonia is a good example of climate work. In line with our savings bank tradition, we now level up our engagement to contribute to financially sound and sustainable society by supporting local decisions of establishing foundations in Estonia and Latvia. We invest 10 million euro in each country so that the foundations can raise awareness on financial literacy and contribute to financial health. And this is a part of our solid 200-year-old tradition and our heritage from the savings banks. And it is still modern. Modern, that means it's your turn, Anders.

Thank you, Jens. We are pleased to report another quarter of strong profitability with the return on equity of 20% and earnings per share growth of around 8% adjusted for the 890 million in one-offs in Q1. Let me start with a side note. On 1st of May, we restated our 2022 and 2023 numbers to reflect organizational changes that have recently been implemented in line with our corporate strategy presented at the Investor Day. They primarily relate to the transfer of advanced corporate customers from Swedish Banking to CNI, as well as staff transfers between these two business areas and group functions. In addition to the restatements, there were further transfers of loans and deposits during the quarter between Swedish Banking and CNI. There were no effects on group level overall. Now let's go through the financials in more detail, beginning with lending and deposits. The total loan portfolio was stable, excluding a positive FX impact of 15 billion. Total private lending in Sweden had a small decrease of 2 billion, The overall market trends remain the same, with very limited new mortgage market volumes and elevated levels of extra amortizations. Total corporate lending in Sweden decreased by 4 billion, excluding a positive FX effect of 8 billion. In Baltic banking, private lending increased by 3 billion, and corporate lending was flat, excluding FX. Customer deposits decreased by 24 billion, excluding a positive FX impact of 19 billion. Although, private deposits increased in both Swedish banking and Baltic banking, with 5 and 2 billion respectively excluding FX. Corporate deposits in Sweden decreased by 25 billion, primarily due to CNI with a normal seasonal pattern of temporary deposit inflows in Q1, which are withdrawn in Q2. And corporate deposits in Baltic banking decreased by 7 billion, excluding FX. Turning to the revenue lines, beginning with net interest income, which increased by 832 million quarter on quarter, mainly driven by a continued expansion of net interest margin in Baltic banking. Overall, lending margins were lower for private and largely flat for corporates. reminding you that rate changes have an immediate effect on the deposit side, while the impact gradually comes into effect on the lending side. With limited new lending volumes, increasing market rates and our pass-through abilities continue to be the main factors impacting NII. And in terms of outlook, Our macro research team forecast a couple of more rate hikes from the ECB and the Riksbank before stabilizing towards the end of the year, i.e. high for longer. Let me reiterate that the NIM expansion is expected to narrow the higher the policy rates go. In this context, we have a good track record. We will continue with our proven pricing strategy and strive to strike an optimal balance between volumes and margins subject to origination standards, market rates, market growth and competition. Over to net commission income, which increased by 151 million. Card commissions were seasonally higher, Asset management performed well on the back of higher average stock market levels. And in Sweden, Svedbank Robor had net inflows of 7 billion, driven by private inflows, which mostly went into equity and mixed funds. Securities and corporate finance decreased due to lower DCM activity. Turning to net gains and losses. which returned to more normal levels after a very strong Q1. Fixed income and FX sales and trading performed well on the back of good client activity, and in Treasury we saw a reversal of the positive revaluation effects of funding-related swaps from last quarter. Other income increased by 194 million. primarily driven by a stronger performance in the insurance business, Intercard and the savings banks. Total expenses ended at 5.7 billion. Quarter on quarter costs increased in line with the normal seasonal trend. The underlying cost development is as expected. and the cost-income ratio went from 0.37 to 0.31. Regarding costs going forward, the annual headwind from inflation is expected to be slightly higher than assumed in our 1525 plan. On the other hand, the inflation also implies that that interest rates have moved higher and will stay higher for longer than previously assumed. The Lithuanian temporary bank fee was implemented as of 16th of May, adding $325 million quarter over quarter. For the full year 2023, we expect the Q2 monthly run rate to be a fairly good assumption, subject to changes in foreign exchange rates. The fee applies until the end of 2024 and is tax deductible. Now over to you, Rolf, to talk about asset quality and credit impairments.

Thank you, Anders. Economic development continues to be impacted by inflation and interest rates. This is putting pressure on many households and companies. But we also see that households and companies show resilience. A cornerstone for us is to be close to our customers, to know them well to assist and to detect problems at an early stage. This we do, and it is particularly important during challenging times. What we have seen so far is that credit risk indicators are stable and at low levels, even though overdue loans increased somewhat in Sweden in the quarter. In the Baltic countries, levels were unchanged. When looking at the credit impairments for the second quarter, they ended at 188 million. We saw a slight positive update of GDP in Sweden. This reduced provisions by 22 million. Credit migrations and state transfers in total added 648 million, which was partly offset by a release of 315 million from the export portfolio adjustment. This is in line with expectations and the intention behind the export portfolio adjustment. to cater for potential credit migrations that are not completely captured by our models a large part of this comes from the property management sector where internal ratings were downgraded migrations also occurred in a few single cases within manufacturing and transportation Individual assessments were once more at a low level and ended at 29 million. Other factors reduced impairments by 153 million. This is mainly explained by amortizations on volumes with higher risk. The export portfolio adjustment is now 1.7 billion, out of which 466 million to property management. In property management, we focus on companies with strong cash flows and collateralized lending. The average LTV for the sector is 53%, where only 1.6% of the total exposure exceeds the 75% LTV level. The Swedish property management sector continued to do well in the second quarter. The sector is facing challenges from interest rates, but so far not from vacancies and cash flows. From Q2 reporting, we see that all property management companies this far have reported increasing net operating income and in most cases positive net rental. Vacancy rates only increased slightly. Value adjustments also continue on top of the approximately 5% decline we saw up until Q1 2023. This development is underpinned by a stable demand from most, but not all, sub-industries and sectors, which supports the vacancy rates and improving cash flows. On the back of this, debt service tolerance, that is the break-even interest rate, increased to 7.4% for the 20 largest customers based on reported Q1 figures. The higher interest rates continue to negatively impact the interest coverage ratios that declined to 3.3 times coverage on average for our 20 largest customers. When stressing these exposures with an interest rate of 7% on the debt that is maturing during the next 12 months, the average ICR goes down to 2.2 times coverage. No company among the 20 largest ones below 1 times coverage. During the second quarter, companies continued to manage their balance sheets, including divestments of properties, restructurings, capital injections, bond buybacks, cancelled dividends and capex reductions. All in all, we conclude that the cash flow generation in the sector has been good, that companies continue to actively adapt to the changing conditions and and that we are well positioned to manage also potentially deteriorating conditions. Against this background, we are comfortable with our asset quality in the property management sector and with a total portfolio. Now back to you, Anders, for some words on cattle, I believe.

Thank you, Rolf. Our CT1 capital ratio stands at 18.6%, with the buffer above the minimum regulatory requirements at around 350 basis points. Our capital requirements increased by 73 basis points this quarter, mainly due to the increase of the counter-cyclical buffer in Sweden. Next quarter, There will be a couple of moving components between capital requirements and risk exposure amount, according to the preliminary SREP decision. All in all, the CT1 buffer will be largely unchanged, while the MREL requirements increases slightly. We will give you more details in Q3. The capital target range of 100 to 300 basis points remains, and our capital position continues to be strong. And with that, I hand over to you, Jens, to conclude.

Thank you, Anders. Let me summarize. Swedbank stands strong, and this quarter we deliver a net profit of 9.1 billion kroner, a cost-income ratio of 0.31%, A solid credit quality. In total, a return on equity of 20.4%. A sustainable bank is a profitable bank. And by being that, we contribute to our vision of a financially sound and sustainable society. Our customer's future, that is our focus. With that, I give the floor back to you, Amin.

Thank you very much, Jens. Let's progress to the Q&As, and I'll hand over to the operator, but also remind everybody that please stick to two questions per turn. Operator, over to you.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star N1 on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue... you may press star and two. Participants are requested to use only handsets while asking questions. Anyone who has a question may press star and one at this time. Our first question comes from the line of Andreas Hakanson from Danske Bank. Please go ahead.

Thank you and good morning, everyone. I have two questions on NII. If we start with your comment on this that you said that the NIM expansion is going to be the higher rates go, which is fine, and I think everyone expected that. But does that mean that you expect that the NII is going to benefit from each coming rate hike, albeit less than what we've seen previously, but it's still a benefit? That's my first question.

Thank you, Andreas. And the answer to that question is yes.

That's good. Then also on NII, At some stage, rates are very likely to start to go down again. And we would then, of course, have an impact on the deposit side. But how do you think that your mortgage margin is going to develop once rates start to go down, given that they're record low at the moment?

Well, we don't give forecasts on margins, but what we've seen during this quarter is a decrease of the margins down six basis points in Sweden, and I think it's nine basis points in the Baltic region.

Okay, I'll leave it at that then. Thank you.

Our next question comes from the line of Richard Strand from Nordea. Please go ahead.

Hi, good morning. Starting off with an NII question on the LCNI division where I think NII increased somewhat more than I expected. I just want to hear your comments there about the underlying drivers there. It says in the report it's due to deposits, but we also know that there's quite high competition for deposits, so I just want to hear your thoughts there on the development on NII in the LCNI division.

Yes, thank you. First of all, I think you should be a little bit careful. We are in the midst, as I said, of restating and transferring volumes between the different business areas. So that will – one single quarter will not give you the answer to sort of the normalized level for CNI. But it is correct. A fair amount of deposits that were coming from advanced corporates in Swedish banking with administratively set rates were transferred to CNI during the quarter period. And they benefited from expansion of NIM on the back of those deposits mainly. But again, be a bit cautious with one quarter before you make any forecasts on CNI's development.

Okay, thanks. And then on asset quality and loan losses, you choose to release around 300 million of your management overlay buffer in the quarter. And just for this release, then the underlying loan losses would have been at around 11 basis points, which is still quite low. Just want to hear your reasoning here about the timing of this release of the management buffer. Why are you not choosing to hold on to it longer? Or if it's confidence about the development going forward that makes you confident to start releasing it now?

Thank you, Rickard. So the reasoning behind this and the intention we've had with the management overlay is to cater for potential future migrations that are not being captured by our models. And then what happens is that when we start to see those migrations, we will mitigate that impact. So that is the intention. And that is exactly what you have seen during this quarter. We have made an exercise where we always, on an annual basis, go through customers and could have rating migrations from that. But then we have also made another review, and then we saw further migrations, and we mitigated that through using the reserve. So that's the intention.

Okay, thanks. The next question comes from Sophie Petersens from JP Morgan. Please go ahead.

Yeah. Hi. Here is Sophie from JP Morgan. So just going back to asset quality and kind of looking at the stage two increases. So stage two increased, I think, 11% quarter and quarter. But if you look at, for example, property management stage two, increased from $32 billion to $42 billion in the quarter. We also saw mortgages, stage 2 loans, increased from $81 to $86 billion quarter to quarter. So I was just wondering, like, Wouldn't it make more sense to be a little bit more kind of cautious and stick with these provisions that you have, the expert overlay provisions that you have on balance sheet and just kind of see how it pans out or what kind of makes you so confident that things are not going to get worse and you're not going to see any losses? So that would be the first question. And then the second question is that you've got to mention that the NII benefits will be lower from coming rate hikes, but if I look in your fact book, you still go for around 6.4 billion of additional NII from 100 basis points rate hike. How should I kind of think about these two comments? Are there some differences and kind of what are those And then the last question would be on the cost outlook. You mentioned that annual cost inflation is coming higher than expected. If you could just elaborate what kind of cost inflation we should be thinking about in 2023 and 2024, please.

Thank you, Sophie. And I'll start with the first one on asset quality. I think you need to look at the big picture here. So if you see, look at the... So that means that we have built buffers to cover for the impact from what you see in the macro picture. So that feeds into the picture. And then on top of that, we have added the management overlay. And then I mentioned on the previous question that the intention behind that was to cater for potential further migrations. And when we see those happen, then we use the reserve as intended. So I think we are well covered and well prepared for potentially future negative developments in that area. And then also to comment on the migrations. Yes, we had migration from stage one to stage two in the CRE sector, and that was related to the exercise I commented on. And in the mortgage book, we continue to see some migrations, not as big as the ones we saw during the previous quarter, but that is exposures with a very low level of risk, but they had had a move in PDs, but at very low levels. So that is what is behind that development.

Yes, and Sophie, on the NII sensitivity, let me... I would go back to our presentation on the investor day, where you can clearly see the balance sheet structure much more sort of transparent than you do in the fact book, but... The fact is that, as you know, we have automatic effects if there would be increases in market rates. We have provided you before with a sensitivity which is more or less unchanged, so you can use the investor day numbers. where we assume zero pass-through on transaction accounts and full pass-through on other assets and liabilities. And as you are probably aware of, that has not been exactly what has been happening, but that is for you to play around with. So the 50 basis point scenario still stands with a 3.2 billion upside. for the group, of which 1.4 is coming from Baltic Banking. And when it comes to the cost inflation headwind, it's all about a number of larger vendor contracts that will be up for renegotiation in the end of this year, taking effect next year. have not been impacted that much by those yet. But since inflation seems to be more sticky than we thought from the beginning, they will most likely be impacted during the end of this year going into 2024.

Okay, that's clear. Thank you.

The next question comes from Jacob from SAB. Please go ahead.

Yeah, good morning, everyone. I was just wondering if you could give any more call on the decrease within corporate deposits in Sweden. Was it driven by any specific sector or was it across the board?

It was primarily institutional money that were placed with us in Q1, and now they were withdrawn, and that is a seasonal pattern we have seen. But then you have seen some withdrawals across the sectors, but nothing specific other than the institutional money.

All right, that's good to hear. And then my second question is if you could maybe quantify the impact of Basel IV a little bit more. You write in the report that you expect minor impact, but do you have any comments on the different components?

No, we actually don't, because what we have stated in the press release is that the impact is very limited when you take all the different pieces into account. And then the impact on the pillar two requirement was 30 basis points, the proposal. It's not the final one. And then we will come back in the third quarter with more details about that. And then regarding Basel IV, we have given guidance during the investor day. So the assumptions we made and what we communicated still holds.

All right. Thank you very much.

The next question comes from Martin Leitch from Goldman Sachs. Please go ahead.

Yes, good morning. Thank you for taking my questions. I just have two questions with regards to how to think about an high progression going forward. And the first one, just looking at the deposit side, so we have seen some migration from transaction account into savings, and I believe from savings account also into time. I was just wondering How do you see this progression and do you expect this to continue over the coming quarters? And the second question, just with regards to the mortgage margin comments made earlier, I was just wondering if you compare, if you were to assume that the back book of mortgages rolls over at the current pricing, could you quantify how much of a headwind this would be to NI? Thank you.

Thank you. If we start off with the first one, I think you should separate between Sweden and the Baltic countries when it comes to the migration that you described. When it comes to Sweden, transaction accounts are very stable. You have seen some further migration from on-demand savings accounts to term in the quarter. I think it was around 6 billion for private in Sweden. In the Baltics, the variety of savings opportunities are less. So the majority of the savings are on transaction accounts. And there you have seen a continuation of savings. migration from transaction accounts to term in this quarter, $11 billion. I will not give you a forecast on that moving forward, but the customers that have the opportunity and the possibility to get the higher interest rates are doing that. For many of our customers, that is not worthwhile doing. So I'm not overly worried about strong migrations continuing. And on your second question, if I were to roll over the whole mortgage book at front book pricing, I don't have any indication to give you on that one.

Could I follow up a bit, Anders, and just say a few of the numbers, what we actually deliver to our customers? In Sweden, we are now paying 0.25% on all private transaction accounts, and there is no upper limit. So that means that you can put whatever amount you want there. On-demand savings account in Sweden, you get 1.85%. And if you come to us and can lock it in for one year, we can give you more than 4%. So that's a very good offer. In Estonia, for instance, we have a 12-month term deposit. You can also get the 4%. So I would say we have a very competitive offering here to our customers.

Thank you very much.

The next question comes from Johan Eikblom from UBS. Please go ahead.

Thank you. Can we maybe just come back to the asset quality? And I'm trying to understand why we're seeing such different credit rating migration between the banks. I mean, you seem to be seeing a much faster increase in Stage 2 loans than a number of your Nordic peers have. Is this just due to how your models work relative, and we're seeing that kind of transfer from overlays into actual stage migration, and that's a decision you made in how you run your IFRS 9 models? Or should we read anything else into the sharper increase in stage 2 loans?

Thank you, Johan. So I think what is driving the transfers to stage two is actually three things, and that could differ between banks, and that you need to keep in mind when you are comparing us with other banks. So the first one is migrations and how the bank calculates that, and that can differ between banks. Secondly, we are putting in place thresholds that define what is an increased level of risk. That could be done in different ways. And then you have the macro component and how that translates into migrations could be done in different ways. So the method you use will give different outcomes. So the intention behind this regulation and what we'd like to see is that when you have a general economic downturn, that could potentially have an impact on asset quality, generally speaking. And then you would expect to also have an impact on the provisions. And that is what we see when we use our models. That means that we are building buffers at an earlier stage. And that is the way our models are functioning. And I think that's the explanation you should keep in mind. I also think that when you want to compare, then it's probably a good thing also to look at the Stage 3 provisions because that's much less model-driven. So there you get a figure that is easy to compare.

And just to follow up, I mean, in your discussions with the regulator about kind of risk and future capital planning, et cetera, how does it feature that the model seems to be running or coming out with such different outcomes for, you know, what's presumably, you know, maybe some variability but not that much in terms of macro assumptions, et cetera? Do you get... the same, you know, can they standardize and treat the banks the same or do they only look at kind of the actual stage ratios or how does that feature into their conversation?

So just to underscore that I don't think our models are overly sensitive. I think they are fit for the purpose. And then when it comes to, I mean, we do this the best way we can, and then we don't have any further discussions with the regulators about this, I must say.

Okay, thank you.

The next question comes from Nemitas Antonio from Barclays. Please go ahead.

Morning. I've just got one question, please. If gross costs are going up, which it sounds like they are given the sticky inflation, do you have any offsets for that, whether it's automation of processes, reducing layers of bureaucracy, reviewing outsourcing contracts or digitalization and efficiency? Thanks.

Thank you. Yes, we have, and I will not go into the details, but we are running a structural cost program within the bank to mitigate parts of the headwind that comes from inflation and the fact that we are keeping up our investment agenda on a high level, preparing the bank for the future.

Thanks very much.

The next question comes from Jens Hallen from Carnegie. Please go ahead.

Thank you, and good morning. Yes, two fairly quick questions on CRE. First, yes, looking at the average LTVs, I mean, you have 51% average LTV for your largest exposure. Can you give us a rough estimate of how much of that is actually bank loans that are seen to bond funding? I presume your risk is much lower than that.

So that is, to a very significant degree, bank loans.

Okay. Okay, thank you. And then, yes, on the second one, on the stress test for ICR, I mean, I see you stress death maturing within the next 12 months, but can you give us an idea of what happens in year two, year three? If you keep rolling forward for 7% funding cost, at what time do we... to start to see ICOs falling below one. It would give us an idea of how much time the companies have to either restructure or hope that revenue catches up.

So what we give you now is the stress you have in the slide that we have presented. And you could run these calculations in different ways. And we see that if we have high rates for longer, of course it impacts. But then you also need to start to take into account different actions that these companies are taking and also the impact from. from increased rents, vacancy levels, and so on. So then it becomes less of a guidance, I would say. But what we do see is also change that is ongoing in the market where these companies are mitigating the situation, especially the ones that are more leveraged are mitigating the situation to meet these higher interest rates.

Okay. Maybe I can understand that you can't provide any details, but I guess what I'm trying to establish is, like within LCR, do you see like a significant cliff effect after sort of in month 13, or do you think this is a good indication of the risk in the portfolio now? Of course, over time, the company should be able to do something, increase revenues, restructure assets, etc.

So what I can say is that the average interest rate fixing they have in this portfolio is approximately three years. So it takes time for this to feed through. It gradually has fed through, as you can see in the numbers over the different quarters. And then if we look at higher interest rates for longer, high for longer, then of course it impacts, but we also see that they have a good ability to stay above the one level.

Perfect. Thank you very much.

The next question comes from Jacob Cruz from Autonomous. Please go ahead.

Hi, thank you, Jacob from Autonomous. Could I just ask on the Baltic LII, firstly, are you paying for transaction accounts in the Baltics as well? And if not, are you planning to introduce that in the Baltics? And secondly, the term deposit increased quite rapidly in this quarter, and I think you said you weren't too concerned of much further flows from transaction into term deposits. So are you already seeing a slowdown in the pace of term deposits or is that more of a sort of future outlook for Q3, Q4 when you think about the shift to the deposit product? Thank you.

Thank you, Jacob. No, it was not any scientifically proven fact that I gave you. It's more the fact the dynamics within the Baltics and the customer base and how the structure of the transaction accounts looks. I'm not in any way ruling out that the ones that can will continue to migrate, which in a sense is good. I think on your first question, no, we are not paying on transaction accounts, generally speaking, but we do pay for deposits in the Baltics. So for around 20-ish percent of the deposit base, we pay interest on average around 2.2%. So we are paying, but not on transaction accounts. And at this point, we do not have an intention to do so either.

Okay. And on the transaction account point, you're still not paying transaction accounts for corporates in Sweden either. Is that right?

Correct.

Okay, thank you.

The next question comes from Ricardo Rovere from Mediobanca. Please go ahead.

Thanks for taking my question and good morning to everybody. Just one, if I may. Sweden is, right or wrong, is supposed to enter into recession in 2023. Now, this one way or the other should be somehow captured by your internal models when you have to calculate 12-month expected losses or large-time expected losses under RFS 9. Now, and on commercial real estate, if we have not seen anything on your credit losses so far, despite this should be somehow included new calculations, despite the tightening that we have seen so far, despite the fact that CRE exposures are supposed to be struggling since a while. And considering that your LTVs continue to remain either on residential mortgages or on commercial estate in the 50% area, what should happen for the situation to suddenly revert. Would you need Sweden to enter in a 2% recession to see something? How do you see this? Thanks.

Thank you, Ricardo. So first of all, to comment on the way the models are supposed to work. Regarding the macro development, what you're referring to is what we have seen over the previous four quarters when we've had macro provisions being made. This time, that was not the case because the macro forecast was quite stable or actually improved a bit in Sweden. What it would take to cause a disruption that would start to impact on asset quality, especially on the property management side, I would say it takes a deeper recession that would start to put pressure on vacancy rates and rents and also unemployment rates to start to increase. But that's my best assumption.

Thanks a lot, Rolf. Thanks.

The next question comes from Magnus Andersson from AVG. Please go ahead.

Yes, good morning. Thank you. Two questions, one on NII and the second one on capital. Starting just to follow up on NII, we see that more than 80% of the quarterly increase was from the Baltic, as you also mentioned, Anders. If you think about the NII dynamics from here in terms of lending, deposit volumes, margins, etc., do you still think that the NII will remain flat pretty much in Swedish banking? It was up slightly also in corporate institutions, although marginally in absolute terms, meaning that it primarily will be the Baltic banking business that drives NII. from here when we get the further rate increases during the second half.

Thank you, Magnus. As you know, the Baltic banking dynamics is completely different from what we see in Sweden. And as I've been saying, the higher the rates go, the narrower the NIM expansion will become. Having said that, though, bear in mind that we are facing an effect on the lending side while the effect on the deposit side comes immediately. And if you look at the quarter, you can also see that we have seen a NIM expansion on the back of higher deposit margins for transaction accounts on corporates. So... The magnificent increase you have seen over the past three quarters will gradually phase down, but let's see how it turns out for the next coming quarters, having the phasing of lending in the back of your head.

Will you be able to keep an AI flat on a quarterly basis, you think, within Swedish banking?

I will not guide on that, Magnus. It's up to you to take my information and do the best out of it.

Okay. Secondly, just on capital, I was wondering if you see the 50% payout ratio as set in stone until you get the potential US fine, given that you're now running at an ROE of about 20%, which means that your capital buildup is going to be very strong in the scenario you are describing.

Well, that is correct.

Okay, so it will be 50% until you get the fine, regardless of profitability and capital buildup and CT1 ratio progression.

Well, that is the capital dividend policy we have. And we've said that we have uncertainties due to the U.S. investigations, and I have nothing to add on them, that we do not know whether we will get any fine. And if we do get the fine, we cannot make a good forecast how large such a potential sum would be. So that is – until then, we stick with 50 percent.

Okay. Thank you.

The last question comes from the line of Peter Brown from HSBC. Please go ahead.

Yeah, thanks for taking my question. It's actually Piers Brown from HSBC. It's just on the Lithuania bank tax. So that's coming in a little bit higher than what I had in my model. And I think that's just because the second quarter NII number for Lithuania is also quite a bit ahead of what I had. So I'm just interested in your comment that Q2 is a representative run rate.

He can continue talking, right?

Excuse me? Sorry, just carry on. There's some noise from the operator.

Okay, right. Yeah, so I'm just interested in your comment that the Q2 tax level is the right sort of run rate going forward because that obviously implies that you think the Q2 NII number for Lithuania is sustainable. And I guess given where margins are at, that seems like quite an interesting assumption. But if you could just comment on that. And then also, just on a broader perspective, how do you assess the risks of the bank tax either being extended or possibly replicated in other jurisdictions? And just on this point, I guess what I'm looking at is the returns on equity that you're now generating in the Baltic businesses, which are above 40% in each of Estonia, Latvia and Lithuania. So just how you assess the risk of other

Well, thank you. Let me start then. First, let me once again underline that we are extremely proud to be the largest retail bank in Lithuania, and we have a long-term commitment to Lithuania as one of our four home markets. If you look on the average return in Estonia, Latvia and Lithuania during the last 15 years, it's been 8%, 10% and 12% respectively. And therefore, I am of the view that a sort of push through a tax in this way is the wrong thing to do. And I share the opinion of the ECB that this tax reduces incentives to finance the real economy and is thus negative for Lithuania both in the short and long term. When it comes to Estonia, they have just decided on tax reform. And when it comes to Latvia, there are some discussions, but we've not seen any results of that.

And on your first question, it's an estimate. It's a couple of moving parts in that specific fee structure. And it's also dependent on the FX rate development between Swedish krona and euro. But I'm not to forecast any of it. So that's the best estimate we can give you at this point. And please remember that it's tax deductible.

Thank you, Anders. Could I just steal a word and say thank you, everybody, for calling in. And from us at Swedbank, wish everybody a good summer. And remember, Swedbank stands strong. Take care.