Swedbank AB (OTC:SWDBY) (SWED-A.ST) has announced a strong third-quarter performance for the year 2024, with net income rising by 9% to SEK 9.4 billion. CEO Jens Henriksson highlighted the bank's solid quarterly results, which were bolstered by one-off and timing effects despite the prevailing global economic headwinds.
The bank's return on equity stood at an impressive 18.4%, with a cost-to-income ratio of 0.31. Credit quality remained firm with low impairments, and the capital position was robust, with a CET1 ratio of 20.4%. Swedbank also emphasized its commitment to customer financial health and sustainability, aiming to empower 1 million people by 2030 and launching a new savings platform to enhance digital experiences.
Key Takeaways
- Swedbank's net income increased by 9% to SEK 9.4 billion in Q3 2024.
- The bank's return on equity was 18.4%, and the earnings per share reached SEK 8.30.
- A strong capital position was maintained with a CET1 ratio of 20.4%.
- Credit impairments were low at SEK 270 million.
- Lending growth was observed in the Baltics, while the Swedish market remained stable.
- The bank launched a new savings platform and is on track to meet its Swedbank 15/25 targets.
Company Outlook
- Swedbank plans to allocate SEK 1 billion for strategic initiatives in 2023 and 2024.
- The bank is optimistic about the economic environment in Sweden and the Baltics, with potential for increased lending due to falling inflation and fiscal expansion.
Bearish Highlights
- The competitive landscape in Sweden and the Baltics is challenging, with pricing pressures from smaller players.
- Loan growth remains subdued, with the bank monitoring the impact of monetary policy on lending.
Bullish Highlights
- Swedbank reported a slight recovery in house prices and transaction volumes in Sweden.
- Baltic insurance saw a significant increase in fee income due to a life insurance product's cash flow revaluation.
Misses
- Cost guidance for the upcoming year remains pending.
- The bank is cautious about credit losses and continues to maintain provisions for potential portfolio risks.
Q&A Highlights
- Anders Karlsson discussed the impact of covered bond swaps and funding costs on net interest income.
- The bank has proactively managed regulatory debt issuance to maintain a buffer against MREL requirements.
- Swedbank's management capital buffer remains within a range of 100 to 300 basis points, with a capital release planned for 2025 pending regulatory approvals.
- Jens Henriksson announced that Jon Lidefelt will succeed Anders Karlsson as CFO starting November 1, 2023.
Swedbank's third-quarter earnings call painted a picture of resilience in the face of global economic challenges. The bank's strong capital position and focus on customer value, efficiency, and sustainability are likely to continue to be key drivers of its strategic direction in the coming years. With a new CFO set to take the helm and the next earnings call scheduled for January 2025, stakeholders will be looking forward to seeing how Swedbank navigates the evolving economic landscape.
Full transcript - Swedbank (SWEDa) Q3 2024:
Annie Ho: Good morning and thank you for dialling into Swedbank's Third Quarter 2024 Results Presentation. My name is Annie Ho from Investor Relations, and we also have our C-suite here today. Jens Henriksson, our CEO, Anders Karlsson, our CFO, and Rolf Marquardt, our CRO. We'll start with our usual presentation and follow up with Q&A. With that, I hand over to you, Jens.
Jens Henriksson: Thank you, Annie. Swedbank has once again delivered a strong results. This time, further supported by one-off and timing effects. We are creating value for our customers and shareholders in both good and bad times. The global economy is being challenged by increased geopolitical uncertainty, low growth and high debt. In addition, Europe needs considerable investments. Looking at our home markets, Lithuania's economy is performing strongly, while Latvia is more sluggish. In Sweden and Estonia, it will take more time before households feel the impact of their stronger purchasing power and consumption begins to accelerate. The Fed, the ECB and the Riksbank cut their policy rates during the quarter and are expecting to cut again before the end of the year and further in 2025. In 2025 and 2026, our four home markets will be among the fastest growing in Europe, strong public finances, real wage growth, profitable banks and competitive business sectors provide a solid base for the future. In this environment, Swedbank stands strong. The result for the third quarter increased by 9% and amounted to SEK9.4 billion. Net interest income was stable, lower lending rates for customers were offset by lower funding costs. Net commission income increased by 3%, mainly from asset management and the underlying card business. Costs decreased according to plan, and we maintained strict cost control. The temporary hiring freeze introduced before summer is producing results as do lower consulting costs. Our cost-to-income ratio was 0.31. We continue to invest in a better and stronger Swedbank, fighting fraud, improving our payment systems, increasing availability as well as the IRB overall are prioritized areas. Summing up, we delivered a return on equity of 18.4% and earnings per share of SEK8.30 for the third quarter, a strong result. Swedbank has a conservative and thorough lending process. Our credit quality is solid and credit impairments for the third quarter amounted to SEK270 million. We generate capital and have a strong capital position with a buffer of 5.2 percentage points. Our liquidity position is strong. Cyber-threats are a reality and that we and other parts of society must deal with. As a systemic bank, we have high preparedness. Our work to fight financial crime and money laundering never stops, that Standard & Poor's raised their outlook on Swedbank to positive is one proof that we prioritize the work on anti-money laundering. The target of a sustainable return on equity of at least 15% is the foundation for our Swedbank 15/25 plan. To deliver, we focus on our customer promise to make our customers' financial life easier. As planned, we have strengthened our local presence in corporate banking as well as premium and private banking. We continue to fine-tune our omnichannel communication platform to increase availability and the capacity for advisory meetings. Through our new savings platform, we have laid the foundation for a digital savings experience for both our customers and advisers, an important step in our work with financial health. One-third of our Swedish private customers have so far been migrated to the new platform. Swedbank is the leader in mortgages in all our four home markets and we maintain our position in tough and tight competition. During the quarter, we cut our mortgage rates. Lending increased in Estonia, Latvia and Lithuania, and was stable in Sweden. Deposit volumes in Sweden decreased due to seasonal effects. In Estonia, Latvia and Lithuania deposit volumes increased. Savings are an important part of our heritage and we continue to build a strong savings culture. Our Baltic customers in Estonia, Latvia and Lithuania can now increase their spontaneous savings by automatically rounding up purchases and depositing the extra amount in the savings account. Our Robur funds remains an attractive investment alternative and Robur had a fund inflow and maintains a market-leading position. During the quarter, we saw stable customer activity in the corporate segment. We continue to optimize routines to improve our advisory by combining local presence with national expertise. Corporate lending is still muted in Sweden. In Estonia, Latvia and Lithuania, corporate lending grew. The commercial real estate sector's challenges of financing via the bond market are fading away. During the year, one-third of the bonds we arranged were sustainability bonds. That is the highest share among Nordic banks. In our own funding, we have issued a first green covered bond because sustainability is at the core of Swedbank business strategy. And our sustainability work is now focusing on two parts financial health and energy transition. Our citizens' financial health is close to our heart. And it goes back to our roots. That's why we want to empower 1 million people in Sweden, Estonia, Latvia and Lithuania to improve their financial health by 2030. Through education, we have continued to build financial literacy among both young and old. Through the Institute of Financial Health and the collaboration with the owner foundations, we reach the local communities. During the quarter, we continued to help customers accelerate the energy transition as a transition that's important to mitigate climate change. We make a difference by financing sustainable energy consumption and production. For our Swedish corporate customers with commercial properties, we have joined together with our partner, Ramboll, to launch the incept platform to assist our customers in the energy transition. Let me now give the floor to Anders, who will deep dive into the financials.
Anders Karlsson: Thank you, Jens. Let's start with lending and deposits. The loan portfolio was stable, excluding a negative FX impact of SEK3 billion. In Sweden, total private mortgage lending was stable. Although household confidence was slightly improved, volumes in the market are still muted. Total corporate lending in Sweden decreased by SEK7 billion, mainly from property management. And in the Baltics, private lending increased by SEK3 billion and corporate lending by SEK6 billion. Customer deposits decreased by SEK7 billion, excluding a SEK2 billion negative FX impact. Private deposits increased in the Baltics by SEK5 billion, while it decreased in Sweden by SEK6 billion in this quarter. Corporate deposits in the Baltics increased by SEK1 billion and it decreased by SEK7 billion in Sweden. Turning to the P&L. Profitability was very good, boosted by some one-offs and timing effects. Let's begin with net interest income, which was stable. Average volumes contributed positively. FX, day count effects, and the correction resulted in a net positive delta of around SEK90 million. During Q3, our total funding costs decreased in line with our lending income as we have continued with our active pricing on both sides of the balance sheet. Part of our assets reprice gradually and slower than our liabilities following the changes in customer lending and deposit pricing that we did at the end of last quarter and this quarter. Hence, during a declining interest rate environment, the NII development will not always be linear due to timing mismatches between rate changes on our assets and liabilities, which was visible in the quarter. This is what we call timing effect in the interim report. Going forward, as policy rates are expected to be further reduced, we will continue to work in accordance with our pricing strategy. But bear in mind that private transaction accounts now have zero interest rate in all our home markets. Over to net commission income, which increased by SEK116 million, mainly driven by stock market performance and day count effects in asset management. Underlying card commissions were seasonally higher. The introduction of a new service concept in Latvia resulted in higher commissions in service concepts and lower card commissions. Net gains and losses were strong and ended at SEK1.2 billion. FX and fixed income sales and trading performed well and there were positive revaluations of interest rate swaps relating to the Swedish covered bond portfolio. Other income increased by SEK470 million. Net insurance income saw a large delta from revaluations. Last quarter, the effect was minus SEK82 million while this quarter was plus SEK184 million, resulting in a delta of SEK266 million quarter-over-quarter. Income from associates increased by SEK162 million, of which Entercard benefited from SEK120 million one-off adjustment in credit impairments. Total expenses for the year are developing according to plan, and the quarter ended lower by SEK480 million due to lower consultancy costs after front-loading of initiatives in the first half of the year, lower staff costs due to the hiring freeze taking effect on FTE levels and the decrease was further amplified by seasonality and some one-offs such as VAT refund. As previously communicated, costs in the second half of the year will be close to the first half of the year excluding any FX impact. The year-to-date FX headwind is around SEK150 million, reminding you that it's net positive on our P&L. Now over to you, Rolf, to talk about asset quality and credit impairments.
Rolf Marquardt: Thanks, Anders. Credit quality is solid. Year-to-date impairment ratio is one basis point. The impact from the downturn and higher interest rates still lingers, but we see positive signs. Past due loans for Swedish households and also in the Baltic countries have stabilized during the quarter. Past due loans in the corporate sector trended downwards in Sweden, but increased slightly in the Baltic countries. In the third quarter, credit impairments ended at SEK271 million. The impact from macro factors reduced provisions by SEK95 million. Rating and stage migrations added SEK428 million distributed across several different sectors. At the same time, SEK84 million of the post-model adjustment was released. This was mainly related to property management on the back of reduced uncertainty in particular for larger companies. The remaining post-model adjustment is SEK858 million. Individual assessments were SEK337 million. Net repayments and balances reduced provisions by SEK426 million, mainly in the property management and finance and insurance sectors. The Swedish property management sector has continued to do well. Bond markets are open and interest rates are coming down. Over the last quarters, we have seen a slight impact on vacancy rates from the downturn, but this stabilized in the third quarter. The uncertainty we saw back in 2022 and 2023 is fading away, especially for the large and medium-sized property management companies. Looking at the reported Q2 financials of the 20 largest customers, the debt service tolerance ratio, that is the breakeven interest rate, increased to 8.6%. The average interest coverage ratio stabilized at 2.4. So with that, I'll give the floor back to you, Anders.
Anders Karlsson: Thank you, Rolf. Turning to capital. Our capital position continues to be strong with the CET1 capital ratio of 20.4% and a buffer of around 520 basis points above the requirement. The capital target range of 100 basis points to 300 basis points remains. Risk exposure amount increased by SEK10 billion net and ended the quarter at SEK858 billion, an increase of SEK10 billion in credit risk REA due to the approval of Baltic banking's IRB model plan was offset by a release in Article 3. I now hand over to you, Jens.
Jens Henriksson: Thank you, Anders. Let me now sum up the quarter. We delivered a strong result this time further supported by one-off and timing and effects. Return on equity was 18.4%. Cost-to-income ratio was 0.31. Our credit quality is solid and our capital buffer is strong at 5.2 percentage points. We continue to take further steps toward achieving our planned Swedbank 15/25. We create value for our customers and our shareholders in both good and bad times. Our customers' future is our focus. And with that, Annie.
Annie Ho: Thank you. Let's kick off with the Q&A part of our presentation. Before I hand over to the operator, can I remind you to please stick to two questions per turn. Operator, please?
Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question from the phone comes from Andreas Hakansson with SEB. Please go ahead. Mr. Andreas Hakansson, your line is open, you may ask your question.
Andreas Hakansson: Good morning, everyone, and thanks for that. Can I just start saying thank you very much to Anders. I think it's your last quarter. So thanks for having -- bearing with us all those years, and thanks for the support. Then going into NII, of course, Anders, you get one last NII question, I think you'll get more on the call. So could you tell us there was a benefit from the reset of covered bond swaps that are three months, that happened in June, I believe. But since covered bond, I believe, the spreads have been tightening further, so should we see another benefit in September? And if you continue to see a tightening throughout the year, should that be an ongoing positive until we get the stabilization there? That's the first question.
Anders Karlsson: Thank you, Andreas, and thank you for asking so many difficult questions over the years. It's probably not over with this one. But coming to your question on NII, you are correct, we have liability swaps that are connected primarily to the IMM dates. And that was changed downward into this quarter. So that's positive. On the other side, though, we have asset swaps that do reprice over the same -- over the quarter. So I wouldn't stare too much on the liability swaps. But I agree with you, when the rates are coming down and the IMM dates, you will see benefits from that. But that is not the primary reason for the NII.
Andreas Hakansson: And the primary reason is then? I mean, you talked about a funding benefit.
Anders Karlsson: We have an underlying funding benefit, which will gradually come in when rates are falling. The reason this quarter for having a stable NII is the fact that we, if you remember, repriced our savings accounts, including the transaction accounts in the beginning of the quarter with a full effect immediately, while on the mortgage side, you have a gradual rolling effect. So they were taken each other out basically. But funding costs will come down gradually.
Andreas Hakansson: So when I look at your sensitivity, it is SEK6 billion, SEK6.1 billion, that's, of course, assuming zero beta on transaction accounts and 100 on savings. Let's assume that, that is fine. But are you including that this funding cost will benefit you over this period of time or isn't that actually an added benefit?
Anders Karlsson: No, but the wholesale funding is totally market rate-dependent. So the way I view it, Andreas, and I know that it's a very rough calculation, but it might help. Currently, if I look at the liability side, I have SEK200 billion of equity, and I have SEK400 billion of transaction accounts where I pay zero, that equals SEK600 billion which is very difficult to do much about. If rates are coming down further, then it is dependent upon market rate movements, timing effects, what will happen to margins and what will happen to volumes. And there, your own assumptions on pass-through will be applicable. So that's the way I'm trying to view it to simplify things, but there are so many moving parts.
Andreas Hakansson: Fair enough. Thank you very much.
Operator: The next question from the phone comes from Magnus Andersson with ABG. Please go ahead.
Magnus Andersson: Yes. Hi and good morning. Just following up on Andreas' question there. When I look at the NII bridges, in the Q2 presentation and compared with this one, it's obviously the positive SEK366 million, that is the main difference. And as you said, there are a lot of moving parts. Is it also, I mean it sounds like we should not regard the SEK366 million as something that was extraordinarily positive in this quarter, but rather that you should have this kind of effects regularly when rates come down. And secondly, just on that, Anders, you made your simplified calculation, are you really saying that what we can do is to try to estimate where NII will be when rates have flattened out wherever we think that will be and that the trajectory down to that level is virtually not impossible, but very difficult to project on a quarterly basis since you're going to have these effects all the time?
Anders Karlsson: Thank you, Magnus. That was exactly what I was trying to say that when we are through this, you will see more timing effects coming, so it will be very difficult to forecast each and every quarter. But when you are through, that is a good proxy for you to use. I also would like to remind you of the fact that you remember that we issued a large substantial volumes within the regulatory space in Q1, that it was both senior non-preferred and it was in AT1 and some senior as well. That had a negative full effect in Q2. We have not increased that substantially in Q2, which means that the delta from Q2 over Q1 versus Q3 over Q2 is much smaller.
Magnus Andersson: Okay. Thank you. And my second question was just briefly on capital. You have the management buffer now of 520 basis points. I mean if we assume that any settlement with US authorities would drag out in time for whatever reason, do you have internally a cap for how high you would let the management buffer become?
Jens Henriksson: Well, thank you. Well, it's the same message as last quarter. And as you rightly put out, we have a capital buffer range between 100 basis points and 300 basis points. And in the program 15/25, we target the mid of it, and that's 200 basis points in 2025. And you know that I talked about that, that gives us an excess capital in 2025 of 300 basis points or maybe a little bit more. And out of these 100 basis points are reserved by the Swedish FSA, and we expect the lion's share of it to be released during 2025 when we expect our private IRB models to be approved. All that stands. And as you know, we have no intention to hold more capital than necessary. So when can you then expect capital release? Well, there are always uncertainties related to what the regulators might do, but the biggest uncertainty is, of course, the U.S. investigations. And as I've told you many times, we have no information on when they will be concluded. We have no information if we will get any fine. And if we do get the fine, we have no possibility to estimate the size of such a potential fine, so no new messages.
Magnus Andersson: Okay. Thank you.
Operator: The next question from the phone comes from Sofie Peterzens with JPMorgan. Please go ahead.
Sofie Peterzens: Yes, thanks for taking my question. Given that we have this lag effect or timing effect, as you call it, should we expect any cliff effect in the fourth quarter as mortgages got free priced and kind of not just in Sweden, but also in the Baltics? And then my second question would be if we -- thank you, Anders, for having been the CFO for so many years and it has been great working with you. But if you could maybe just comment what the rationale is for Anders moving to the US and becoming the head of the US operations? Thank you.
Jens Henriksson: Well, let me start with that. Well, Anders talked about there is this great job in New York that Anders wanted to have and then he got that job. So it's that simple. And I have a great person coming in, Jon Lidefelt, but I was going to save that for the last sort of part of this speech to thank Anders, but I'll do that later on. Anders, do you want to take the one on the first serve.
Anders Karlsson: Yes. Thank you, Sofie. It's a dream coming true actually working in New York. Cliff effect, what I call it nonlinear, if you think about the difference in how things are repriced, liabilities came in with full effect in the quarter. On the asset side, it's gradually rolling in. So depending on where market rates are heading, I think you can draw the conclusions from that.
Sofie Peterzens: Okay. And could you just confirm that you don't have any hedging in place, any structural swaps or structural hedges or any kind of nonderivative hedges in place for net interest income in Sweden or the Baltics?
Anders Karlsson: No. We have very, very little of that.
Sofie Peterzens: Okay. Perfect. Thank you.
Operator: The next question comes from Bettina Thurner with BNP. Please go ahead.
Bettina Thurner: Yes, hi, everyone, and thanks for taking my question. Sorry for dwelling on the timing effect that you mentioned on NII. I just want to ask whether you think that the timing difference between short-term money market rates moving and policy rates moving also had an impact on this quarter given that, I guess, your liability side on the wholesale funding part, the pricing on the money market side, whilst deposit pricing changes have been more or seems at least to be more connected to the policy rate changes? And then connected to that, on the wholesale funding, you mentioned that you did a lot of issuance in the first half that had a bit of a drag impact on NII last quarter where you also mentioned that you're going to plan to do a similar amount in the second half. So I just wanted to check where you stand on that in terms of progress? And also whether you now feel with quite muted loan demand still whether you're in a good place or whether you continue to ramp up as it stands now? Thank you.
Anders Karlsson: Thank you. I will try to remember your questions. But if I start with your middle question, which was around regulatory debt issuance, what we have been saying during the year is that we have been very proactive in issuance in order to be at a level where we have a conservative buffer to the MREL requirements on the back of geopolitical and macroeconomic uncertainty, we don't want to be out of the volatile capital market. We have reached that level. So now we need to uphold that level. And as you are aware of, when senior or senior nonpreferred comes within one-year window, they become worthless from an MREL perspective, and then we need to continue issuance. But it's not as aggressive as it has been, and you can actually see quite clearly in the factbook of how these bonds are maturing. On your first question, whether short-term money market rates had a substantial impact on the NII? No. The main reasons why we are stable was the lag effects that I talked about when it comes to assets repricing slower than liabilities where we set the prices ourselves. And sorry, I don't remember your third question.
Bettina Thurner: No, it was just connected to the wholesale funding, whether you think you're at a good level, but I think that has been already answered now.
Anders Karlsson: Okay. Thank you.
Operator: The next question comes from Saitkulova Gulnara with Morgan Stanley. Please go ahead.
Gulnara Saitkulova: Hi. Good morning. Gulnara from Morgan Stanley. Thanks for taking my questions. More broader question on competition. How would you describe the evolution of the competitive environment across your key home markets, especially Sweden and the Baltics? When it comes to the pricing of loans and savings products? Do you still see some of the smaller players like SBB putting aggressively on the pricing in Sweden or do you see any signs of improvement compared to the prior quarters? And how does this could potentially affect the outlook on the underlying loan and deposit margins in the coming quarters? And a follow-up on the cost, maybe you can share the thoughts on how the cost base and the key win parts could possibly look like the next year? What are you assuming on the underlying cost inflation and have this changed since the start of the year? And also you mentioned the potential implications from the cyber-threats that you mentioned at the start of the call, what are the implications on the cost from this?
Jens Henriksson: Well, let me see if I can answer those questions. First, it is a tough and tight competition on and I'll talk about the private mortgages. But we are the market leaders in all our four home markets. In Sweden, we see some signs of a pickup. House prices are up 2% compared to a year ago, while down 10% compared to the top and the number of transactions is up about 10% compared to last year. If you take sort of a little bit a look from above, you will see that in the first eight months of this year, and that's the only thing we got the statistics, official statistics on, the full Swedish mortgage market has grown by around SEK25 billion. A year ago, I would say the same number was around SEK10 billion. And two years ago, it was SEK136 million. Out of those SEK25 billion, we have a market share of around 17% that goes for our own channels. And remember, the savings banks they can either put it in for our you take it or they can fund it in their own book. For own channels, 17%, the last eight months or the eight months we have statistics for compared to a back book of 18%. So we're very close. If you look quarter-on-quarter, our Swedish mortgage book is close to flat. Competition is very tight. And we had some issues in July and August with too long waiting times due that we got an enormous amount of phone calls. And what happened then is that we have had a little bit lower in September, but that's in the quarterly numbers. And that is now being dealt with. So now we're fully online and answer as quick as we can. And there is a tough competition in the Swedish mortgage market. And in this environment, it's the same. It's about striking a balance between margins and volume and that's what we try to do. That was the first one. Should you -- there was a cost question or Anders, do you want to take that? Then I'll take the cyber.
Anders Karlsson: Yes. I think the cost guidance for next year, you will have to wait for. But the headwind is obviously still there as it is every year and we are working with that to take out efficiencies. But you have to be a little bit more patient to get the cost guidance for next year.
Jens Henriksson: And then on cyber, it is a challenging environment out there. And I think everybody, who is the CEO or Director General, notices that it's a lot of DDoS attacks and that's something we have to deal with. And this is the same message I've given for a long time. I've always talked about cyber-threats in my introductory speech.
Gulnara Saitkulova: Thank you very much
Operator: The next question comes from Martin Ekstedt. Please go ahead, sir.
Martin Ekstedt: Thank you. So listening to previous answers about unpredictability of NII, I'm changing back to fee income and start with my questions, if I may. So Baltic insurance fee income was up more than 200% quarter-on-quarter, which seems driven by the life insurance company there, where net insurance income was up very materially. So what is driving this? You mentioned the revaluations before, but we didn't see the same effect in the Swedish insurance company. So I just wanted to check what differs in the Baltics. And is this customer driven in any way? And then my second question is around the new private banking segment. How is it developing? We saw in the quarter Carnegie, now in effect, DNB as well as Avanza pushing further into this segment. Your profit before tax there is on a declining trend, but largely driven by what you call cost for internal services. How should we interpret this? Is the business scaling up infrastructure and platform? And will it grow into that new cost base or are these costs more of a temporary nature? Thank you.
Jens Henriksson: Well, let me start with the private premium and private banking. It's an important part of our business, and that's why we created this business area. And we think we can combine this in the local presence with the national expertise. And when we do that, we are unbeatable. And what we see now is that the number of customers in that segment or the number of people who take that is actually increasing. So it's a good business, but they, of course, have to bear the cost of everything that happens within the bank. And as you know, and I talked about it's the only communication platform, it's the savings platform and they have to bear the cost of that like all other business areas. Anders, do you want to follow up on the other part?
Anders Karlsson: Yes. Thank you for the insurance question. It came, as you rightly point out, from the Baltic life insurance company, where we have something which is similar to unit-linked defined benefit plan. There we have an income that is calculated sort of cash flows throughout the period of the contract. And when you do the net present value calculation of that income and rates are coming down, you get this effect. So that is why you see it in the Baltics.
Annie Ho: Can we move on to the next question, please.
Johan Ekblom: Can you talk about whether you have received a similar approval and whether you have any intention to establish a hedge? You were pretty clear that you don't have much in place today, but how does this change how you will manage rate sensitivity in the future?
Anders Karlsson: Sorry I missed your -- the beginning of the question. But if I talk about the hedges, you are correct, I think you need to look into the balance sheet structures of the different banks. And if you look at us, we are, in particular, very heavy on deposits and we are -- any hedge that we would put on would require more capital. Will there be any changes? That we are in a constant dialogue with the regulator around this, the Swedish FSA. I don't think there will be any change in the near future at least.
Johan Ekblom: Thank you.
Operator: The next question from the phone comes from Markus Sandgren with Kepler Cheuvreux. Please go ahead sir.
Markus Sandgren: Good morning. I was just thinking about credit losses. You have used the Euro PMA gradually since you took it up in connection to the pandemic. Is that the plan to continue on that path or should we expect it to come to a more stable level or at least a larger chunk at one point in time?
Rolf Marquardt: Thank you, Markus. So the PMA is intended to reflect potential portfolio level uncertainty and risks that are not being completely captured by our models. And as we then have migrations, we make releases from this. And also when we deem that it is not necessary anymore to keep the reserve then we also make reversal. So that's the way it functions. And for the time being, we still do assess that we have uncertainties and that's why we keep it.
Markus Sandgren: Okay. Thanks.
Operator: The next question from the phone comes from Shrey Srivastava with Citi. Please go ahead.
Shrey Srivastava: Hi. Thanks very much for taking my question. Just one for me. I know you're not going to guide confidently on cost '25 and onwards. But just through the course of the year since you since your FY results in February, do you think that there is any incremental investment need? I suppose what I'm trying to get at is, these temporary investments of SEK1 billion you highlighted then, do you feel like there's any need for them to recur based on what you've seen in the eight months since then?
Anders Karlsson: Thank you. What we have said and been very clear about is that we have to put possibility to increase the pace of our strategic and important initiatives. And consequently, we are setting off roughly SEK1 billion this year and roughly SEK1 billion next year of temporary nature.
Shrey Srivastava: Okay. Thank you.
Operator: The next question from the phone comes from Patrik Nilsson with Goldman Sachs. Please go ahead sir.
Patrik Nilsson: Hi. Good morning and thanks a lot for taking the time. Sorry to go back to NII, but I just had two questions on the Swedish NII. And we've so far seen 75 basis points of cuts in Sweden on the policy rate. And I was just wondering if you could provide any color around how much of these 75 basis points that are now reflected in today's NII figure? And how much is yet to come? And then also in addition to that, you mentioned that the benefit from lowering transaction accounts remuneration. Could you provide how much that benefited NII Q-on-Q and how much it will benefit NII in the coming quarter? Thank you.
Jens Henriksson: Well, I'm sorry to disappoint you there. But as we've talked, we are in a period of falling rates and quantity of tightening. And it's very clear on Page 76 in the fact book that the interest rate sensitivity is SEK3 billion for 50 basis points with some assumptions. There are always timing effects, and that's not something I will dwell more into.
Anders Karlsson: And just to be clear on the transaction accounts, my point is that we have around SEK400 billion of liabilities where we pay zero. And then we have SEK200 billion roughly of equity that is also very difficult to do anything about when rates are falling. So that is giving you a similar number to the Page 76 that Jens was referring to. And then you have to do your own assumptions on pass-through on the mortgages and on the savings accounts.
Patrik Nilsson: Okay. Thank you very much.
Operator: Last question from the phone comes from Riccardo Rovere with Mediobanca (OTC:MDIBY). Please go ahead sir.
Riccardo Rovere: Thank you. Thank you for taking my question. I have a couple, if I may. First of all, you're running the bank with 31% (sic) [0.31] cost-to-income ratio, which is very low. Do you think this is somehow tenable? Can you keep it sustainable? What's your thought around this value? Very good, very low level and hence very good, level. This is my first question. And the second question I had is loan growth is still fairly subdued. It's too early probably to see any impact from using monetary policy. At what level of rate -- if you have to do a ball park, at what level of rate do you think is needed to, let's say, to boost the lending growth in Sweden and in the Baltics? Thank you.
Jens Henriksson: Well, let's see what I can say about that. The first one is, you're correct, 0.31 is very low. But as you know, when we presented Swedbank 15/25, we talked about the supporting KPI of running a bank with a 15% return on equity with 0.4. And, well, the plan stands that we want to reach this sustainable return on equity of at least 15%. But we know that interest rates are going down and we talked about the net interest rate, the sensitivity on NII. And I don't want to get into a situation where we have a too large cost costume. And Anders, and I talked a lot about that, that running with low cost, it's a strategic advantage. That means you need to prioritize within the bank and also make sure that you can run a more stable operation. So that's on the first one. Second one is the million-dollar question. I mean who knows when this will sort of when you would see an increased loan demand. A lot of Swedes remember the tough times, and we should be open about that, but a lot of Swedes had really tough times the last few years. And what happens then is that it takes a while before you start to consume. We see some small signs, but let's see. The good thing is that, as I said in my introduction is that, we are in a great region. And if you look read the Letta report, if you read the Drager report, what they talk very much about, both of them, is something that we have in Sweden. We have a very well-functioning capital market, good venture capital seen, a good private equity seen, profitable banks, and we also see quite a lot of money out there with individuals who can get into the market. And Swedes like the financial markets. We have a lot of -- look at our bank, the number of shareholders. We have many things there. And on top of that, you will see inflation leading -- falling. So that means that we have real wage growth. And on top of that, you have a fiscal expansionary policy that's very well run because it's going to push much more money into the system. And then we have interest rates falling. So combined means that we will have a good environment for growth with profitable banks and good corporate governance, good companies. I can keep on talking about because it's a good region. And I expect Sweden, Estonia, Latvia and Lithuania to do very good. Will it be 3% or 2.5%, well, let's see. But and then loan demand will pick up. Was that the last question? Yes, it was the last question. And then I'll say what I always do.
Jens Henriksson: Thank you for, as always, asking the tough questions. And now Anders, I look at you and say, thank you, Anders. This was your 34th quarterly report as the CFO. And during your time in the role, you have, on average, delivered a return on equity of 14.8%. Thank you. November 1, there will be a change of guards and Jon Lidefelt, the Head of Baltic Banking, will take over as the new CFO. Thus being with you the next time we meet in January 2025. I'm now looking forward to meeting many of you and continue our dialogue on Swedbank. Enjoy the rest of the autumn. Take care out there.
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