Swedbank's (SWDBF) CEO Michael Wolf on Q4 2015 Results - Earnings Call Transcript

| About: Swedbank AB (SWDBF)

Swedbank AB (OTCPK:SWDBF) Q4 2015 Results Earnings Conference Call February 2, 2016 2:30 AM ET

Executives

Michael Wolf - CEO

Gregori Karamouzis - Head, IR

Anders Karlsson - CRO

Analysts

Pawel Wyszynski - Danske Bank

Peter Wallin - Handelsbanken

Magnus Andersson - ABG

Masih Yazdi - SEB

Rickard Henze - Nordea

Andreas Håkansson - Exane

Heiner Luz - Goldman Sachs

Peter Kessiakoff - Carnegie

Omar Keenan - Deutsche Bank

Anton Kryachok - UBS

Jan Wolter - Credit Suisse

Adrian Cighi - RBC

Adonis Catic - DNB Markets

Michael Wolf

Good morning, everyone and thanks for participating. We have a little change in the setup today. Göran Bronner is unfortunately homesick with very high fever. So, Gregori is going to play the role of CFO during this call and run you through the numbers. Also with me is Anders Karlsson, our CRO.

And if we look at the quarter, I would say that once again a quarter with stable results. And what I’m very pleased about is that the adjustment especially in Swedish banking to new customer behavior, that work is going well and has a good momentum.

If we look at the global economy, it’s definitely an economy out of sync. Europe is slowly improving but low inflation pressure is still there, and falling raw material prices set the tone. In the U.S., we have though seen an improving economy and Fed has high rates for the first time since 2006, China’s economy is breaking or slowing down which of course affects the global trade negatively.

However, the economies in our four home markets -- well in a global comparison. The challenges in Sweden relates to lack of housing starts bearing in mind the strong urbanization trends and the new trend on immigration. In the Baltics, wage inflation is an issue to keep an eye on as is geopolitical situation in their neighborhoods. The sudden drop of oil price in Q4 has led to an increased risk in that sector.

We have, as we discussed in Q3, seen stagnation of the house price inflation in Sweden and that’s positive. The implementation of strong amortization culture in Sweden is progressing well in Swedbank. 95% of all new loans with an LTV north of 70% is amortizing and the corresponding number for LTVs between 60% and 70% is 82%, which is up from 64% in last quarter and 53%, 52% in half year number. So, a quick adaptation, and that affects our markets during the quarter slightly negatively. The front book mortgage area is hovering around 14% to 15% compared to a normal 20%, and that is very much due to that not every bank in Sweden is adopting the new amortization rules as we speak. Overall credit quality remains strong. However, the low oil price will -- if it continues to trade at this level, cause credit quality challenges in the sector.

If we look at our different businesses, I would like to start with Swedish banking. Here we see a new chapter of transforming the operation to meet new client behaviors. Half of their branch offices have been refurbished and updated, and this effort will be completed during 2016.

The next generation of our internet bank will be launched during Q2. The telephone bankers increased their capacity to serve both corporate and private clients, and then mobile bank continues to add features. Furthermore, we will during the year show that all channels have the same feel and look for our clients.

Swish continues to show its relevance and now we are introducing that to ecommerce, and I hope for that to be as successful as in the other sort of channels that we have presented Swish. We are defending our market position overall on mortgages as we are on corporate lending, and we see market share growth in corporate deposits. So that’s very positive.

When it comes to savings and mutual fund, Robur is still the largest provider in the market space. During 2015, we have had net outflows relating mainly to that the elder part of our client base is now starting to shift from saving to consuming, as they get into pension age. We have also seen outflows from financial institutions. We have during the year done quite a massive effort to update our fund range to change prices in order to be competitive going forward.

Moving over to Baltic banking, I would say a very strong year overall, strong Q4, probably the best ever, and this in an environment which is very difficult and we see continuous deleveraging in society. The key to this performance is well-executed multi-channel strategy and the strong capability to sell through the digital channels.

Credit quality will remain solid despite the geopolitical situation and we expect that we get regulatory -- more regulatory clearance around acquisition of Danske Bank’s private customer portfolio in Latvia Lithuania during the quarter.

LCI: sluggish trading environment through the autumn but improving in December, a reasonably good pipeline of primary marketers into 2016. Also very pleased to note that we ended the year as market leader on bond issuance in SEK; [ph] we are number three in Norway and we continue to make good progress on euro denominated bonds.

Turning back to the Bank, the capital situation is very strong, core tier 1 at 24.1%. As credit demand has been as anticipated, we can go ahead with the fourth consecutive year of dividending out 75% of the profits that equals SEK 10.70 [ph] per share. If we look at sort of credit growth going into 2016, probably slightly weaker than 2015, much weaker but overall going into 2016, I feel very confident about our financial resilience. We continue focusing on cost as we guided for. We should aim for it around 16 billion in costs by the year end. And I feel that the transformation that we are doing in Sweden has a good momentum. And finally, I really want to thank all the coworkers for stellar 2015.

With that I hand over to Gregori who will take you through the numbers, and then we will hand over risk.

Gregori Karamouzis

Thank you, Michael. Good morning, everyone. I’ll take a few moments for us to talk about the three business segments and then from summarize the quarter at the group level.

And if we first turn to Swedish banking, the income was strong across our income lines, despite even lower interest rate environment. If we start with NII, looking at the deposit margins being again under pressure in the quarter, while we have higher mortgage margins supporting NII. Back book margins expanded with 4 to 5 basis points while new lending mortgage margins were up 1 to 2 basis points.

Turning to volumes, mortgage loan volume growth continued to support income. On an annualized basis, it was around 5% growth. On the deposit side, we saw start of our savings advice to our customers; we were able to attract volumes in the quarter, primarily in the corporate space which has also contributed positively in the quarter.

Net commission income was supported by PPMs, meaning pension flows and performance fees towards the end of the year. Asset quality was solid in the quarter with one specific engagement causing an increase in impairments; Anders will talk a bit more about that in a few minutes.

Looking ahead, we expect mortgage volumes to continue growing at about the same rates. We see moderate corporate loan growth. In terms of margins, new lending mortgage margins expansion is approaching the end of the weak pricing cycle on the back of the increased capital capture requirements, as we have seen in the last couple of years, while back book will continue weak pricing though.

On the corporate side, the corporate margins were under pressure in the quarter, while looking ahead, we expect on the back of upcoming regulatory -- the capital regulatory requirements this pressure to recover somewhat. But of course that will depend on competition and how the pricing in the market looks going forward.

If we look to Baltic banking, we continue to have a very -- or show very solid performance, again in this quarter. We have on the volume side a flat development in the lending side in euro terms, while it was a decline in Swedish krona terms.

If you look at margins, it was a slightly mixed picture with lower deposit margins while we saw higher margins on the new mortgage lending. And the corporate loan margins were a bit under pressure, primarily because of better asset quality continuing in this quarter. We had one-off in NII in Lithuania, a lower deposit guarantee fee due to a change of the fee level but also the base that the calculation’s being made of. Asset quality continues to be very solid.

Looking ahead, we expect mortgage to stay at stable levels and the margin development to continue the way I just described.

To look at large corporate institutions, which showed a good outcome in light of volatile markets. We had deposit and lending margins being under pressure while a positive contribution came from deposit volumes. The trading activity was higher in FX than equity but somewhat lower for the season. In the corporate finance space, we had a low activity for the season but we are building up a nice pipeline when we look ahead with deals that have been postponed due to market conditions.

From the lending -- if you look ahead on the lending growth side, we expect a continued modest loan growth in 2016. Repeating what I said on the Swedish banking that the corporate margins should start recovering during 2016 in light of the upcoming regulatory requirements, although this will depend on the competition, which is tough and that we still have a low demand.

Summarizing now the quarter at the group level, NII was stable and held up quite nicely, despite lower market rates. Mortgage deposit volume growth supported NII in the quarter while the development in margins was mixed. And in NII specifically, we had some traffic between treasury and the business segments this quarter on the back of attracting more deposits. So, there was a reallocation of between 75 million and 100 million from treasury to the different business segments in this quarter. Most of that reallocation went to Swedish banking of course as the deposit base is larger. Expenses in the quarter were seasonally higher, but we are still in line with our ambitions to reach total expenses of 16 billion in 2016. Summarizing the asset quality, I would say for the full year, we showed another solid quarter.

Looking ahead, as Michael touched upon, in terms of volume growth expectations are to be somewhat lower than the 4% to 5% growth that we saw during 2015.

And if I spend just one minute looking at treasury result, we would like you to continue looking at the results combined with NII and NGL. In 2015 we saw NII and NGL combined falling somewhat more than was expected at the beginning of the year that was due to market rates and credit spread movements during the year. This means that when we look into 2016, the combined results for treasury should be around the same level as in 2015 but with a change in the mix between NII and NGL meaning that NII should continue falling while net gains and losses should start improving.

If we turn to capital, we finished the year with the common equity tier 1 capital ratio of 24.1%, which we’re very happy with. The ratio was increased in the quarter, both as a result of increased common equity tier 1 capital base and the reduction in risk exposure amount. If we first look at the risk exposure amount, it decreased with around 15 billion. There were mainly four factors leading to this decline, the first one is relating to credit exposures with lower corporate credit exposed to particularly over year end in retail and manufacturing. There were loan commitments that matured before year-end, and some financial institution lending also that went away over year-end.

We had increased collateral values, contributed positively as well with a little bit more than 3 billion. And over the year-end, we had reduced our interest rate positions which combined with the market rates and movements in the market, reduced market risk with almost 4 billion. Positive FX effect in the quarter with around 2 billion reduction in the REA was also contributing positively.

Summarizing then and putting the ratio into the context of the requirements, we see that we have a bit more than 400 basis points of buffer to the minimum requirements that we see that we currently have. However, I would say with the continued regulatory uncertainty, when we look ahead, we still have no visibility of any excess capital. We expect and hope that there will be more clarity on the regulatory uncertainties during the course of 2016.

I just want to finish off with showing you a slide on our funding activities throughout 2015. And you remember that we started the year with very active prefunding activities that we actually continued in Q3 and Q4 issuing total almost SEK 230 billion. We have also extended our maturity profile slightly during the year with a little bit more senior funding. This has put us in a very comfortable and nice position from a liquidating funding perspective reaching NSFR ratio of 107% at the year end.

With that, I’ll hand it over to Anders.

Anders Karlsson

Thank you. Gregori. During 2015 the development of the asset quality was favorable. The increase lending volume generally comprised low risk customers with good collateral further strengthening the asset quality. Unsecured loans declined during 2015 and throughout the year and the level of credit losses remained low with low, although provisions for two individual customers had an impact during Q4. One of these affected Swedish banking while the other affected LC&I. All-in-all, the credit impairments ended at 4 basis points in 2015 to be compared with 3 basis points in 2014.

As earlier communicated, we have implemented in guidelines for private mortgages in terms of amortization requirements, limits on debt to income, and the more conservative affordability calculation. In addition, as we also have communicated, we in the property management sector shortened the requirements on sustainable cash flows in a situation with stressed interest rate levels.

Due to the uncertain oil price development, I would like to spend some time on our oil price sensitive portfolio in Norway. As you might remember, in conjunction with Q4 2014 report, we communicated an outcome of the stress test that we performed on oil prices being at $40 per barrel for two consecutive years. We then said that at that price level, we would see a negative impact on credit quality starting in 2015 with credit losses in the sector will most likely not materialize until 2016 or 2017.

Due to a contingent supply service and uncertainty regarding the future demand for oil, the price has been under pressure throughout the year. We have consequently been in close contact with our customers throughout the year. And in line with expectations, they have so far succeeded in handling the situation well. As a result, the Bank was not affected by any credit losses in the sector during 2015. And we managed to reduce our exposures in the oil sensitive offshore portfolio by almost 10% to $2.2 billion equivalent to roughly a SEK 18 billion; the derivatives exposure amount to $300 million.

With the further decline at the end of the year in the oil price, the uncertainty has obviously increased. And we conclude that disposals, stacking, and renegotiated contracts of new builds will be necessary to regulate the supply in the market.

With the deteriorated cash flow generation capacity as well as asset value declines in the sector, we expect negative rating migrations going forward, impacting full year provisions and risk exposure amount. It also means that the need for equity injections into the sector becomes vital to avoid insolvencies and credit losses, should the oil price remain around the current levels.

Most of the financing agreements are syndications or club financing which is common practice in this capital intensive industry. In addition to that, it is also common for these companies to obtain relatively large part of their financing on the bond market. We have therefore concentrated our resources and competencies to further secure a close dialogue with our customers and relevant banks.

Having said this, I would like to remind you that the oil price sensitive offshore portfolio constitutes only 1.3% of our total lending. And I still expect that Swedbank’s asset quality will continue to perform strongly. However, given the uncertainties in the external environment and the low stability in the oil price development, it is not reasonable to expect credit losses on these very, very low levels and hence we expect somewhat higher credit losses for 2016. Thank you.

Michael Wolf

Thanks Anders. Then we open up for Q&As.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Pawel Wyszynski from Danske Bank. Please go ahead. Your line is now open.

Pawel Wyszynski

Just a question I guess on the dividend. You are keeping that 75% payout this year and you say that there is still capital uncertainty for next year due to regulations. But if regulations don’t come in kind as harsh as you believe them to come in, I mean you have 420 basis points buffer and lending growth is decelerating. So, how would you address this extra capital buffer during 2016 and 2017, if regulations are actually less severe than what you think?

Michael Wolf

I think the most important thing is to get clarity before we start speculating how we are going to ensure the efficient use of excess capital. But I think we have proven in the past that there are ample set of tools to work with the case, if you have excess capital. So, let’s focus on firming in on capital regulation and then we will open up the next chapter about the capability of handling excess.

Pawel Wyszynski

And one question on NII margins; you are saying that front book or the expansion for mortgages re-pricing is coming to an end. But does that include if the countercyclical buffer is increased further or is that as things are today?

Michael Wolf

That remains to be seen. But I mean re-pricing of capital chapter requirements is very important in this new banking environment, and I think everyone rationally sees that in the market, as we continue to get pressure on ancillary business and margins on the ancillary business. So, I assume that there is capability to do re-pricing for further capital increases.

Pawel Wyszynski

And just lastly, looking on loan losses, consensus is at 1.1 billion for next year, so quite significantly up from 2015. Is that kind of what’s -- I know that you won’t guide that specifically, but you are saying loan losses to increase somewhat for the next year; is consensus around right or are they still too defensive, given the low oil price?

Michael Wolf

We don’t want to guide. I think Anders was very clear in his message; it’s low stability. We want to be prudent and be transparent to talk about the strategies we see in the market. We are very proactive. But 3 basis points to 4 basis points, if the oil price remains is a very low number and that’s why I think consensus should come up a bit. But I mean we don’t want to guide.

Operator

Thank you. Our next question comes from the line of Peter Wallin of Handelsbanken. Please go ahead. Your line is now open.

Peter Wallin

I would like to come back to your capital position. And you are stating that your current capital requirement is 19.9. Could you just refresh me what’s included in there? I guess that the coming countercyclical buffer hikes in Sweden and Norway to SEK 1.5 is in that, but is it also some kind of crude estimate for stricter corporate modeling in the Swedish risk exposures?

Gregori Karamouzis

Hi, it’s Gregori here. No, actually what happens in the quarter compared to 19.6 from previous quarter is that since risk exposure amount goes down, we have the risk weight [ph] floor, mortgage is going with 0.3 percentage units. So it’s -- the requirements, it’s still the same basis as last quarter meaning countercyclical buffer of 1.5%.

Peter Wallin

And also would it be possible to give some kind of color on the provisioning you’ve seen in Swedish banking and large corporate in terms of sector for this quarter?

Anders Karlsson

You can find that in the fact book. It’s primarily within manufacturing.

Peter Wallin

And then my final question would be for -- if you believe that like the credit demand for the corporate sector will be remain sustained, do you see sort of which risks, the positive and the negatives ones, do you still see them so like the most considerable and the positives being the further capital requirements could help like push margins up or rather that the lack of demand will increase the competitive pressure?

Michael Wolf

Well, that’s a very difficult question. I mean we are guiding for slightly lower credit growth 2016 over 2015. I think like in any market, you need to be close to your customer to win the deals; you need to understand the structures necessary to become competitive. And I do feel that we are making good headway on corporate lending. Out in the Swedish banking unit, we see good progress on mid-corporate clients and SMEs. We are under our sort of normal market shares in SME sectors. So, there is definitely a capability for us to take market share there. And on mortgage lending, I think everyone will sort of have to adopt to the new amortization requirements, and that should have a positive effect on front book market share for us who have already implemented new rules towards our customers.

Operator

Thank you. Our next question comes from the line of Magnus Andersson from ABG. Please go ahead. Your line is now open.

Magnus Andersson

First, a question on costs; you keep the guidance for 2016 of a level towards 16 billion. Can you give any light of what you expect for 2017; is it still flattish development you’re targeting or is there something else in the pipeline?

Michael Wolf

We have not yet guided for 2017; we are still working with 2016. And we have higher agenda of investments and transformation ahead of us. And as we see the year materialize, we will get back if we feel that further guidance on costs is necessary.

Magnus Andersson

Okay and then…

Michael Wolf

Cost is always important in this type of industry, especially with these interest rates and massive digitalization trend that we see. So being cost efficient is going to be a competitive question.

Magnus Andersson

And then secondly just on capital, I was wondering if you have anything more to say, any update on the expected financial impact from the Visa deal where you earlier talked about 1.5 billion to 2.5 billion. And secondly in addition to that just if you can confirm that we should expect 75% of the net one-offs from the Visa and the Hemnet deal to come back as dividends in 2016.

Michael Wolf

Yes. Both, potential Visa and Hemnet proceeds should be included in the base of next year. On Visa, we have updated the range that we talked about during the quarter. We have described the range in euro terms and the range is €140 million to €180 million is the expected income, one-off income from the sale of Visa. And the reason why we have adjusted the range is that we have received some more information from Visa Europe as to the allocation key. But there is a lot uncertainty and we can therefore not be more precise with the range and the level.

Magnus Andersson

And finally, just you write in your retail section in report about your increased efforts on consumer credit in Sweden that you gained 1 billion in new loans there. Can you just say something about what kind of efforts or targets you have there? I guess your portfolio is if I am right, is 18 -- 19 billion or so?

Michael Wolf

We see a slight increase in market share from low levels, but the positive that we have I mean that book amortized quite quickly. So, in order to grow you need to be strong on sales. And we have intensified sales efforts. We’re still investing in further capabilities on the digital arena to really make a larger impact in that market. So, right now we’re using old tools, more traditional ways to communicate with customers and we should be pleased if we can continue to slightly improve market share during this year. And once we have installed more digitalized services, we should go for a much larger ambition.

Magnus Andersson

But what is it that is done differently in 2015; is it you’ve increased your efforts; what is that you’re doing now that you didn’t do before?

Michael Wolf

We’re more active in seeking clients that are clients with us but we know how consumer credit in other organization - other area financial institutions.

Operator

Thank you. Our next question comes from the line of Masih Yazdi of SEB. Please go ahead. Your line is now open.

Masih Yazdi

Just a follow-up question there on Gregori’s comment on NII and NGL in treasury. Could you give any more guidance on sort of the mix there? You said, it’s going to be fairly flat in ‘16 over ‘15 but then NII will come down and NGL will be less negative than in 2015. Could you give any more sort of detail on how you think those lines will develop separately, going forward?

Michael Wolf

As you know Masih, we don’t give exact guidance on the levels. What you can look at however is the fall in NII in treasury during ‘15 is a good proxy I would say for what you would expect for next year and the equivalent will then be coming back on NGL. But that’s largely -- that depends on so many things during the year. The important thing is that combined NII, NGL level I think, there is a lot of strategy between those two lines, as you know that depend on market movements and covered bond buyback activities and positions that we actually take in treasury. So, we’ll just mislead you if we talk about specific level.

Masih Yazdi

And just another one then on capital, I think you were the only Nordic bank that hasn’t given any guidance on what you are targeting or what you think your management buffer should be. What are your thoughts on that currently? And you had a very positive improvement of your common equity tier 1 ratio, but also sort of have been high volatility. Should we see that high volatility in your ratio on your capital there as something that should lead towards a higher management buffer than what your peers have or how should we think about your buffer in general?

Michael Wolf

I think what we are trying to do is to ensure that we have the flexibility to act in any given instance. And therefore, we refrained to come out last with specifics on buffers. And I think we have been proven to take the right core tier. We have still more than anyone else and you’re not questioning our capital buffers, you’re more hovering into the excess side of that equation. And once we have firm knowledge, we will also set down the foot on that one. So, I think as CEO, I am very happy to have the flexibility I do have; it’s a pleasant problem. And then on volatility, Gregori?

Gregori Karamouzis

Yes. I think Masih, the short answer is it depend on markets, market movements. As you have seen during the year, the IAS 19 effect is now no longer impacting CT1 capital base as we have more pension asset and we have liabilities. So, the volatility from that factor as long as we have that relation has gone away. And then on REA, it really depends on interest rates and FX development during the year.

Operator

Thank you. Our next question comes from the line of Rickard Henze from Nordea. Please go ahead. Your line is now open.

Rickard Henze

I just had a few detailed questions. If we start off with the NII development, I can see in your details that the stability fund fee was SEK 50 million lower in Q4 and the resolution -- sorry, deposit guarantee scheme SEK 50 million. I think the deposit cost fell in Latvia. Can you confirm that the stability fund fee was SEK 50 million lower in the Swedish banking and why did it decline quarter-on-quarter?

Gregori Karamouzis

I can confirm that Rickard. It’s a normal reconciliation that you do at the end of the year when you look at the total balances of the -- throughout the year. And since we have been accumulating the stability fund fee throughout the year. At the end of the year, we looked at the base and it was lower and therefore there is one-off kickback if you want, back to businesses as part of reconciliation.

Rickard Henze

Okay. So that should have been spread over the first three quarters so to speak, over the year or so?

Gregori Karamouzis

Correct.

Michael Wolf

And then we had a question on Lithuania also, Gregori.

Gregori Karamouzis

And that’s correct, there is one-off there of $47 million because of the change of basis and also the fee level in the Lithuanian guarantee scheme but that means also going forward that the deposit guarantee scheme fees will be lower.

Rickard Henze

And the other numbers I can’t really get together in a rational way is the asset management commission. Firstly, the volumes were up 4% quarter-on-quarter, despite the net inflow being 0.6% of assets under management, and also the margin seems very strong in the quarter despite performance fees being in line with expectations. Is there anything I’m missing here? Have you increased your prices or is it a very positive mix change or can you shed some light upon that?

Gregori Karamouzis

Yes, there are three factors impacting. One is that we actually have net inflows in the quarter as part of the pension flow that we saw, both in Sweden and in the Baltics. And then we’ve had despite the stock market being quite volatile, on average it was positive. So, the performance has also been slightly positive in the quarter. And then lastly the performance fees, I looked it up more specifically before the call, and we had slightly higher performance fees in the quarter, if we also take into consideration the Baltics and Norway. So, it typically is around 50 million coming in December; this quarter, it was closer to 80 million.

Operator

Our next question comes from the line of Andreas Håkansson from Exane. Please go ahead. Your line is now open.

Andreas Håkansson

Just a few follow-ups from what you have been speaking about. On NII, if I look in Sweden, there were some movements between treasury and so on but then you also had the lower interest rates in the quarter. Can you tell us how big was that negative impact to see what clean growth number would have been in the quarter? Then the second question; it’s quite interesting that you have such a high core tier 1 ratio and you say that you have no excess capital, then you have one of your competitors in Denmark started a big buyback program with a much lower core tier 1 ratio. So, I wonder when you say that you don’t have excess capital, is that all you wanted to be conservative or have you also got some sort of messages from the FSA that you should wait to see what’s happening?

Michael Wolf

If I take the latter question, then Gregori will answer your first question. I think we want to be prudent. There is no new message from anyone. It’s just us wanting to be prudent.

Gregori Karamouzis

And on NII question Andreas, I’ll just come back to my earlier commentary that there was around 75 million to SEK 100 million of traffic or reallocation from treasury to the business and most of that is referred to Swedish banking. So, you could take a proxy based on deposits maybe just to use a number and that you should then deduct when you look ahead, of course assuming that that won’t be a regularity going ahead that we have this reallocation. But it depends on deposit volumes and it would depend on spreads and market rates.

Andreas Håkansson

Yes, I understood that move between treasury and rate. Just saying how big was the negative impact from the lower short rates in the quarter?

Gregori Karamouzis

We haven’t provided a magnitude of that in the past. It’s very difficult to give an exact answer.

Operator

Our next question comes from the line of Heiner Luz from Goldman Sachs. Please go ahead. Your line is now open.

Heiner Luz

I have got one very brief question sort of on asset quality. You basically flagged that you had losses in Swedish manufacturing. Just generally looking at Sweden as a very open economy with a lot of [indiscernible] manufacturing corporates, the slowdown seen in Asia, do we think having the occasional loan losses in that area is something we should get more used to or do you feel like those ones where we know loan losses on large corporates are always one-off by nature but do you just feel like okay, there’s a specific case or would you generally feel like we reached a point where we might see a bit more loan losses, particularly on exporting companies?

Michael Wolf

No, I think overall credit quality remains solid. And you need to bear in mind that our loss ratio is 4 basis points over the year and 3 last year. So, I can’t see any single effect in this quarter due to the losses that we have recorded.

Heiner Luz

My question is more coming from the point, given it’s so low, it seems like the only direction would be it sort of going up.

Michael Wolf

That is something we have said on these calls for the last five years. So, of course, there are factors that we don’t control that might happen tomorrow and then, it will go up north. But credit quality as we see it right now is solid. And we have since 2009 worked with the stress test as far as steering model, allocating capital and everything out to the business to cope with a more stressed environment. And we are very proactively analyzing sectors that might be affected, if this and that happens. So, we want to be proactive; we want to be close to clients and understand the robustness of their business models. And so far, I think we have done a good job and we have prevented things to materialize. And that’s why our relative credit loss levels have been at the level it has been. So, I’m very proud with the organization’s ability to work through different sectors in difficult times. But nothing specifically making me feel that we have a deteriorating credit quality, apart from the language we just had on oil sector.

Operator

Our next question comes from the line of Peter Kessiakoff from Carnegie. Please go ahead. Your line is now open.

Peter Kessiakoff

A couple of questions from my side. First of all, relating to costs. And as you’ve mentioned before, you will invest more into IT and you mentioned that you have a quite high pace of development during 2016 with many launches. Just noting that the IT costs rose in Q4 to the highest level that we’ve seen in a couple of years, could you give some more details on that? Should we expect it to continue increasing? It was up 4% year-on-year in Q4 and whether that will increase into 2017 as well or if 2016 is when we’ll reach a peak? I guess I’ll start with that question.

Michael Wolf

Thanks to the good efforts on cost in the organization, we could start certain investments slightly earlier than planned. And that’s some of the effect that you see in the Q4. So, we are able to do something positively and start projects earlier than anticipated.

Peter Kessiakoff

And do you expect that to -- the IT investment level to continue increasing throughout 2016 or is this a level that you want to be at?

Michael Wolf

No, we have said that our IT development costs will come up. How much, again Gregori, help me there.

Gregori Karamouzis

Around 300.

Michael Wolf

Around 200 million, 300 million compared to last year. So that’s part of the plan to increase capability to develop on IT.

Peter Kessiakoff

Then just going on to your REA that declined, saw declining market risks and you mentioned that it relates to fewer interest rate positions. Does that relate to the trends that we’re seeing in treasury now and the positions that you have in the past? And the REA towards market risk has halved since Q1 roughly. And should we expect that to continue into Q1 as well as NII and treasury declines further?

Anders Karlsson

They are actually not correlated. So, the one relating to REA is not specific treasury. And the treasury positions we’ve talked about in the past are positions that we’ve been able to take when we’ve had a falling interest rate environment and a yield curve that’s been -- that’s not been flat basically. And that possibility is diminishing as rates are at the levels where they are today.

Peter Kessiakoff

And then just one last question relating to NSFR which was at 107%, which is up from previous quarters. Is that a temporary rise that we saw now and it should decline again in Q1 or is that level where you expect it to be going forward as well?

Anders Karlsson

It’s not temporary. However, during the end of this year, being positively impacted by increased deposits as we have seen an increased deposit base, a bit more senior funding, we’re not specifically steering towards this specific level yet as the regulation is still a few years ahead of us but we will be close to around that level, I would say going forward as well. It’s a bit high in the quarter, but it’s nothing that is of temporary nature.

Peter Kessiakoff

And with the inflow of deposits, does that mean that you feel comfortable issuing less wholesale funding during 2016?

Michael Wolf

I think if I answer on deposits, I think that you will probably see more deposit inflows to banks as people who become more risk avert. That’s something we’ve definitely seen in the Baltics and we’re starting to see it in Sweden as well. So deposits everything else equal will be a much more preferable form of savings for households I believe. And wholesale funding, would you like to answer on that?

Gregori Karamouzis

Yes, it’s always when we do the funding plan for the full year, we look at deposit development; we look at loan volume development; and then we look at how much maturities we have. And that boils down then to how much wholesale funding we need to do. And that we change on a monthly basis depending on flows and levels that we see. The funding plan for 2016 is still a bit higher than what we have maturities in the year. We have maturities of 110 billion and we’re aiming to issue around 180 billion of long-term funding. That might be adjusted depending on the other parameters that I mentioned.

Operator

Our next question comes from the line of Omar Keenan from Deutsche Bank. Please go ahead. Your line is now open.

Omar Keenan

I just had a question on corporate risk weights. One of your peers talked towards a 20 bps potential impact from corporate risk weight harmonization from the Swedish FSA. I was just wondering whether you’ve thought about whether similar impacts or what the sensitivity could be for Swedbank and what kind of measures you think will be in place; do you think it will be a harmonized floor or more model fixes? And then, I just have a follow-up question on margins.

Gregori Karamouzis

We don’t have any additional information from the FSA over the past few months. Therefore, we’re not in a position to make any estimates of potential additional requirements. So, I’m not really sure what our competitor is basing the 20 basis points on. We will of course come back to this when we have more information.

Omar Keenan

And then my second question is just your comments on corporate re-pricing, how confident are you that margins can be re-priced? It was done very successfully with mortgages but you had quite a bit of volume growth and not very much international competition. Given the margin pressure we’ve seen, how confident are you we can get that play book again?

Michael Wolf

I think if you look at the quality of Swedish corporates, they are very solid and they can withstand that that’s my view. And I also think that the banking market has to be rational and re-price capital because the underlying reason for that is to create more robustness. So, I’m pretty confident around those issues.

Gregori Karamouzis

Omar, just another comment on that. The international competition is above all linked to the largest corporates, multinationals where Swedbank has not historically been very strong in that segment.

Omar Keenan

And just last question. I understand that the front book expansion on Swedish mortgages has now ended. How much upside do you see to the back book margin coming through over the next couple of quarters?

Gregori Karamouzis

We still have higher front book margins than back book margins. Last quarter we commented that it was between 5 and 10 basis points. It’s maybe a little bit narrower, but I would say between 5 and 8 basis points or something like that.

Operator

Our next question comes from the line of Anton Kryachok from UBS. Please go ahead. Your line is now open.

Anton Kryachok

Just two questions, please. Firstly, to come back to the theme of excess capital, I think it is fair to say that regulatory uncertainty has persisted all over the years that you’ve been managing Swedbank and at the same time we saw a gradual increase in capital distribution. So, I’m just trying to understand what exactly do you need to see in terms of regulatory clarity, before you can become more assertive on this front again? Is it just the Swedish regulatory debate that needs to be settled, i.e. corporate risk weights and things like that or are you waiting more clarity on the global regulatory discussions, such as Basel proposal on credit risk weight monetization? That’s the first question please. And then the second question on your oil exposure. Have you actually seen any increase in NPLs and if so, how much have you provided for those NPLs?

Michael Wolf

The first one, I mean, my reading on the regulatory landscape is that we have been receiving new news constantly the last couple of years. So, it’s very difficult to say when clarity will be there. But I do believe that every one of us will have a very clear view when things are more halting and we have regulatory clarity. Bear in mind, the crisis happened in 2008-2009 and we’re at 2016 and still experiencing new regulation and new surprises. So, I think one needs to be prudent here. And I think the most important thing for me is that my customers know that I have a capital to support them in good and bad times. I don’t want to tamper with that perception. I feel strong, I do believe we have a positive momentum towards the client base, and I don’t want to tamper with that perception at all. Once we have clarity, I think we have proven in the past that we are rational users of capital. And we will find ways to work with that capital base.

Gregori -- Anders, on the oil exposure?

Anders Karlsson

The short answer is no. What I said is that what I foresee coming up in the environment that our clients are working in is a rating migration, which essentially means that you will have an impact on portfolio persistence going forward. But the short answer to your question is no.

Operator

Our next question comes from the line of Jan Wolter from Credit Suisse. Please go ahead. Your line is now open.

Jan Wolter

A couple on lending growth. What kind of growth levels do you expect now for 2016? And perhaps if you look a bit further out to 2017 and especially if you do expect corporate lending to continue to come down? That’s the first question. On mortgage growth, rounding now at 8% or so in the Swedish market, would you expect that the amortization requirement will drive that down in any way, if you look at the market as such? Third question is on interchange fees. Do you think that you’ll see any impact in 2016 from that cap being implemented in December?

Michael Wolf

Hi, Jan. Thanks for your questions. Sorry, we -- credit growth. For 2015, we talked about 4% or 5% credit growth; for 2016, we’re talking about 3% to 4%. It’s too early to make any assumptions about 2017. When it comes to amortization, I would say that it will probably not have huge effect on things initially because it’s new credit. And we have had amortization requirements on LTVs that were 70% in the past. So that is something that has been there for a while. But of course the stagnating house price inflation will of course affect volume growth. And that is not due to amortization requirements, primarily it does have an effect I do believe, but more a minor one. The bigger one is that house price inflation over the last years has been so significant that fewer and fewer people can afford the present pricing levels. And that is actually driving down the house price inflation more than anything else.

So, look at the demographic; look at our Baltics index; and look at what macro-economical people says about people in the urban areas and their cash flow. That is the driver going forward. And I do believe that cash flow has reached sort of its capacity. So you will get a two-tier market where the really good spots will continue to price upwards because there are quite a few people that can afford paying whatever they need to pay in order to get access of apartments. But the broader market has a capacity ceiling that has gradually been reached. That’s how I read the market.

Gregori Karamouzis

And then on the interchange fees -- sorry, do you have any follow-up question on that?

Jan Wolter

No, that was very clear.

Gregori Karamouzis

On the interchange fees, it’s net neutral for Swedbank across the group. As you know, the fees or the cap came into effect in December last year 2015. And we have a mixed impact, in Sweden it’s net positive and in the Baltics it’s net negative slightly, which combined for the group is net neutral. And as you know, it impacts, both the issuing and the acquiring side of the cards business. That’s why we have a net impact, which is neutral because we are also large in the acquiring side of the business. But that remains -- I think competition and development going forward will of course dictate how this develops.

Operator

Our next question comes from the line of Adrian Cighi from RBC. Please go ahead. Your line is now open.

Adrian Cighi

Two follow-up questions please, one on NII and one on the oil exposures. On the front book mortgage pricing, Swedbank is the only bank of the four largest banks that has not increased its list price in three-month mortgage product for this quarter. Does this reflect the strategy to defend market share or is there may be a focus on longer-term product, any color here would be very helpful? And the second question on the oil exposure, thank you very much for the detail provided already. But just to confirm the 18.3 billion oil sector. Does this include, both the committed and uncommitted exposures? And is it possible to give us the current coverage levels for this level of exposures?

Gregori Karamouzis

On the mortgage prices, Adrian, we follow the market. It’s a competitive market and we adjust price when we think it’s appropriate. We follow of course both the marketplace development but also how competition changes prices. Over the last three months we have stayed at the current average price that you see that we have published. Of course that will change potentially, depending on how competition and market rates move from here.

Anders Karlsson

And on your question on the offshore oil related exposure, it’s the net. So, there are no commitments in that number.

Operator

Our next question comes from the line of Adonis Catic from DNB Markets. Please go ahead. Your line is now open.

Adonis Catic

Michael, I just had a follow-up question regarding your guidance on asset quality, because you said that one should expect higher loan losses in 2016. Were you referring to the loan losses that you saw in 2015, i.e. the 4 basis points or were you talking about that consensus would need to increase their loan loss expectations for 2016? And then, my second question relates to this single impairments in the manufacturing sector which you saw, both in Swedish banking and also LC&I. Do you see any connection between these two, other than that they are both in the manufacturing sector?

Michael Wolf

No, there is no connection between the two losses in the quarter. So, it’s two separate things; no trend in any sector or geography or such. And my guidance was based on that 4 basis points in any scenario is very low credit loss levels. So that was what I was speaking about.

Operator

Our next question comes from the line of [indiscernible] from Citi. Please go ahead. Your line is now open.

Unidentified Analyst

I have two questions, the first is around your RWA and REA exposures, particularly around operational risk. Do you have an estimate of what is the implementation of the new standardized framework going to impact your operational RWA inflation? And then secondly, I was quite pleased to see that your leverage ratio improved 50 bps Q-on-Q. Could you give more color around what’s driving the reduction in the leverage exposure that is contributing to the increase in leverage ratio?

Gregori Karamouzis

On REA, we haven’t guided and don’t have an exact number what that might be. But what we are sure of it that it would be higher requirements coming from the standardized approach. On the leverage ratio, we have a smaller balance sheet at the end of the year, primarily as you can see that in short-term debt outstanding and the equivalent in the deposits with central banks, but it’s primarily reducing the exposures.

Operator

Our next question comes from the line of Pawel Wyszynski from Danske Bank. Please go ahead. Your line is now open.

Pawel Wyszynski

Just two follow-ups; the first one is on tax. Could you give us an update for the long-term tax rate now that the tax has been lowered in Norway?

Gregori Karamouzis

We have a short explanation in the report this quarter with the first reduction impacting slightly, lowering the tax rate. But there is still -- we cannot guide specifically going forward. And I still think there is uncertainty, if you look at ‘17 and ‘18, as exactly how the decline of the corporate tax rate will be implemented in Norway. So, I think we will need to wait for more clarity from the tax authorities in Norway before we can comment on that.

Pawel Wyszynski

And last question, funding; could you just say where do you expect the funding cost to go during 2016 compared to now?

Gregori Karamouzis

Impossible to say of course. During 2015, we took a view in the beginning of the year that the situation was very good in the funding markets and therefore we did a little bit more funding during the first half, which proved to be right because the spreads widened a bit towards the end of the year. It’s difficult to say; it’s a volatile market out there. And we try to time our transactions so that we can obtain the best possible funding price, but it’s difficult to say when you look at the full year.

Michael Wolf

And treasury has a wide mandate to operate in this environment. I think that has helped timing different transactions through the last years and hopefully that will continue to prevail.

Operator

Thank you. There appear to be no further questions, I return the conference to you.

Michael Wolf

Once again, thanks for being so active everyone and thanks for following us. And we’ll be there, if you have further questions.

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