Swedbank's (SWDBF) CEO Birgitte Bonnesen on Q1 2016 Results - Earnings Call Transcript

| About: Swedbank AB (SWDBF)

Swedbank AB (OTCPK:SWDBF) Q1 2016 Earnings Conference Call April 26, 2016 2:30 AM ET

Executives

Birgitte Bonnesen - Acting President and CEO

Goeran Bronner - CFO

Anders Karlsson - CRO

Analysts

Jan Wolter - Credit Suisse

Adrian Cighi - RBC Capital Markets

Daniel Do-Thoi - JPMorgan

Riccardo Rovere - Mediobanca

Christoffer Rosquist - Barclays

Chris Manners - Morgan Stanley

Omar Keenan - Deutsche Bank

Peter Kessiakoff - Carnegie

Pawel Wyszynski - Danske Bank

Peter Wallin - Handelsbanken

Magnus Andersson - ABG Sundal Collier

Masih Yazdi - SEB Enskilda

Birgitte Bonnesen

Good morning and very welcome to this first quarter call, I'm especially pleased to and proud to have been given the trust to lead Swedbank and present this first quarter to you. We have a very clear and well-anchored strategy and that strategy will remain. We will continue to be the full accessible, full-service bank, with low risk in four home markets; Sweden, Estonia, Latvia and Lithuania. I see my mission as, primarily as being about mobilizing and organizing the skills and competencies and also the positive energy that we have in Swedbank, to consolidate and even strengthen the current market and financial position. The focus is, as I have said before, the customer and my colleagues.

The customer behavior has changed dramatically, our customers expect us to be accessible and relevant where and when they like, this requires a different way of working for us, and for the customer, who is the guiding principle. This is needed at many different levels; customer focus, efficient processes and good internal control. My focus will be on the execution of the activity plans and extra attention I will give to the IT agenda, as this is completely key. We have ambitious goals in Swedbank. We strive for market-leading cost efficiency and a return on equity of 15%. These goals push us forward and support me and the rest of the management team to take on the challenges and to capture the opportunities that lie ahead of us, they force us to think out of the box and strive for even higher efficiency that is important.

Now, coming to the first quarter, it has been characterized by volatility, increased macroeconomic uncertainty and further negative interest rates. Amidst this, I think our focus has remained with our customers. We have had more customer meetings that ever using our digital channels. Our customers like our digital offering. We have more customers using our mobile bank both in Sweden and in the Baltics. This trend and the, this trend is, and the focus is, on digitalization of daily banking services.

And in this quarter we have digitalized mortgage loan renewals as well as commitment. In the Baltics consumer loans have been made available in the mobile, just to mention a couple of deliveries.

We also deliver a very strong result despite the challenging environment. And I think that our ability to price risk correctly and grow our loan book in Sweden has offset the headwinds faced primarily from even lower interest rates. Our front-book market shares in mortgages climbed back to around 20%. This is very good. This is where we should be as a retail bank, and the retail bank in Sweden, Estonia, Latvia and Lithuania. We should have healthy market shares in all daily banking services and I think with the, when you look at the mortgages, with the final decision coming up by Parliament to implement mandatory amortization in June this year, this is completely in line with what we have been applying since August last year. So, we expect the front book market shares to be restored. I am also very happy to see that Swedish banking corporate loan book have grown this year. However, the demand is still low.

We continue to have outflows in our mutual funds business and this is not good. We've taken a number of measures this quarter and we have a plan for the year. We hire more sales staff support. We adjusted our fund offering in terms of investment focus and also style. And we've lower prices. These measures are being closely evaluated and will be complemented with additional ones if needed. The Baltic franchise continues to deliver. I think that this quarter they return, their returns are less, they are not less than world class with a cost/income ratio of 37% and very high return on equity. We see increased digital sales and also long-term customer relationships that have led to loan volume growth, it's picking up slightly in Baltics now, which is a very, very good sign.

In this quarter we also got the final approval to take on Danske Bank's private customer portfolio in Latvia and Lithuania and we'll welcome 90,000 new customers, they will join our platform later this year. The large corporate and institutions business has faced a difficult trading environment with poor liquidity and we saw less activity in the corporate finance area, however, on the debt capital markets business, we had some very a very good quarter with several very good mandates. We'll come back and talk more about Norway.

Good cost control was manifested in all areas and, as you know, this is a priority for Swedbank. Our asset quality remained strong and this was confirmed by very low loan losses.

We continue to stay very close to the few customers that we have in the oil sector. And since the last quarter we have successfully completed a few restructurings. But, as I said we'll come back to this.

The stable profitability, the solid asset quality and high cost efficiency that we demonstrated again this quarter, give us the comfort and confidence to deliver on the ambitious plans that we have ahead of us for the remaining part of the year. And, as I said, my focus is on execution. It's on executing the strategy that we have, and it's more specifically, looking closer in to the IT agenda and make sure that we are correctly equipped to meet up with the digitalization trends and challenges too.

So, let me say just once again finally, how proud I am to be able to present this quarter to you and for the trust that's been placed in me. And then, with that I'll hand over to Goeran.

Goeran Bronner

Thank you, Birgitte. I will go through the three various business areas very briefly. And then I will summarize that on the Group level and look a little bit on capital before I hand over to Anders. Starting with Swedish banking, the development in the quarter we have seen pressure continue to see pressure on the deposit margins due to the rate decreases by the central bank. We have experienced a continuation of the widening of the mortgage margins during the quarter. And we have also had good loan volume growth in the business area both on the mortgage market I think, but also on the corporate side.

Provision income has been affected by the weaker stock market primarily by Robur and asset management income being weaker in the quarter. Cost control continued to be very good, as always in this business area. We have, though experienced an increased compensations to our cooperation with the savings banks due to the fact that we, on the volumes that they place with us on the mortgages, we give them a kickback fee. And that has increased with the widening of the spreads.

Asset quality continued to be excellent. This quarter we even have a small reversal. Deposit growth has been weak or haven't been any real deposit growth, but that is also the seasonality of the first quarter being slightly more subdued on deposit growth. Turning to the Baltic banking business area I think, as Birgitte mentioned, it is a pleasure to look at the numbers being a CFO. I think there also are encouraging signs in the business area where we actually are seeing tentative signs of a more rapid growth numbers especially on the mortgage segment I think we have seen a month and a couple of quarters with more steady buildup of volumes. And we are looking ahead that feels very encouraging. The income in this quarter is in small numbers slightly down compared to the Q4 number, but that is mostly relating to seasonality effect in the fourth quarter, actually. So, the underlying income trend I feel is very solid. The business area continued to deliver a fantastic cost efficiency and capabilities to manage their operational efficiency in an excellent way. And asset quality continued to remain robust with slight recoveries in the quarter.

Lastly, turning to large corporate and institutions, this business area has been more exposed to a difficult environment. They have been more affected by the shrinking deposit margins, but also the lack of activity you could say in some part of the capital markets, especially in Norway. So, the corporate finance fees are slightly lower compared to previous quarters.

We have continued to see financial effects of the difficult situation in the offshore market, oil and offshore market, through PD migration with increased REA. I will come back to that. But also the credit impairments that we have booked in this quarter are almost entirely due to Norwegian market. Nevertheless, I think with a return on equity on 15%, I think with these rather difficult circumstances I think the result is quite good.

Then trying to summarize on a Group level, we have slightly weaker NII. Much of that is due to the fact that deposit margin pressure comes immediately. But also we have one day less this quarter than the previous quarter. If I look at the NII, going forward I think we have increasing tailwind coming to us. And I think there are three elements to that. One is that we continue to have good volume growth and I can't see that changing really, and the volumes will drive NII. I also think that the widening of the mortgage margin has come to the -- such a magnitude, though if you go back over a 12 months - 18 months period that the re-pricing of the fixed element of the mortgage book that is coming through, the 40% of the book, the incremental MII tailwind is quite good and the third element I would say is that we feel that in light of the capital requirement changes in Sweden, with countercyclical buffer and other measures, we can also feel that the pricing environment are pointing towards higher margin for the corporate market in Sweden.

That will have a slower financial effect coming through but, nevertheless, it will be a good tailwind, going forward. In the quarter, as I've stated, we have slightly weaker provision income on asset management and also on corporate finance. Costs are, before costs I just want to mention treasury. We have a stronger treasury result net gains and losses. That is primarily relating to that we have done fewer buybacks in this quarter and we have some positive valuation effects due to shrinking credit spreads, so, the normal volatility, you could say there, that we experienced in treasury.

Then coming to cost, cost is well maintained in the Group. I think we are definitely set to reach our plan that we have previous, there is one changing element, though, and that is that with the increase in mortgage margin we are also paying more in compensation through our cooperation with the independent savings banks for the volumes in the mortgage book and that will drive some variable costs in the cost line and so, the cost target for the full year 2016 will be SEK16.2 billion, so an increase of SEK200 million. But it's very much revenue related, so we shouldn't see that as a negative. On the contrary, that's a positive going forward. Asset quality for the Group it's very good. Anders will come back to that. And then we have a one off tax effect of roughly SEK100 million in the quarter. Return on equity 13.8%, cost/income number 0.43%, and Core Tier 1 in the quarter is 23.7%.

The slightly lower capital ratio is relating almost entirely to an increase in REA and that, you can say, the volume are driving increased capital need, but also we have had, as I've stated earlier, a positive PD migration in the Norwegian book and in this, on this picture you can see it's SEK5 billion, it's actually more than that. It's higher than that because in the Swedish book we continue to experience a positive PD migration, while the negative one is in the Norwegian market, so it's an offsetting and there we see increased collateral values that actually drives the release of capital in the LGD dimension. But, all in all, this is a slight increased need for capital.

Looking at capital and the capital position, the ratio has gone down 40 basis points and predominantly that has been affected the intention that the IAS 19 has taken out the retained earnings element and, therefore, we have a small dip. Looking on the requirement, we have seen an increased countercyclical buffer which we have added on, so the requirement is 20.4%. On top of that we, the likely impact effect of the announced changes from the Swedish SFSA are around 90 basis points. So, all in all, the buffer currently with all known regulatory changes, are in the neighborhood of 250 basis points, which we feel very comfortable with but do not think we have any excess capital in light of upcoming new regulatory initiatives from the Basel committee, we need to review those first.

Lastly, before I hand over to Anders, I just want to say the other binding requirements, NSFR at 107% is very strong and LCR, as always, quite good. So, with that, I hand over to Anders.

Anders Karlsson

Thank you, Goeran. Strong growth in the Swedish economy and stable economic development in the Baltic countries contributed to the positive trend for the credit portfolio, hence, the trend seen in previous years, with low credit losses and a declining impaired loans continued in Q1, ending up in losses of SEK35 million, or 1 basis point. In both the Swedish banking and Baltic banking showing reversals and the provisions, although limited, came from LG&I and were oil related. We have guided that higher loan losses in the oil related sector should be expected, given the persistent low oil prices. Even more important decreased investments by oil companies globally.

We have also said that many of our clients have a quite robust cash flow, thanks to long contracts and strong backlogs. The continued subdued market is however increasingly affecting clients as contracts and funding mature. Consequently, loan losses are quite low in the first part of the year. The challenges will arise with time if market circumstances are not improving.

We acknowledge that the Brent oil price stabilized somewhat during the quarter and closed around $40 per barrel. This is on the margin positive for the market, but what really matters for recovery, is that oil majors are increasing their investments. Swedbank research estimate that oil companies globally decreased investments last year with 23% and that investments will decrease with another 25% in 2016. Only 2017 is that in increase of investments can be expected.

We know that oil related clients and market players in general are doing many things to cope with the situation and Swedbank has too in the quarter actively participated in a number of restructuring negotiations. The increased risk has not yet materialized in individual impairments. However, we have since last year seen increased in number of exposures, in our internal early warning indicators such as watch List, negative rating migrations and increased through a born exposures.

So summing up, we remain with the expectation that loan loss provisions will increase, particularly in the second part of 2016 and possibly into 2017, in line with the continued bleak outlook on the oil related market. Thank you.

Goeran Bronner

With that, I think we are finished and open up for questions.

Question-And-Answer Session

Operator

Thank you [Operator Instructions] Our first question comes from Jan Wolter of Credit Suisse, please go ahead sir.

Jan Wolter

Yes, good morning. Jan Wolter, Credit Suisse. Thanks for taking the questions, a couple on the NII there we can see that the treasury NII is actually coming up Q-on-Q, and I think we thought it would come down and again, and then Swedbank discussed the treasury NII fall gradually during 2016. Do you see little that -- still see that happening or not? It also looks like the NII sensitivity, is down significantly vis-a-vis the fourth quarter in the fact book there from around 4.5 billion to 3 billion, for 100 bps fall in short trades. If you could comment on that if something has changed. So, that's my first question.

And the second one related to the situation around costs, and I think you highlighted on the call that the focus is on execution and the IT agenda. Is it fair to say that the Bank has underinvested in the last couple of years and now to improve customer satisfaction, the Bank needs to invest more especially beyond 2016, so it could be difficult to maintain flat costs? So, that's really my question here. Will that be difficult or [indiscernible] this year? Thank you.

Goeran Bronner

Thank you, Jan. If I take the NII question and I'll leave to Birgitte to comment on the cost issue, I would say that in comparison between quarters you -- we have -- it's difficult to steer fund transfer pricing between treasury and the business areas in a negative rate environment. So, in this quarter compared to previous quarter we have a slight tilt towards NII coming in the treasury area compared to being -- diminishing slightly in each in the individual business area. It's a minor effect but you can see that in order to reconcile your numbers.

We do not guide NII on the NII -- or the treasury result on NII. We guide the treasury result on the totality of that result and you could say that guidance remains, we talked about SEK1 billion for total revenue for treasury in 2016 and that guidance remains. Even though we have a strong first quarter you must remember there are valuation effects and buybacks effected which are volatile in nature. So I think underlying that guidance remains.

Birgitte Bonnesen

And on the cost question, let me open up by saying that there's absolutely no contradiction between customer satisfaction and low cost. Just look at our Baltic franchise and you'll see very cost-efficient operation combined with very high customer satisfaction. Although, having said that, you're correct in the fact that we have gradually increased the IT spend and that we'll continue to do and I think that will come, if you look at the coming couple of years we need to, we have some big projects both on legacy, but we also on the digitalization side. We have a good plan and we deliver according to our plan so far.

Jan Wolter

Thank you and would you say then that given this increase in IT spend it would be difficult to maintain the ambition with flattish costs as we see, for example this year, 2016?

Goeran Bronner

I think we’ve said in the previous quarter, Jan, that we see the continuous, I think all banks are seeing continuously a transformation in the IT side. You see more and more areas requiring transformation so from that point of view, I think it's a common feature among banks, but, as the same breath, we are also having other initiatives that take out cost; procurement, near shoring, and also the changed distribution forms actually enables you to do other initiatives and I don't think there is any different view on the cost level at this point in view here, here and now.

Operator

Thank you. Our next question comes from Adrian Cighi of RBC. Your line is open sir please go ahead.

Adrian Cighi

Thank you very much. Thank you for taking my question. I have three questions please; I want to follow up on the question on cost. One of your peer announced that they're taking a charge to deal with potentially closing or merging some of the branches is that one of the avenues you're exploring to further rationalize costs? The second question on mortgages, you mentioned you're targeting a mortgage market of 20% below your back book of 25%, why would you do that and what's the rationale? Is this driven by potentially a view on the frothiness of the real estate market? Or is a view of the potential impact of the amortization rules coming up later in the year? And then maybe one last question on asset quality, as you mentioned you had a very low level of asset, further losses of 1 basis point this quarter. But you also mentioned you were part of a few restructurings that happened despite and no impact or visible impact on loan losses, is there any more color on what you can sort of see for later on in this year? Any particular instead of target you might provide us in terms of for asset and loan losses for the year? Thank you very much.

Goeran Bronner

Okay, If I start with the mortgage and the market share there and Birgitte will comment on the development or on branches and Anders on credit impairment, I think Birgitte mentioned 20% market share. I think you need to remember that our back book is 25%, but that also entails the volumes put on there by the independent savings banks and they are putting a historically they have given us higher volumes that what they are currently doing, so you need to distinguish between what is Swedbank's own market share and what we do through our cooperation agreement and since the savings banks are very well capitalized and have a good liquidity position they put more than they've done historically on their own balance sheet. So, therefore, you have the discrepancies in there and.

Birgitte Bonnesen

On the branches you related to Handelsbanken and my comment to this is I think that we are ahead of the curve absolutely, we already closed branches, we already have made a good, deep analysis of the need we have for physical meeting places in Sweden and what we're in the midst now is that going through the branches and sort of restructuring it to better meet customer needs and this means that in some smaller towns you need them just a service center with a couple of people, and in other bigger towns you need hubs and bigger branches with lots of more expertise and this is what we are doing at the moment.

Anders Karlsson

And, sorry about that one, asset quality, what I said is that the investment cycles are very long in this industry and now the investments are going down that put pressure on this specific sector. We are doing things together with them, they are injecting equity. Some of the debt investors are taking their lot and the syndicates are discussing these issues. But if the market condition prevails we will definitely see clients running into problems and it's extremely difficult for me to give you guidance on the exact numbers, because it's few exposures. It's single-event driven. But, yes, you will see increased loan losses from the oil related sector in this year if the market condition prevails.

Operator

Thank you our next question comes from Daniel Do-Thoi of JPMorgan, please go ahead sir.

Daniel Do-Thoi

Hi. Good morning. Just three questions please. The first one was on the mortgage management in Sweden, the comment that you made last quarter around the front book with this back-book spread being roughly 5 to 8 basis points. I'm just wondering how that has developed since then. That's the first one.

Second, slightly related on amortization, you've given the stats again of the proportion of new customers amortizing, 94% for those above 70%, 82% for those between 50% and 70% LTV. I'm just wondering with the upcoming amortization requirement will these both to go -- close to 100%? Or how should we think about this?

And then, lastly, on the costs I think you mentioned previously that you would expect to see IT cost increase something like 200-300 million, year on year. Yet the IT expenses that you've booked this quarter were actually flat year on year, if I'm comparing the first quarter to the first quarter of last year. So, just wondering whether your previous guidance here remains valid and whether we should, as a result, expect a bit of a ramp-up in IT expenses for the remaining nine quarters of the year. Thank you.

Birgitte Bonnesen

I'll just start on the question on the mortgages. As I said, we already introduced these new rules in August last year. No, I don't think it will come up to 100% because they all will always be different circumstances for different customers. And I think the most important thing is that we make sure that we maintain low risk on our balance sheet and also that we give advice that is the right ones for customers.

When you look at the amortization setup and the rules it's not always so easy to put everybody in the same bracket. You may have income from different sources, etc. So, I think we will not reach 100% and I don't think we should, either.

Goeran Bronner

On the margin side, I think the front versus back book increase during the quarter was north of 10% so and we ended the quarter on a high note. So I do think the market is continuing to re-price, definitely.

On IT spend, you can't really just look at the IT cost line for IT spend because there is very much also staff cost that is incorporated and consultancy cost that incorporates in the overall picture for IT spend. So it's difficult to just look at the one line. I do think that we hope to do more on IT 2017 over 2016, but it will also be incorporated in the overall cost targets. So it's a natural process where IT-related spend, whether it's pure IT or staff relating to IT, will absolutely over time substitute a number of people in the physical distribution form and also in the production area. So IT will increase as a proportion of the overall cost base over time.

Daniel Do-Thoi

Okay. And can I just ask one thing on the amortization. So that number will not go to 100% but you've also guided or you've also stated that in the previous 12 months you've seen about SEK11 billion amortization, that's in SEK, which is pretty much unchanged from when I look back a year ago. Would you -- would it be fair to expect that number to trend up in the coming quarters post the introduction of the requirement?

Goeran Bronner

Mathematically that would go up, I think, it's likely of course with more people amortizing.

Operator

Thank you, our next question comes from Riccardo of Mediobanca, go ahead sir, your line is open.

Riccardo Rovere

Good morning to everybody. Just a couple of questions from my side. First of all, on asset quality, if we abandon one second oil and gas exposures, in any case, we have seen very, very low provisions across the rest of the Group. Now do you think this -- do you see this as sustainable going forward? And if not, what do you think could change from the current conditions? This is the first question.

The second one I have is on the capital. Before you made extremely clear that you have no excess capital with, if I'm not mistaken, a couple of -- 250 basis points above on your updated capital requirement because of incoming initiatives from the Basel Committee, if I heard that correctly. Is there anything you expect in the short term and what really makes you more concerned on your capital from any intervention at the European level? Thank you.

Anders Karlsson

Okay. On the asset quality side, if I understood your question correctly, if I disregard the oil-related part of the exposure, you asked whether it would be sustainable to be at 1 basis point for Swedish banking and Baltic banking was that correct?

Riccardo Rovere

Yes. Correct.

Anders Karlsson

And then I would argue that, if you look at Baltic banking it's extremely strong from an asset quality point of view. So I would expect them to perform accordingly on Swedish banking, it is extremely difficult to be on a 1 basis point level sustainable. If you look at the last quarter we had one single credit loss which was bringing us up to 9 basis points or something. So no, it's not sustainable. You shouldn't expect that to continue forever.

Riccardo Rovere

Okay. Thanks. Very clear.

Goeran Bronner

On the capital I think nothing has changed really. What is new in this quarter is that we got a high countercyclical buffer confirmed and that we also got a measurement from the Swedish SFSA that we estimated to be 90 basis points. Other than that we continue to say that the buffer after that is 250 basis points. But we know that there are new regulatory initiatives like everyone knows discussed in terms of Basel Committee and we don't have any visibility. And as long as we don't have that visibility, we don't see us having any excess capital. I think in the end it's very difficult to make any prediction for what the requirement will benefit, but I think Swedbank is well placed to meet that increased requirement.

Riccardo Rovere

If I may continue on this just one second, given that these consultation documents are out if you run some internal calculations of what could be the impact maybe on operational risk on or credit risk on large corporate exposure, should those documents remain as they are today?

Goeran Bronner

Okay, we have received the consultation paper. We have modeled the input floors. You have input floors, output floors and leverage ratio in that consultation document. And I can just say that with regard to input floors Swedbank has no problem to taking this new regulation.

Riccardo Rovere

Okay.

Anders Karlsson

And when it comes to operational risk it is -- our best estimate is that there will be basically no change from what you have seen so far in terms of REA.

Riccardo Rovere

Okay.

Goeran Bronner

And on output floors or a new leverage ratio coming there is no visibility on what that would be. We are currently around 4.5% on leverage ratio we can easily go to 5%. And we think that we are well placed really to meet that --the regulatory. So -- but still we need to have more clarity before we can state anything on the capital.

Operator

Thank you, our next question comes from Christoffer Rosquist of Barclays, go ahead your line is open sir.

Christoffer Rosquist

Thank you very much. This is Christoffer from Barclays. Just two questions, the first one on your asset management business which I think we haven't covered off yet. You mentioned here, Birgitte, that you saw a problem or that the current trend was not good. What is the main challenge in your opinion right now? Do you not have the right product offering, the right skill and staff in the organization? Is it the problem with distribution in the branch network to promote the products you have in this yield environment? Do you have a reputational problem since the conflict with the Shareholder Savings Association in Sweden or -- perhaps if you could speak about what your plans are going forward to continue to address this because it looks as a large opportunity for you given your significant market share in Swedish mutual funds for an example.

And then I had a question, just a follow-up on what you said on amortization and competition. Just what wanting to understand why you think the environment will change? Certain challengers currently are using the more lax formal regulatory environment around amortization and they will have to change the supply that they can provide or the demand that they can meet when these ideas become actual regulation or why expect a trend change? Thank you.

Birgitte Bonnesen

On the asset management side, I think there are two reasons one is -- and you alluded to both of them. One, I think that actually all the media attention actually did hurt the product. There's nothing wrong with the product. So the funds we've gone through it and we have 80 plus funds today and we have a very good mix of actively managed index funds and when we have some that are actually coming down to a zero fee paid. So I think that we have a good mix today. I think that the yes, the media hurt.

But I also think that there's another reason. And I think that we underestimated the customers willingness or -- how should I say -- there is the fact that they go to digital channels to buy a fund. What we still see is that lots of Swedes don't actively go in and buy funds. Funds are sold in physical meetings. So I think that we were -- we had in -- we had a gap between the restructuring of our delivery model. Now we are moving into a, we are bridging this with more people and more actively, proactively selling our funds, as we move into a better and smarter setup on the digital, in the digital space, so we’re on these two things, I think is the reason and then you have [indiscernible].

Goeran Bronner

You can also say that haven't been successful in the transfer market [indiscernible] this segment which we are putting an increased [indiscernible].

Birgitte Bonnesen

On the pension side and I think that is but that is part of the whole setup too, so what we are doing is that in the whole transfer market and occupational pension area we are now initiating a new start on this and we have market shares that are too low, given the fact that we are the home bank for many small businesses and we are setting up a transfer factory internally to make it so much easier for the frontline to attract this kind of business. So we're looking and working on processes, but we're also looking to be more proactive in our sales efforts.

Goeran Bronner

Your second question was with regard to the competitive environment on the mortgage side. I didn't really understand the question, if you could repeat it?

Christoffer Rosquist

Absolutely, so I understood your opening statement here on the call that when amortization becomes mandatory, that you'd expect a change in the competitive environment in Sweden either leading to less supply from challenger banks or that those will have to raise prices which is then a helpful thing to Swedbank as well. I just want or I was asking to clarify if I understood it correctly that it's both of those two, one of those or what it is that you expect to change once amortization becomes mandatory?

Anders Karlsson

I think what we saw in the last two quarters in 2015 was that we lost market share and we introduced not only stricter amortization rules but also stricter origination standards from a risk perspective. What we've seen in this quarter is that it seems like some of the smaller players are getting into line and they will be further into line when you have mandatory amortizations and therefore we expect our natural market share to come back and we also saw that in the quarter.

Christoffer Rosquist

Okay. I understand. Thank you. That's very clear and can I just, just to be perfectly clear, did you say that you expected people to buy mutual funds online but that was not the case and now you are actually adjusting your operating model to meet, be able to meet those customers to sell those products face to face?

Birgitte Bonnesen

What I'm saying is that people didn't buy to the extent that we expected. So we're bridging the, we think that this is absolutely where we will end up and we're working very much on our digital offering on savings products and selling funds digitally. But we need to bridge this, it didn't happen as quickly as before it was.

Operator

Thank you and our next question if from Chris Manners of Morgan Stanley. Your line is open sir please ask your question.

Chris Manners

Good morning, everyone. So I have a question for you on the deposits, and I saw that there was a big increase in corporate deposits in the quarter it looked like you've gone from about SEK350 billion to around SEK500 billion, so about 46% increase. Maybe I could just ask you what's driven the increase in the corporate deposit base and also how are you doing now on pricing? I mean are you able to pass on negative rates to a bigger section of your corporate customer base? I know that some have been able to be price-negative, Just though I'd ask around that. Thank you.

Goeran Bronner

The big increase in corporate deposit is very much related to short term money in the US, so it has nothing to do with the Swedish client base or negative rates. It's the ability to maneuver your liquidity with gathering short term money and placing that with the Fed and ECB really, because you can make some short term money in there, so you have volatility in that number. So I think we have, the underlying corporate deposit growth in the quarter has been around SEK15 billion which is a tenth of that number.

Chris Manners

Thank you and how are you doing about being able to pass on negative deposit rates to your corporate client base?

Goeran Bronner

I think we have more or less the same strategy. On the margin we have sort of with negative rates in the quarter coming down further, we have reviewed sort of on the financial institutions and the really large clients, looked at a number of more clients that will be charged for deposits. But if you take an overall perspective on how we treat the strategy going forward for negative rates, it remains.

Operator

Thank you and our next questions comes from Omar Keenan of Deutsche Bank. Please go ahead sir.

Omar Keenan

Good morning and thanks very much for taking. I just have one question on capital and then a second question on NII. Thanks, Goeran, I think the comments on the input floors and the output floors of risk proposal having little impact on Swedbank were helpful. But the capital floors is a key unknown for now. I was just wondering if you could add some questions on the interest rate risk in the banking book. I know that the final standards were out last week only, so not that long ago. Thankfully, there's no Pillar 1 standard, but the conditions for working out whether Pillar 2 will look tougher, so just wondering if you've had a chance to think about what would happen to the Pillar 2 add-on, what kind of magnitude we could potentially expect to have from the new standardized measure. So that was my first question.

My second question is for Birgitte. It's just on the net interest income. Could you just remind us where the front book on mortgage margin is versus the back book? And if the current interest rate environment continues, how would you expect the quarterly NII progression for the Group to go from here? Thank you.

Goeran Bronner

Yes. On the capital there, Omar, unfortunately I'm not able to give you an answer. I need to come back on that one. I don't have it on the top of my head there. We have to take it when we meet up later this week.

Omar Keenan

That's okay. It was only Thursday it came out so --.

Goeran Bronner

Yes.

Birgitte Bonnesen

Omar, 10 basis points between front and back.

Omar Keenan

That's great. And if the current rate environment continues, I guess, how would you expect Swedbank Group's NII progression to go from here?

Goeran Bronner

I think we see that it's becoming more tailwind than headwind on the NII. If you look at how we are placed on capital and what we see in the marketplace for corporate margins, that should be tailwind. And then we also see that we are competitive on the volume side. That will give tailwind. And then also the proportion of the mortgage book that is coming in for re-pricing which is 40% of the overall book that hasn't really been re-priced, that of course with now 18 months of expanding margin will give a more significant tailwind on the NII. So I think if I add these three elements up, it looks increasingly positive. The negative is the central bank, if it would for any reason continue to lower deposit rates from here.

Omar Keenan

Perfect. That's very clear. Thank you.

Operator

Thank you, and our next question comes from Peter Kessiakoff of Carnegie, please go ahead sir.

Peter Kessiakoff

Yes. Hi. Thank you very much for taking my questions. First of all, congratulations to the new job, Birgitte. Then just a question from my side in terms of corporate margins. You mentioned that we should expect corporate -- or that we could say corporate margins expanding. The question is have we seen any impact yet? Is there any type of lending, for instance, housing corporations where you see that -- where we potentially could see re-pricing start off?

And then secondly, just in terms of interchange fees where it looked like the impact on your card income was largely unchanged. Well, the net was largely zero following that you are large in card acquiring. Is this the effect that you expect for the full year as well or do you expect any price adjustments on the card acquiring side that will change these dynamics? Thank you.

Birgitte Bonnesen

To start off, what you are asking about the corporate book, we are seeing, but anecdotal I think, evidence of re-pricing in the corporate book. So I think it's -- there is a trend. And we also -- it's becoming slightly, slightly easier in negotiations. So I think that we'll hopefully we'll see that reinforced.

On the card question I think when you, as you know well, as big as we are, we have -- in both acquiring and issuing -- we have 50% of the transaction are actually in house which means that we are not hit at all by changes in the regulations. So, our expectation for the year is neutral.

Peter Kessiakoff

Okay. And then just a follow-up on a previous question that was asked relating to the NII trend during the year. And you mentioned that you see fairly good tailwinds coming through during the year. Does this mean that despite a decline in our NII of 2% quarter on quarter in Q1 that we could expect to see NII for 2016 being flat or actually up on a year-on-year basis?

Goeran Bronner

I would think that it will be flat to positive. It's more likely to be positive for the full year actually if I look what is on the table currently.

Operator

Thank you, our next question comes from Pawel Wyszynski with Danske Bank, please go ahead sir.

Pawel Wyszynski

Yes. Hi. Pawel here. Just a couple of questions. First one, you are saying that the costs are going to be higher for 2016, so 16.2 versus 16 previously expected. What is the net effect of that, because you are saying that this is on the back of a higher top line?

Goeran Bronner

We really don't comment on the agreement we have with the -- if I were to comment on that, I would give you the margins that we have with the independent savings banks in our commercial agreement and I can't really do that.

Pawel Wyszynski

Okay, fair enough. And then the second question, Birgitte, I think you have said that you are looking at lowering fund fees in Robur. Was that correctly understood or did you refer that you had it lowered down previously?

Birgitte Bonnesen

No. We are not lowering. We already did. So, yes.

Pawel Wyszynski

And then just the third question, REA going forward, we saw REA increasing this quarter on the back of negative credit migration. How much do we expect that to continue increasing on the back of continued increases on the oil price or negative effects from the oil price?

Anders Karlsson

I don't think I can give you specific numbers. As we run through the different counterparties systemically and review this, so you can expect more to come, but I can't give you the magnitude.

Pawel Wyszynski

Okay. And then the last question regarding regulation that is now -- recently we had new admiral requirements coming out from the Swedish Debt Office today. Have you looked anything at that or have you been prepared on this topic? And can we expect any negative factors from more expensive funding coming through?

Goeran Bronner

We know that there are, news coming today. We have no pre-sneak of that. So we have to review that in good order. I -- we will struggle to comment on it in this room. We need to work it through actually. So you need to give us a little bit of time there.

Operator

Thank you. Our next question comes from Peter Wallin of Handelsbanken. Please go ahead, sir.

Peter Wallin

I would just like to come back to mortgages a bit. At least in the Swedish media there's been anecdotal evidence that people rushing to the bank to take especially add-on mortgages before the new amortization regulations are put in place. Is that something you have seen as well which has boosted the volumes in Q1?

Birgitte Bonnesen

No. Not really. I think that we have a good activity. And as I said before, we already introduced the amortization rules in August last year. So, yes, I think our activity is in line with the housing market, the activity in the housing market.

Peter Wallin

Okay. So I guess that you and at least some of the other banks have been implementing these rules prematurely. You don't expect to see any slowdown in the volume in the overall market starting from Q3?

Birgitte Bonnesen

No.

Peter Wallin

Okay. Thank you. And then a last question of mine regarding asset quality, now obviously loan losses in this quarter was much lower than expected. How should we look at loan losses for this year compared to what you were saying in conjunction with the Q4 results? Since you do expect loan losses to pick up in the second half of this year, will the levels we see in the second half of this year still land the total loan loss levels for the full year in line with what you were expecting then? Or will the lower loan losses you are indicating now for the first half of this year mean that 2016 as such will not see the kind of loan losses that you thought a couple of months ago?

Anders Karlsson

It's extremely difficult to guide as such. First of all, I think you should remember that these large customers they are on the stock exchange, they are doing restructurings. So it will take time. Again, it's a small number of clients, a fairly large exposure, so it's single-loss-driven. I think we've said that you could expect somewhere roughly between 10 and 15 and I think that stays relevant.

Operator

Our next question comes from Riccardo Rovere of Mediobanca. Go head sir your line is open.

Riccardo Rovere

Thanks. Thanks again for taking my question. I just want to have your opinion on negative rates are certainly hitting you on NII, but maybe, and this is just what I want to understand from you, your customers are also and the cost of debt borrowing is going down. So I just wondered whether -- let's assume rates remain where they are. Do you think that lower cost of borrowing for your clients could somehow offset the margin pressure that you are seeing on NII? Or put in a straight way, do you think lower loan losses in a negative rate environment can somehow smooth or eventually balance the effect on NII, the impact on NII?

Goeran Bronner

I think it's very, loan losses in Sweden cannot be lower, they are zero basically low. So that I don't think monetary policy can sort of help mitigate NII pressure on the deposit side. I think though banks in general have been very successful in mitigating the margin pressure on the costs with actually capping lending rates on corporate and mortgages to some extent. So you can say that banks are insulating the books from the effect of negative rates and that is what you are witnessing. It's only some part of the balance sheet that actually only gets affected by negative rates. So that is, has been a good way of maintaining profitability in the banks so far and I think we should be happy with that.

Operator

Thank you. [Operator Instruction] and we already have one further coming from that from Magnus Andersson of ABG. Go ahead your line is open sir.

Magnus Andersson

Yes. Hi. Good morning and most questions have been answered obviously, but just one on the treasury result, do you still expect it to be fairly flat year on year, if I take the NII and net gains and losses items into account, around SEK800 million?

Goeran Bronner

I think we are talking about, we have talked about SEK1 billion roughly in revenue on treasury and that remains.

Magnus Andersson

SEK1 billion in 2016?

Goeran Bronner

Yes

Magnus Andersson

Yes and then in 2017 should it be less or more or less equal?

Goeran Bronner

2017 we haven't talked about at all, Magnus so.

Operator

Thank you and our next questions from Masih Yazdi of SEB. Go ahead your line is open.

Masih Yazdi

Hi Good morning. Just following up on NII, I think there was a first question that you got this morning that I don't think you answered, it's about the NII sensitivity that's come down from SEK4.9 billion to SEK3.2 billion, for 100 basis points higher interest rates. Can you explain what that lower sensitivity is due to?

Goeran Bronner

I wasn't aware of that sensitivity change, so it wasn't really, you shouldn't read anything too strongly into it, I need to go through why that has changed within, I'll ask my colleagues and I will come back on that.

Masih Yazdi

Okay and another question then. I can see in your report that you haven't introduced negative rates to your corporate clients which obviously is hitting your LC&I NII, do you expect to do that going forward in the coming quarters?

Goeran Bronner

I think we have introduced it where we see it applicable to being introduced. It's not that we haven't or we have introduced it on some specific clients, I don't think that's changing going forward unless repo rates change. I think the current strategy is where it is.

Masih Yazdi

Okay and then finally on NII again, obviously you are saying that the high yield market in Norway isn't functioning and you are restructuring some oil exposure loans, do you also see a re-pricing of those loans that you can see higher margins on corporate lending in Norway and especially on your oil exposure there?

Goeran Bronner

Yes, there is definitely higher margins in that kind of environment.

Operator

[Operator Instructions] As there are no further questions on the line, I'll hand the call back to our speakers for the closing comments.

Birgitte Bonnesen

Thank you so much for attending this call and I look forward to talking to you in the next quarter. Have a good day.

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