Earnings Transcript for SVNLY - Q2 Fiscal Year 2024

Michael Green: Good morning, everyone, and welcome to this presentation of Handelsbanken's Results for the First Half and Second Quarter of 2024. In the second quarter, we saw recovering earnings, the financial position remaining solid, and high activity within the Bank with execution efficiency-enhancing measures. ROE improved to 15.2% from 13.7% in the previous quarter. Operating profit rose by 3% to SEK8.5 billion. As income grew, costs dropped, and another quarter with net credit loss recoveries. The cost-income ratio dropped to 41.5% from 42.2%. In short, a positive development on the key lines. The financial position of the Bank remains very healthy. The CET1 ratio was 18.9%, was 400 basis points above the regulatory requirement, which was in line with previous communication. As of April 1, a new organizational structure was implemented in the central and business supporting units. With the organizational changes, decentralization was enhanced and measures taken for increased efficiency and profitability going forward. Business support functions have been more closely connected to the business-generating units, and Group functions have been streamlined. Group functions now account only for 4% of the workforce in the Bank, down from 8% prior to the reorganization. As a result of the changes, the expenses and the revenues get more closely connected. With increased transparency, facilitates the prioritization of business-oriented IT development and clarifies P&L responsibilities. As part of the efficiency initiatives in Q2, around 200 employees have signed agreements to leave the Bank, which was reflected in around SEK300 million of one-off cost for redundancy payments. About half of the related employees ended their employment at the last day of the quarter and the rest will leave in the coming months. Hence, there was no visible effects on underlying cost in Q2 from these agreements. Furthermore, a review of use of external consultants concluded to decline in the numbers of contracted consultants by 15% at the end of the quarter compared to the end of previous quarter. While the efficiency work has started off and been executed on swiftly, the work will continue also in resuming in the coming quarters. Redundancies that will be recognized will be addressed and accounted for continuously. Finally, the Bank's position as one of the few banks globally that have the highest combined credit ratings by the leading rating agencies was again confirmed in the quarter, as Moody's not only confirmed its Aa2 rating on the Bank but also raised the outlook from negative to stable. Now, if we look closer at the second quarter, we can see, as previously mentioned, that ROE increased to 15.2%, the cost-income ratio dropped to 41.5% and credit losses amounted to net recoveries of 2 basis points. Net increase - sorry, NII increased by 1% as the net effect of margins and funding recovered from Q1. Part of the effects related to volume mix effects on deposit with a slightly bigger share of deposits on transaction accounts. Volume growth generally remains subdued in all of our home markets. Adjusted for currency effects, the fee and commission income grew by 6% and reached the second-highest level historically. The key contributor was again the savings and mutual funds business, which saw assets under management supported by stock market development, as well as net inflows. Expenses dropped by 1%. Adjusted for the one-off cost relating to staff layoff agreements, Oktogonen and FX, the expenses dropped by 2%. Credit losses consisted of net recoveries of SEK133 million or 2 basis points. All-in-all, operating profit grew by 3% and 2% adjusted for the items affecting comparability. If we then move over to the accumulated numbers for the first half year compared to the same period last year, ROE amounted to 14%, the cost-income ratio to 41.9%, and net credit losses recoveries of SEK228 million or 1 basis point. On an underlying basis, NII was fairly flat compared to the same period last year and fee and commission grew by 3%. Expenses increased by 10%. The increase was attributable to increased staffing, which was up 7% in between the years, as well as the annual salary revisions. The net credit losses recoveries amounted, as said, to SEK228 million. All in all, the operating profits declined by 2%. Now, if we zoom into the NII development compared to the previous quarter. While the NII impact from volume changes remains muted, the key driver apart from positive FX effects of SEK92 million was the sum of the effects from margin development and funding costs. In this category, there were always many different components, sometimes pulling in different directions. The cut in central bank interest rates affected negatively in the quarter but was offset by a break in the trend of deposit volumes, moving from lower to higher-yielding deposits account and positive net funding effects. As always, our branches individually adjust and fine-tune the customer rates to the prevailing local market and conditions. Furthermore, we saw net positive funding cost impacts on our treasury department. Fee and commission income recovered in the quarter. Almost 70% comes from the savings-related commissions, where we saw the main pickup in the quarter. Payment fees also rose in line with normal seasonality. Now, over to the expenses. First, to the left. The staff costs increased by 1% in the quarter. There were two main effects in the quarter that more or less offset each other. Firstly, there was a net positive effect of SEK307 million relating to Oktogonen. Last quarter, there was a total provision of SEK233 million, which included a final calibration of SEK170 million related to the provision for 2023, as well as a provision for Q1 of SEK63 million. In this quarter, there was instead a reversal of the latter, bringing the difference in Oktogonen provision to SEK307 million between the quarters. Then, secondly, as previously mentioned, a one-off cost of SEK302 million was taken related to the redundancies. Again, the majority of the employees referred to were employed until the last day of the quarter and hence the redundancies had no effect on the underlying cost in the quarter. The remaining staff cost increased by 2%, of which FX accounted for half of it. To the right, then you can see other expenses which declined by 4%. The decline was partly related to seasonality, but also effects from the scale-down of external consultants contracts during the course of the quarter, as previously mentioned. As we've said in Q1, we expect the IT development spend to run at a slightly lower rate going forward. The reduction of external consultants should be seen in that context. In the recent years, we have seen necessary but elevated investment in IT development. After the implementation of some larger development projects, such as a new CRM system for the Bank, Microsoft 365 and cloud migration, we to some extent have an investment hurdle behind us. Going forward, we continue with our high ambition with our IT development and in a somewhat more focused way. Emphasis lies on a further strengthening of our already appreciated digital offering to customers, both individuals and corporates, as well as continuous improvements of tools for employees to increase internal efficiency and processes. We hear from our customers and also see in external service that our locally connected business model, together with a strong digital offering, creates high customer satisfaction, which in turn form a foundation for long-term customer relationships and business opportunities. Now over to asset quality and credit losses, or rather the net credit recoveries that we have seen for the two consecutive quarters. For a long time, credit losses have been more or less zero and asset quality remains strong, just as we should expect it to be. The reason for the - relates to the Bank's limited risk appetite, the consistency in the underwriting, the preference for collateralized lending, and not least the local presence and local connection through our branches and their knowledge of - with their local - on their local business. Also in this quarter, we managed add-ons - the management add-ons was trimmed down, this time by SEK75 million. The add-ons is reassessed each quarter and stood at SEK454 million at the end of the quarter. The financial position of the Bank is strong. The core tier 1 ratio stood at 18.9%, which is 400 basis points above the regulatory requirement, which is in line with what we have guided for in 2024. The 100 basis point extra buffer that the Bank holds on top of the long-term target range of 100 to 300 basis points above the regulatory requirement, will be reviewed in conjunction with the year-end report at the latest, subject to assessing - assessment of the prevailing geopolitic and macro uncertainties. In order to calibrate the CET1 ratio to 400 basis points above the regulatory requirement, the anticipated dividend in the quarter amounted to SEK4 per share, or 116% of the quarter earnings. For the first six months, the anticipated dividend amounted to SEK5.2 per share, or 78% of earnings. A few words about the respectively home markets. As I commented in the first quarter, Norway has struggled with the profitability over the past years and a strategic review was made earlier this spring. A clearer profitability focus, a clarification of the responsibility between local head office and branches, and a review of the cost base have been carried out. In the second quarter, the earnings development was material. Operating profit grew by 37%. The cost-to-income ratio improved by 6 percentage points to 46%, and the return on equity increased from 7% to 11%. In Sweden, the development is quite natural and more stable given the market position as the biggest lender combined on private and corporate customers in Sweden. Earnings grew by 2% in the quarter and the cost-to-income ratio improved somewhat to 30%. The ROE stands at 18.3%, the highest among the home markets. In the U.K., earnings and volumes remain stable and ROE of 18% was up from 17% in Q1, and was hence just shy of the level of Sweden's. Earnings grew by 1% and the cost-income ratio was largely unchanged. Finally, the Netherlands, which is the smallest home market. Operating profit dropped into the quarter - in the quarter and the cost-income ratio increased from 53% to 55%. ROE increased to 13%. So to sum up, earnings grew in the quarter as income increased, costs dropped and there were, again, credit loss recoveries. ROE we increased in all of the Bank's home markets. In the beginning of the year, we've initiated a review of parts of the Bank in order to improve the efficiency in especially business support and center Group functions. Since then, we've taken action. Today, we have a more business-oriented organization in place with a trimmed headquarter function and business support units more closely tied to the business generating parts of the Bank. We have identified, addressed and started to execute on redundancies with positive underlying financial effects yet to be materialized. We've also scaled down the cost of external consultants, which gradually materialized during the quarter. From a financial perspective, the Bank stands strong. That means we're in a good position and have the capacity to grow, an ability to support customers regardless of the external factors that might occur. The position as one among only a handful of banks globally with the highest combined credit rating by the leading rating agencies confirms the stability of the Bank, both from a business model perspective, risk level, as well as financial stability perspective. So the Bank is in a good position and we will continue to strive at becoming even more efficient, to grow with good profitability and not least, to continue to grow with satisfied customers and thereby, generate stable value growth to our shareholder over time. So, thank you very much for listening in, and we will now take a short break before commencing the Q&A session. Thank you so much.

Unidentified Company Representative: Hello, and welcome back to the Q&A session. [Operator Instructions] With that said, operator, we're ready to take on the first question, please.

Operator: [Operator Instructions] We will now take the first question from the line of Magnus Andersson from ABG SC. Please go ahead.

Magnus Andersson: Yes, thank you, and good morning. Just on costs then, I was just thinking how you think about the total level of IT investments in, let's say, '25 to '26 versus the level you had in 2023. And also on costs in terms of potential redundancies, should we think about what you've announced now as the low-hanging fruit, so that we should expect more to come as we go along? Thank you.

Unidentified Company Representative: Thank you, Magnus, and good morning, everyone. Well, first of all, the IT investments, I mean, we won't guide on the absolute level of the spending pace we will have. But what Michael said is obviously that we've gone through a period where we've invested in a few larger projects, i.e., CRM system, Microsoft 365, and setting us up for a cloud transformation. So, we think we can slow down the pace. We haven't said anything about it, but obviously, the slower pace that do affect the consultancy ratios, et cetera. So, we won't guide on the absolute levels, but it should definitely be smaller, we think. When it comes to the cost consequences, if I read you correctly, I mean, yes, we have signed agreements with a bit more than 200. We've also released a bit more than 160 consultants. So I think you - more or less, you can judge by the level of the restructuring fee, the more or less - with a few assumptions of yours, you can judge the cost savings on that when it comes to the staff level. And you can also see that consultancy ratios are more - consultants are more expensive than staff. So it should definitely have an impact. And yes, obviously, this has been - it's the starting of a journey, but nevertheless, material in this quarter.

Michael Green: So, hello, Magnus, Michael here. I just want to emphasize there, actually, there are no low-hanging fruits. This is hard work and it's done with consistency. And we will continue to do that when we execute on the plans we've put in place in the - actually, after the first quarter. So that will continue.

Magnus Andersson: Okay, fine. Just two follow-ups then. I guess, on the IT question then, with what you know now, you do not foresee any new large projects for 2025 and '26. And secondly, on the cost, though, it was not so much on the financial impact. I can quite easily gauge that, but more whether this was the first - just the first batch of a headcount reduction, so that there could be more as we go along.

Unidentified Company Representative: I think it's fair to say that, I mean, we are spending more than SEK4 billion a year as it is in the start of the year at least, and that has gone up quite dramatically. So including in these investments, there's definitely a lot of bigger projects, and it will be continuously so. So it's wrong to say that we don't do a lot of larger projects, but nevertheless, we think we can slim it down to a touch.

Magnus Andersson: Yes. Okay. Thank you.

Operator: Thank you. We will now take the next question, coming from the line of Gulnara Saitkulova from Morgan Stanley. Please go ahead.

Gulnara Saitkulova: Hi, good morning. This is Gulnara from Morgan Stanley. Thank you for taking my question. On NII, can you please elaborate on your outlook for lending and deposit margins in the coming quarters across your markets? What is your current expectation when it comes to the margin development? And do you think it is possible to see there a visible improvement in the mortgage margins in the second half of the year? What are your key observations when it comes to the competitive behavior and the overall customer sentiment? Thank you.

Unidentified Company Representative: Well, as you know, we don't guide on margin development going forward because there are many moving parts in that equation. So far, margins on mortgages especially are quite slim. We've, obviously, as - we've had a tailwind when it comes to our Norwegian business, but that comes from the notice periods going away. So, that has increased mortgage margins a touch. We think - or at least if we reverse the outcome which we've seen during the rates has been going up, one might expect lending margins to increase a touch and obviously deposit margins to shrink. So the outcome of that one, I think, we will have to wait and see. But it is quite fierce competition - so far quite fierce competition, but expecting lending margins to widen when we drop in rates.

Gulnara Saitkulova: Thank you.

Operator: Thank you. We will now take the next question coming from the line of Sofie Peterzens from JPMorgan. Please go ahead.

Sofie Peterzens: Yes, hi. This is Sofie from JPMorgan. Thanks a lot for taking my question. If I look at the net interest income in your fact book on Page 10 from loans to credit institutions and central banks, that has, kind of, over the past two years increased from SEK2 billion to SEK9 billion. But the kind of opposite interest expense, that hasn't really changed much over the past two years. If I kind of look - compare these two balances that you have with credit institutions and central banks, I get to a very high yield, like 7%. I mean, could you just elaborate what interest income this is, where does it come from, what central banks are replacing because it - kind of just back of the envelope, it implies that you're putting money maybe with some other central banks and the Sveriges Riksbank, given that the yield is so high on these placements. So that would be my question. Thank you.

Michael Green: Go ahead.

Unidentified Company Representative: Thanks, Sofie, for the question. But I'm sorry, I think we will have to get back to you on that topic, because all of us are looking at each other and we don't really have a good answer to that one. But having said that, I mean, what has happened during the quarter is obviously that, yes, our funding - we have a positive impact from our funding mix. So - and I don't think you can see that from the rationale you're making in the fact book. But having said that, I think it's worth to highlight that, yes, when we are attracting a lot of deposits, we - if we are attracting them in a local market, most likely we will place them at the Fed or something like that. So, that has obviously impacted us quite good. And so - and when rating - when the rating approval came as well, we're attracting once again even more deposits. So we could have a slightly beneficial from that one. But apart from that one, I think the major contribution of lower funding cost, first of all. It comes from a maturing AT1 and a Tier 2 bond. The Tier 2 bond was pre-funded earlier on, so that's really good. The AT1 maturing, we have a lot of capital, as you know, so we're not in a need to rush into refinance that one. So that has impacted us positively. Apart from that one, I think it's fair to say that our bonds has traded quite nicely during the quarter. So we see actually a tailwind when it comes to the finance cost.

Sofie Peterzens: Yes. But, I mean, isn't the funding on the interest expense line? So I was wondering around the interest income line because here it's really a quite significant improvement. I mean, even in the quarter it's over SEK0.5 billion, kind of in the past two years it's SEK7 billion. So it's not that it's enough. Could you maybe just remind us, like, in terms of your central bank placement, how much do you hold with the Fed? What proportion do you hold with the ECB? How much is with the Riksbank, to just try to work out the mix of these placements to maybe get a better sense with which central banks you're replacing the money.

Unidentified Company Representative: I think we will have to get back to you, Sofie. We don't have a good answer, or we might look it up during the meeting and get back later on in the call.

Sofie Peterzens: Okay. Thank you.

Operator: Thank you.

Unidentified Company Representative: May I just say, Sofie, on Page 49 in the report you have the assets and liabilities per currency. And I think that can provide some flavor as to the currencies in which we have deposited money at central banks. So you find some details there. But let us get back with more details on the previous question that you had.

Operator: Thank you. The next question comes from the line of Nicolas McBeath from the DNB. Please go ahead.

Nicolas McBeath: Thank you. So a question on Norway, on the volumes there. We saw a quite nice improvement in the household segment, both for mortgages and deposits. So just wondering what you're seeing there. Is this the consequence of some of the - already a consequence of some of the changes you're making there or some other explanation. Thanks.

Unidentified Company Representative: So. Hi, Nicolas. So the growth comes from just continuous working with new customers onboarding with the Bank. Part of that, or actually quite a bit of it comes from the collaboration we have with the unions in Norway. So that's actually - and I'm very happy to see that when we onboard customers now in Norway, we do it in a very balanced way, as you can see in the numbers where we have both deposits and lending, and also to some extent also asset management volumes coming onboard, which I think is the way we should grow the Bank, profitability - with profitability. And then we need diversed income streams, which I think we do have in this quarter in Norway.

Nicolas McBeath: Alright. Yes. Thank you.

Operator: Thank you. We will now take the next question from the line of Shrey Srivastava from Citi. Please go ahead.

Shrey Srivastava: Hi, and thank you very much for taking my questions. Again, on the cost, you've obviously reduced around 200 roles. And I know within this, the Swedish press talks about some roles of the markets function being made redundant. Overall, what do you think about as the sort of revenue impact from these cuts and sort of looking forward with the CEO having been in the role for over half a year now, what do you see as the revenue impact of future cost cuts that you're considering? Thanks.

Michael Green: Alright, thank you. So the impact on earnings, on the income, when we get a few less people on head office and business support functions, that's not affected actually at all in my perspective. And when it comes to the - you refer to the few changes they've made in the markets area, that's kind of - as I see it, that happens sometimes. It's not a big thing and they will be putting resources in the right place to be able to serve their customers going forward. So that's not going to have any impact as well from my perspective. So, I think, this is just kind of excluding the markets area. It's overhead costs which has no impact on the income side.

Shrey Srivastava: Okay. And having said that, I mean, I know you said that it's hard work to cut employees. How much more of these overhead costs would you say there are, where reducing them would have no revenue impact?

Michael Green: Well, we do not forecast in how many people we will be less going forward. So the work that I've initiated and we started during the Q2 will continue as long as we find it necessary. And we will stop when we get the right service level and the right support and the relevant support to our branches throughout the Bank.

Shrey Srivastava: Okay, thank you very much.

Operator: Thank you. We will now take the next question from the line of Namita Samtani from Barclays. Please go ahead.

Namita Samtani: Morning. Thanks for taking my questions. The first one, given the volatility in some of the P&L items, how are you encouraging us to think about underlying costs and restructuring charges going forward? I just want to be crystal clear on what are you going to do with these cost savings from cutting employees, or are you managing things via a cost-income ratio, like what metrics should we use and what are you using internally? Or is it just about solving for return on equity? And secondly, I want to ask why there's no urgency to increase the fee base given rates are getting cut. Handelsbanken has the largest exposure of investment grade across SME and large corporates across European banks. So why are you not taking advantage of this by tapping into fee commissions from corporates? Thanks very much.

Unidentified Company Representative: Thanks, Namita. I will start from the end, because I don't know if I followed actually your first question. It was a really bad line actually. But, no, you are correct in that we are large obviously towards SME, and we do quite a lot actually to try to attract the fee and commission income there. We, over the last, I would say - I mean I have the background from the investment banks and Michael, you do as well. So, I think it's fair to say that over the last 10 years, we have been refocusing the investment bank to suit the Bank's identity quite well. And we made quite a lot of progress actually in setting us up to increase the commission income. So you should not think that we don't focus on that one, rather the contrary actually.

Michael Green: Right. So can I just chip in there? I think you are spot on, something we really emphasize when we turn and - talk about growth. So you're totally correct. We have such a great impact, especially in Sweden, with the SMEs throughout the country. And as I've also stretched and emphasized before, when we grow the Bank, we should grow with a great focus on fee and commission income in order to balance our income stream as I just said. So, the focus within the branches is, and they do a lot of their day-to-day work is actually to serving all of these customers because there are quite a lot number of customers there. So they do their best in trying to serve them and create customer satisfaction and also put some emphasis on the fee commission-based income that we could generate from that part of the business. So I agree.

Unidentified Company Representative: And could you please repeat your first question because I didn't follow that one?

Namita Samtani: Yes, sure. I just want to understand how are you encouraging us to think about underlying costs and restructuring charges going forward. I just want to understand like what are you going to do with the cost savings from cutting employees? Or are you managing things via cost-income ratio? Or should we just look at solving for return on equity?

Unidentified Company Representative: I think it's fair to say that, I mean, from the central departments and the support functions, we will strive to have the best of efficiencies all the time. So if we can cut costs there, we will continue cutting costs. And the more we can cut costs there, the easier we have to compete towards our client. When you look at the branch organizations, they will adjust their cost base to the market momentum and to the client business, et cetera. So that's really how we steer it. It's not from a top-down steering on cost to income, et cetera. As a corporate, we obviously have the corporate goal, low return on equity. So that would be in the backyard of all of us.

Namita Samtani: Thanks very much.

Operator: Thank you. We will now take the next question from the line of Markus Sandgren from Kepler Cheuvreux. Please go ahead.

Markus Sandgren: Yes, good morning. So, I was just thinking, the return on equity you report is adjusted for defined pension plans, and that takes it about 1 percentage point higher than if you don't adjust for that. Is that - when you say that you should be on par with other banks, is that the number you're comparing with, or is it the unadjusted? And secondly, I mean, you are - if you don't adjust - you're around 13, 14 in Q1 and Q2 on return on equity compared to the others that are above 17, when do you expect this gap to close, if you still have that target? Thanks.

Unidentified Company Representative: Thanks, Markus. Well, first of all, we, as well as most of the banks, are actually adjusting for pension schemes. I know the question came up yesterday, but we definitely adjust for pension schemes. And that was - I think that was an adjustment being made when we moved over to IAS 19. So we do adjust just to make that transparent. The corporate goal of us will then measure the banks when it comes to adjusted ROE, and that's the goal we have. And as you know, we are in four countries. So it will be - if or not we'll reach our corporate goal will be dependent on all of - the performance we have in all of these markets.

Markus Sandgren: Okay. And if I ask a follow-up regarding Oktogonen. I mean, what's the take on this then? You reverse the provision for Q1 and you're far below the others. What's the take for the year-end adjustments you usually do?

Unidentified Company Representative: The Oktogonen, during Q1, Q2 and Q3, you should read the Oktogonen just as a mechanical movement with no - actually no guidance in for the future. What we do is we - the decision now is based on the outcome of Q1. So what you can read into it is that during Q1, no, we didn't reach our corporate goal. Having said that, I mean, we obviously - as of now, we do increase our ROE more than the largest Swedish banks and we will have to wait and see what happens to the other ones.

Markus Sandgren: Okay, thanks.

Operator: Thank you. We will now take the next question from the line of Andreas Hakansson from SEB. Please go ahead.

Andreas Hakansson: Thank you and good morning, everyone. So I'm looking at Page 15 in your presentation pack where you show the change of the NII split by areas. And could you tell us the funding benefits that you get from the AT1 and the tier 2, is that entirely in treasury? Has it any impact on Sweden and other home markets? That's first part of my NII question.

Unidentified Company Representative: Well, the ambition of the treasury department is to have as low a result as possible, meaning that any surplus that arises in the treasury department is then allocated out to the respective business areas. So within the figures you see for Sweden as well as the other home markets, you do indirectly have the impact from the AT1 and tier 2, as you touched upon.

Andreas Hakansson: Okay. So underlying in Sweden, for example, the margins did actually go down, but it was held up then by the load of funding cost, I guess.

Unidentified Company Representative: Yes, I think that's fair to say. I mean, we will have lower margins if the central banks are cutting rates. Yes, we're likely to see margins drop. On the other hand, we will have the financing impact and that has been positively impacting this quarter.

Andreas Hakansson: Yes. And then - it might not all be Norway, but the SEK60 million that you see, it's a lot of the six to eight weeks' time issue you have in Norway. If now rates are flat for the rest of the year, should we assume that that will be zero from here or are there any remaining benefits coming from it?

Unidentified Company Representative: We have a slight positive impact coming, but the majority is behind us now in this quarter, but a slight one.

Unidentified Company Representative: And Andreas, if I just may add. I mean, obviously the margin development, all else equal, most likely margins will drop when central banks cut rates. But then we have the mix shift between transaction account and savings account and we've been keep saying that for a few quarters that - that are at levels where we think they should start bottoming out. And we've actually seen a touch of that one this quarter. Then we will see what happens going forward.

Andreas Hakansson: Yes. No, we heard that from other banks. It sounds like it's true for the market. Then just following up on Sofie's question. If I look in the balance sheet on your cash balances, I mean, if you look at the interest income divided by the cash balances, isn't it just a fact or is it the fact that what you report in the balance sheet in Q2 now of 581 billion, is that a significantly reduced number by the end of the quarter? So, the number that you had during the quarter is significantly higher, which means that the yield on that money is not at all as it looks when we just take the end of the quarter.

Unidentified Company Representative: You're entirely correct. So that goes back to Sofie's question initially that you can't compare the P&L impact to the quarterly end number. You must look at the quarterly average number, and then most likely the implied yields would change a bit.

Andreas Hakansson: Yes. So if I think that the yield you get in central banks could be around 3%, 4%. Does that mean that the balance is actually closer to 800 billion, 900 billion rather than the 581 that you have in the end of the quarter?

Unidentified Company Representative: Well, we don't disclose balances per day. We disclose them per quarter-end.

Andreas Hakansson: Okay, that's it. Thank you.

Operator: Thank you. Thank you. We will now take the next question from the line of Riccardo Rovere from Mediobanca. Please go ahead.

Riccardo Rovere: Thanks for taking my question and good morning everybody. Just a quick follow-up. Can you explain very simply, how can NII go up quarter-on-quarter, because with the rates going up NII go up, with the rates going down NII go up. So is it just a matter of this subordinated debt that have come to expiry that generated an uptick in NII In this quarter? Or is there anything more underlying? And these AT1 and subordinated debt in general, I would imagine, those should be somehow replaced at some point, unless you tell us that your capital is so rich that you are covering AT1 buckets with common equity tier 1. And then a clarification. On the slide on capital, when you mention SEK5.2 dividend, does this refer to the first half or does this refer to the full year, because it is - the SEK1.3 that you mentioned that you showed in Q1 results presentation multiplied by four. So probably it's just a coincidence. I imagine this refers to the first half, but I just want to be sure about that. Thanks.

Unidentified Company Representative: Good morning Riccardo. Let's start with the NII. Yes, I'll try to do this as simply as possible and we see if we reach your ambition. First of all, as you say, yes, most likely when central banks cut rates, it will have an overall marginal negative component. Then having said that, we have the deposit mix. And this quarter, we've seen a positive impact from the deposit mix, i.e., money moving from savings account to transaction account. Then thirdly, we have Norway, and we've kept saying that we're likely to see a positive tailwind in our Norwegian business coming from notice periods. And we see that this quarter a part and obviously from the positive volume change in Norway as well. And then thirdly, we have the financing component. And as you say, I mean, we've had the maturing AT1 and T2, and you can see the volumes and the coupons. So that has obviously positively benefited us by roughly SEK90 million or so. The tier 2 bond was a pre-funding, so that one should not - you shouldn't expect that to increase. As you say, the AT1, obviously, yes, we can run a deficit there as long as we have more CET1. And that - so we're in a positive situation as of now. If we move down into the target range, we will obviously come back and talk to you about how we will think about AT1s.

Riccardo Rovere: Thanks. And on the dividend, if I might?

Unidentified Company Representative: I didn't actually follow your question there. It was SEK5.2. And what was the question?

Riccardo Rovere: The question is, you show 5.2 on slide 15 or 16, accrued for - I imagine it's H1 because - so the question is, does this relate to H1 or to the full year?

Unidentified Company Representative: Yes, that's a good question of yours. As you know, in Q1, we accrued SEK1.3 per share.

Riccardo Rovere: Exactly, exactly. Which times four gives you 5.2.

Unidentified Company Representative: No, no, no. That's just a coincidence. In Q1, we accrued 1.3. And in Q1, as you know, we had some negative components to our risk weighted assets, i.e., the operational risks increased. We had some structural FX impacting us negatively. So in Q1, we didn't manage to accrue that much of the P&L. So that's 1.3 for the first quarter. In the second quarter, we had a positive movement in risk weighted assets. They dropped. That's due to quite modest growth numbers, but also positively impact from the structural FX. You know, we have a subsidiary in U.K., they've made a dividend to the parent company. So that decreases the risk weighted assets. So in Q2, we actually anticipate 118% of the profit. So it is 1.3 in the first quarter and 3.9 in the second quarter, or SEK4 if you round it off. So the aggregate number is 5.2 for the first half. If we move into the second half and we still keep seeing slow growth, we shouldn't rule out that we will accrue more than 100% of the P&L. We will see.

Riccardo Rovere: Yes. Okay. No, that's clear. That refers to the H1. Thanks.

Operator: Thank you. We will now take the next question from the line of Hugh Moorhead from Berenberg. Please go ahead.

Hugh Moorhead: Good morning and thanks for taking my question. Just a little follow-up on the sort of positive shift in the deposit mix which you talked about. Could you just give us a bit more detail, possibly, on where you're seeing that both in terms of, is it household or corporate deposits where you're seeing a shift back into transaction, and also in which countries you might be seeing that shift? Thank you.

Unidentified Company Representative: I think it's fair to say that - I mean, if you remember in Q1, we obviously had a movement, a bit bigger movement to savings account than we thought was long-term balanced. This quarter, we're actually reversing that one. So it is in households and in Sweden the predominant factor, and that is a movement from savings accounts over to transaction accounts. I think it's fair to say that we most likely see this in most of the countries, i.e., bottoming out levels now. So we're likely to see a similar direction, both when it comes to corporate and households in each country. But the biggest shift this quarter is in Swedish households.

Hugh Moorhead: Thanks very much.

Operator: Thank you. We will now take the next question from the line of Jacob Kruse from Autonomous. Please go ahead.

Jacob Kruse: Hi. Thank you. So I just wanted to follow up on the discussion around deposits and NII. So if I'm back in the fact book on that chart we've been - table we've been talking about, your cost of deposits increased by about 0.5 billion in the quarter. Your deposit balances are roughly unchanged or down a little bit. So I don't quite understand how the deposit mix was positive when your cost of deposits goes up. Could you just explain what the moves we're seeing here are? Thank you very much.

Unidentified Company Representative: Well, I follow your numbers, what you're looking at, but I think we will have to get back on that one. You're referring to the 11 billion rising to 11.5 billion in the quarter.

Jacob Kruse: Yes, which is meaningful. Especially when rates are coming down in the quarter, I would have expected most of your deposit pricing to go down rather than up. And then you're saying mix change is also supported, but the overall cost is going against you. And, I guess, if I could just follow up, the moves we're seeing here still seem to say that there is pressure on the overall customer margin with the cost of deposits increasing faster than the sort of lending margin increases.

Unidentified Company Representative: I think, Jacob, we will have to get back to you on that one.

Jacob Kruse: Okay, thank you.

Operator: Thank you. We will now take the next question from the line of Piers Brown from HSBC. Please go ahead.

Piers Brown: Yes, good morning. Just one on the capital target, so the 400 basis point CET1 buffer target that you've got. Why is that number still so high? I mean, it looks like macro risks are receding, interest rates are falling. You're obviously generating a good level of profitability, but you're operating on a buffer to your previous buffer target, I guess, you could say. What would be the trigger for thinking about operating at a lower target buffer level than 400 basis points, maybe moving back to the old 100 to the 300 basis point range you used to target? Thanks.

Unidentified Company Representative: And hi, Piers. And thanks for the question. I agree with you. I mean, macro risks are receding and things look a bit better now. What we said is that at the latest - at the AGM, we will - or rather at Q4, we will come back and tell you about how we view this. And yes, I mean, we still run with a normal target range of 1 to 3, and then we have an extra percentage point. But you will have to wait until Q4 and then we'll come back and talk about it.

Piers Brown: Okay, thanks for that.

Operator: Thank you. We will now take the next question from the line of Andreas Hakansson from SEB. Please go ahead.

Andreas Hakansson: Yes. Hi. Sorry. Just a follow-up. About this mix shift on deposits, do you actually see people moving money from savings accounts to transaction accounts, or are we seeing a Q2 effect on transaction accounts where the tax paybacks is coming into the accounts and the dividends is coming back. So it's a temporary increase in transaction accounts rather than a shift from one to the other.

Unidentified Company Representative: Yes, rather the latter one, new money coming into transaction accounts.

Andreas Hakansson: Okay. And have you got the feeling that it's a lot of the tax money coming in, or what's the driver on that?

Unidentified Company Representative: It's just like you allude to. I mean, in Q1, in particular, in Sweden, customers pay in to the tax authorities. In Q2, they get money back from the tax authorities. And that money is typically placed on transaction accounts. So to some degree, you can say there was a temporary downturn in Q1 and a corresponding upturn in Q2.

Andreas Hakansson: Okay. Yes, it's fair. Thanks.

Operator: Thank you. We will now take the next question from the line of Jacob Kruse from Autonomous. Please go ahead.

Jacob Kruse: Hi. Thank you. Sorry, just another follow-up on the capital. Could I just ask, firstly, is your dividend allocation now basically not linked to payout ratio, but rather the 4% target? And secondly, on the capital again. You have a pension surplus of about, I think, SEK12 billion. Do you think that that's something that you could revert into the Bank, or is that kind of buffer not large enough to think about those kind of moves?

Unidentified Company Representative: Well, thanks, Jacob. First of all, yes, you're correct. I mean, we do anticipate based on keeping the 4% constant. Then when it comes to Q4, the Board will obviously make a decision of the actual dividend being paid out. But that's the way we do it. And yes, we have a pension surplus of SEK12 billion. That is the consequence of having that one. I know the discussions around the report of a bank yesterday. We have already deducted that one from the - when it comes to calculating the ROE. But having a surplus in the pension systems will eventually lower the pension cost for the Bank. So that's the way you will see the positive benefit for us.

Jacob Kruse: Okay. But you're not anticipating bringing it back to the company in any way to just support your CET1 build?

Unidentified Company Representative: No.

Jacob Kruse: Okay, thank you.

Unidentified Company Representative: May I get back to the previous question regarding the cost for deposits? It's the same actually answer as to previous questions about quarterly end numbers and average quarterly numbers. In the Fact Book on Page 31, you have the average deposit numbers for the Group, and you can see that the average deposits grew by 2% even though the quarterly end numbers did not move materially. So that could perhaps provide some flavor to the question about deposit costs going up.

Jacob Kruse: Okay. But that still seems to miss a few percent because I think you would expect deposit costs to go down when rates go down.

Unidentified Company Representative: We'll get back to you, Jacob

Jacob Kruse: Great. Thank you.

Operator: Thank you. We will now take the final question from the line of Nicolas McBeath from DNB. Please go ahead.

Nicolas McBeath: Thank you. Just some follow up on lending. So I was wondering whether you've seen any pressure on margins on new loans to commercial real estate borrowers, now that the bond market funding conditions have improved in this segment. And also related to that, any outlook for increasing loan demand in H2? I guess, I mean, some of your peers have indicated that they're seeing increased - signs of increased activity on the mortgage side, but then maybe you also have some negative implications, again, also from more active bond markets. So whether you could comment how you see those dynamics playing out.

Michael Green: So yes, there is - if I compare to Q1, I see a slight pickup in interest and activity from, especially, our private individuals - customers, but also to some extent from the corporate sector. So there is a slight pickup. It hasn't been materialized, but we get quite a bit of more, what do you say, demands for - on the mortgage side, actually, for new business. When it comes to margins, I wouldn't say there is a margin pressure as I see it when I talk to the branches outside. But the capital market is in much better shape now than it was before. So, of course, there is a competition between capital markets and the bank lending part of the business. But I don't see any change in the margins so far in this.

Nicolas McBeath: Okay, perfect. Thank you.

Operator: Thank you. I would like to turn the conference back to the speakers for closing remarks.

Michael Green: Well, thank you all for joining this session. I really appreciate it from my side. And I wish you all a very nice and good summer, everybody. And we'll talk later after the summer breaks, whatever. Thank you so much. Take care.

Unidentified Company Representative: Thank you, everyone.