SVKEF - Skandinaviska Enskilda Banken AB (publ.) (SKVKY) Q4 2022 Earnings Call Transcript

Skandinaviska Enskilda Banken AB (publ.) (SKVKY)

Q4 2022 Earnings Conference Call

January 26, 2023, 02:30 AM ET

Company Participants

Johan Torgeby - President and CEO

Masih Yazdi - CFO

Conference Call Participants

Magnus Andersson - ABG

Omar Keenan - Credit Suisse

Nicolas McBeath - DNB

Maria Semikhatova - Citibank

Andreas Hakansson - Danske Bank

Sofie Peterzens - JPMorgan

Rickard Strand - Nordea

Namita Samtani - Barclays

Piers Brown - HSBC

Riccardo Rovere - Mediobanca

Martin Leitgeb - Goldman Sachs

Jacob Kruse - Autonomous

Andreas Hakansson - Danske Bank

Presentation

Operator

Good morning. This is the conference operator. Welcome, and thank you for joining SEB's Q4 2022 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Johan Torgeby, President and CEO. Please go ahead, sir.

Johan Torgeby

Thank you, and good morning, everyone, to the full year quarter and Q4 quarter presentation of today.

So turning to Page number 2 on the PowerPoint presentation that we posted online, we start with just saying a humble thank you to all of our clients. We've just received this -- the last 12 months customer satisfaction, and it was a very supportive result of SEB. And we were top ranked both amongst corporates and financial institutions in the Nordics for the second year running.

For the full year, we've had a good performance. Return on equity amounted to 14.7% in the quarter, and it was driven by strong trading activity and, of course, a more benign environment as interest rates have been at a higher level than in the past. This was done on a core equity Tier 1 ratio of 19% with a capital buffer of 470 basis points. Our strategy that we launched in January last year is broadly intact, and we have checked all the assumptions, and we think it still holds.

However, we've done some minor changes in the short run, which we will get back to and concluded that we will continue to invest in SEB and have set a new cost target for 2023 in the range of SEK26.5 billion to SEK27 billion, assuming constant FX as of 2022. The Board of Directors has also proposed to the AGM to pay a dividend of SEK6.75 per share.

And now as we have switched into quarterly share buyback continued for now with the annual pace of SEK5 billion amounting to SEK1.25 billion for the next quarter and then a new decision will be taken.

Flipping to Page number 3, we can see the financial year of 2022 in numbers. And Masih will come back to these numbers, but I'll just state that underlying results was very strong. However, after the imposed levies and the adjustment for Russia and the tax line, operating -- net profit grew by 6% and return on equity marginally fell to 13.8%. This was on a cost -- led to a cost/income of 0.39 and expected credit loss level of 7 basis points.

On Page 4, we look at the credit exposure, the credit portfolio development. And we have seen a 3% to 4% adjusted for a reclassification Q-on-Q growth for corporate FX adjusted. So continuation of good demand for credit to be provided and also the annual number becomes 5%, mostly now falling because of the base effect as Q4 last year was very strong.

We have had somewhat lower volumes in Swedish mortgages and also real estate, commercial real estate, it looks like it's up 6%, but it's a flat underlying. And there's been a minor reclassification of some of the corporate exposures that we've had to be put into the real estate category.

Now, I hand over to Masih.

Masih Yazdi

Thank you, Johan.

So I'm going to focus on the quarter, and we're at Page 6 now. So if you look at Q4, we've seen income grew by 33% compared to the same quarter last year. That's largely driven by net interest income, as well as net financial income, whereas fees and commission are slightly down compared to the last quarter in 2021. As you can see, it is true also for the full year, the expected credit losses are higher than last quarter -- in '21 and because of the introduction of the tax fee, bank tax, as well as the higher resolution fund fee, the imposed levies have increased as well.

Just a couple of comments on the item affecting comparability. This is an impairment we've done in our Russian business, and it's an impairment of the equity that we place at the Russian Central Bank. Because of the dividend restrictions that the Russian Federation has imposed, it will take us many, many decades to be able to transfer this equity to the parent company.

And because of this and because of the time value of money, we've decided to be prudent and do an impairment of the equity we have, which is almost the full amount of equity that we have in the Russian subsidiary, and this amounts to SEK1.4 billion. So in the quarter, we had a return on equity of 14.7%, a cost/income ratio of 0.36 and we took 8 basis points of expected credit losses.

If I move to Slide 7 and we look at the long-term development of the bank in terms of income expenses and profit before ECL and Imposed levies, we can see that since 1990, we've seen an average income growth of 6% and expense growth of 4%, leading to a profit growth of 6% before ECL and imposed levies.

The numbers look fairly similar if you look at the last 10-year period, but if you look at the last six years, we have seen slightly higher income growth and slightly lower cost expense growth than we've done in the very long term. So for now, at least, it seems like we found a better balance between how we invest in the bank and what type of income growth that lead to.

If I move to Slide 8, net interest income, up 28% or just over SEK7 billion in 2022 compared to 2021. You can see that the contribution from the lending side has come down during the quarter compared to the same quarter last year, but we've seen positive development in all divisions. So because of this -- this is mainly driven by the deposit side.

And if I move to the next slide, you can see a bridge. So we're on Slide 9 of the development of NII during 2022. So this increase of SEK7.3 billion, SEK1.1 billion is coming from increased corporate lending during the year and SEK4.1 billion is corporate deposits. And the absolute majority here is deposit margins and deposit volumes, even though they're up, the contribution from that is fairly small. We have another positive effect of about SEK600 million from our fixed income currencies and commodities business.

On Swedish households, we've seen declining mortgage margins that have led to a negative effect of SEK0.5 billion but that's more than offset by improved deposit margins from Swedish households and the contribution from our Baltic business, if you look at the household side, is about SEK1 billion year-over-year.

So the issue or what we want to conclude with this slide is that, for this bank, 80% of the net interest income improvement during 2022 is coming from our corporate and financial institutions business. And this is pretty natural as that's the dominating part of the business as we run.

If you look at Slide 10 and the net fee and commission income development that grew by 2% during 2022. The main contribution here comes from the cards and payments business, which grew by about 25% during 2022. And this is basically a full recovery of the sort of the lower level we had during the pandemic and now we've seen a full recovery, especially on the corporate card side. And we've seen an extra boost on this line due to the high level of inflation. We've also seen a positive development of lending fees as the balance sheet has grown. But on the other hand, we've seen the negative development from advisory fees.

So DCM, equity capital markets and M&A, that type of activity has been lower in 2022. What I think is positive here is asset management and custody fees, which are largely flat during the year, even though asset values are down quite a bit. And the reason it is flat is that, we've had large custody inflows by the end of '21 and early parts of '22 that has offset the valuation decline during the year.

Moving to Slide 11 and the development of net financial income. We've seen a 13% growth in '22 versus 2021 and Q4 was especially strong with a total amount of SEK3.5 billion. We've seen good underlying development within our fixed income business in the quarter, and we continue to see elevated levels of activity within FX and commodities, albeit a bit lower than we've seen in Q2 and Q3.

We've also had some positive effects related to XVA, as well as positive effects within our treasury business. We've always guided on this line and the guidance has been and it stays that this should be between SEK1.5 billion and SEK1.7 billion, excluding treasury and XVA.

Here, we have, for the first time, added what the average has been, if you look at the total amount of NFI over the last 16 quarters, and we've seen an average of SEK2 billion with a standard deviation of about SEK1 billion. So we think that the combination of the guidance of SEK1.5 billion to SEK1.7 billion, excluding treasury and XVA and this historical level we've been at is the best possible guidance we can give.

If I move to Slide 12 and the capital development during the quarter. We've seen an improvement of the buffer of about 60 basis points in Q4. A large part of this is driven by the strong underlying capital generation, which has added 47 basis points net of the dividend that the Board has proposed to the AGM. We have a negative effect from the item affecting comparability, the Russian impairment of 16 basis points gross. One should note here that there's also a reduction of the risk exposure amount related to this.

So the net effect of the Russian impairment is only about 5 basis points. We've seen an improvement of asset quality. This is mainly due to the fact that the new business that we've written during the quarter has been to corporates that are high-quality and better than the back book average of the bank. And we've seen a reduction of the market risk capital comments during the quarter, although they are still at elevated levels compared to the history.

On the right-hand side, you can see that during the course of 2022, the capital buffer above the requirements came down by 120 basis points from 590 basis points to 470 basis points. So in the first year of the 3-year business plan, we have reduced the capital buffer by about 120 basis points. And we think we are on track of reaching the guidance we've given to be within our target range of 100 to 300 basis points by year-end 2024.

If I move to Slide 13 and look at the expected credit losses. So in the quarter, we took about SEK0.5 billion of the expected credit losses. About SEK190 million of this amount was driven by adjustments to macro scenarios. So driven by the IFRS 9 rules and due to lower GDP and consumption estimates going forward.

The remaining part is due to a new portfolio overlay for our real estate portfolio of about SEK300 million. What we've done here is to do a bottom-up screening of the real estate portfolio and look at what could be potential vulnerable clients. What we've looked at here is, for example, access to market financing, how much of that, that is needed to be done in the near term and the ownership of these companies.

For this part of the portfolio, we've assumed that there will be a 10% default rate and that at that point in time, the collateral values will have dropped by 20%. When doing this exercise, this leads to a portfolio overlay of SEK300 million. This is pretty much the edge of what we can do at this point in terms of being within the accounting rules and being proactive and take reserves for this portfolio.

You should obviously put this reserve of about SEK300 million in connection with the total size of the portfolio of about or over SEK300 billion. Overall, you can see that Stage 3 loans in the quarter came down quite a lot and that we today have more reserves than the total amount of Stage 3 loans. The total reserves in the bank is SEK8.6 billion, of which SEK2.2 billion are portfolio overlays.

Moving to Slide 14 and looking at some key ratios. So we saw customer deposits grow by about SEK100 billion during the year. We've seen that liquidity ratios, both the short term, the LCR, liquidity coverage ratio, as well as the NSFR, net stable fund ratio are stable and that we've gone through the capital buffers before, and the leverage ratio, I should add, is stable compared to the end of 2021.

So with this, I'll go back to Johan, and we'll have an update on the business plan.

Johan Torgeby

Thank you, Masih.

So now we turn to Page 16 and switch gear a bit. And we start with just a quick little key highlights from what we achieved and what we did in 2022 and divided by the four pillars of the strategy that we launched last year. So first, we have had a modest expansion of our corporate banking business in the Netherlands, Austria and Switzerland, and this is broadly in line with what we plan to do.

Investment Management has launched several new investment products, and we are on track, both when it comes to The Green activity, the Sustainability Index and The Brown, the Carbon Exposure Index, where we want to improve The Green activity and reduce the exposure to carbon.

On the strategic change, we've launched new functionalities in the app that meets our clients, and we've continued to expand Private Wealth Management & Family Office division and established an office in South of France in Nice to support Nordic customers that we signed there. We've also decided that as a spin-off of SEBx to commercialize Banking-as-a-Service, and we've launched a business area we call SEB Embedded, which is a very exciting new leg to stand on for the future. Still early days where we support and give access to our clients, our industrial and retail clients to use banking-like services in turn for their clients.

On partnerships, the most noticeable is the Private Wealth Management initiative in Denmark, where we partnered up with Ringkjoebing Landbobank to support private banking customers, making us reach much more customers in Denmark in the future and also focusing on getting more clients into the Family Office initiative.

We've done six investments in clean tech and green tech entrepreneurs, and this is, of course, to help early-stage companies to finance new innovations in order to improve the transition to a carbon-free economy. And lastly, we continue to solidify the cooperation with authorities, most noticeably the police in order for us to work together to combat financial crime.

On efficiency, we've done many small and operationally organic improvement in automation, but most notably, I'd like to highlight the one in sub-custody as we have onboarded about SEK5,000 billion over the last 18 months. And this is, of course, meant that we have a completely different version of how to handle that volume in the future. We've also set up a Financial Intelligence Unit to help us to combat financial crime, but also using intelligence that we can find in-house and we've improved and launched a new data governance and appointed a new Head of Data in the bank.

Going to Page 17, we now have the full year result of all customer surveys that we do. And broadly speaking, the outcome is such that we are either on top or we are flat, except for one, which is the business bank at the -- in the bottom row. So this is a very good result for us. We're going to work hard to maintain this position or even improvement, and there are still many things that we can improve.

Then looking at the particular initiatives that we did last year from the perspective of what did we say on the trends that we want to capitalize on and support our customers in. This is on Page 18. We have a very optimistic and long-term positive view on corporate and investment banking, and we've had a very strong underlying growth for some time.

However, during 2022, not at all planned in January 2022, we saw a sharp shift in activity, particularly within ECM, M&A, DCM, corporate finance, investment banking, and we had significantly dampened activity due to volatility and lower asset prices and higher risk outlook.

Savings and investment, we had a very, very solid starting point with one of the highest savings ratios we've seen. This has also changed quite dramatically, and that is, of course, that the cost of living has gone up and also the ability to save has gone down, therefore. So we are still very positive on savings and investments and corporate and investment bank move in the long run, but clearly, there's been a cyclical headwind in the near term.

On technology and sustainability and on nonfinancial risks, we would say more or less more of the same. So we have not changed either short- or long-term view. If anything, cybersecurity has been accentuated around the new technologies that we can do.

Sustainability continues to be a top priority, and we met, broadly speaking, all the targets that we set out on The Green and The Brown and nonfinancial risk, the trend continues that in the past, majority of the risk CROs of banks would identify would be of financial nature. Today, the majority of risks are nonfinancial in nature, operating risk. And that is really something that all banks need to relate to because the risk landscape is changing.

Next page, Page 19, is more or less just a plain repeat. So for the ones -- for time stepping the strategy 2030, we've included here as a reminder.

And now, I hand over to Masih.

Masih Yazdi

Thanks, again, Johan.

So looking at Page 21 and the cost development and the cost target we've given out today for 2023. As you can see here, for the first time, we are giving out an interval of SEK26.5 billion and SEK27 billion in 2023, assuming average FX rates of 2022. The reason we have given out an interval rather than the point estimate, which has been customary for us is the uncertainty around inflation in general, both when it comes to salary inflation, as well as inflation on other areas impacting the bank, such as premises, information services and energy prices. When it comes to the things that we can do something about ourselves, that means efficiencies, those are a bit clearer.

So we'll do more efficiency work during 2023, or we'll take out more costs related to efficiencies, and this can be achieved through measures we've taken over the last few years in terms of automation and so forth. And we'll invest as much in 2023, as we've done in 2022 on top of the investments we do going into the year, so SEK800 million to SEK900 million extra in 2023.

And here, you can see what we are investing in. Just a few examples. So in the front, the customer-facing part of the bank, we will continue to develop our remote advisory. We will continue to expand our Private Wealth Management & Family Office division, and we'll continue with the expansion within Austria, Switzerland and Netherlands and within sustainability, we'll continue to improve our customer offering, as well as our disclosure and reporting.

When it comes to future-proofing the core, cybersecurity is a very important area in the bank, as well as the whole society, and we'll continue to develop our cloud capabilities. On and off-boarding is both a future-proofing, but it's also something that will enable us to become more efficient in the future doing that process much more automatically than historically.

And then finally, house in order. We've invested a lot within financial crime prevention in the last few years, and we'll continue to increase those investments in 2023. That will also, over time, lead to efficiencies for the bank. And risk and compliance are areas that we've seen increased investments in for the last decade or so, and those will continue in 2023.

On the next page, Page 22, we've done some minor revisions to the financial aspirations or different divisions of the bank. As a reminder, we do a review of these aspirations every year depending on how our peers have performed, but as well as taking into account any potential accounting changes or organizational changes.

This year, there are two minor changes, so a slightly lower cost/income ratio aspiration for the large corporate and financial institutions divisions -- division and a slightly higher cost/income aspiration for Investment Management, and this is mainly related to organizational change, moving one unit from one of the divisions to the other.

On group level, we have a slightly lower aspiration on cost/income ratio instead of around 0.45. We now aspire to be between 0.4 and 0.45. And this is mainly related to the fact that we've done a reclassification of the resolution fund fee out of the net interest income line to imposed levies.

So therefore, everything else equal, the bank, on a group level, needs to have a slightly lower cost/income ratio to reach the group aspiration of 15% return on equity. And again, a reminder here, the cost/income aspirations, those are not explicit targets. Those are implicit targets. What we think is needed for each part of the bank to achieve what we think is the explicit target a certain level of return on business equity.

And then finally, just a reminder of our group financial targets to pay out 50% of the earnings per share adjusted for items affecting comparability every year to be within our management target range of 100 to 300 basis points and to have return on equity that's competitive with peers and aspire to reach 15% in the long term.

I'll stop there, and we can open up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Magnus Andersson with ABG. Please go ahead.

Magnus Andersson

Yes. Good morning. If I start with NII, just if you could give us some flavor around the competitive situation on deposits? For example, I note that your deposits shrink -- your household deposits and corporate deposits are shrinking quarter-on-quarter and is primarily in the -- when I look at the retail-oriented deposits there. And also, if you, on deposits, could share with us what share of the Baltic deposits have -- still have zero interest rates? Secondly, on NII, just you're talking about volatile -- more volatile items in your favor in -- from Q1, really, bridge financings and a strong FICC-related NII in Q3, for example, what's the status is there right now? So that's an NII.

And then secondly, just on capital. Last year, you gave us a capital repatriation outlook or outlook for buybacks of SEK5 billion to SEK10 billion. Now we know that you have announced SEK1.25 billion for Q1. So my question is just this, SEK5 billion then the annualized level are the best expectations for 2003 or could anything change that? Thank you.

Johan Torgeby

Thank you. I think I'll start on the three questions, and I ask Masih to fill in on all three. If we start with deposit, I think it's a macro trend, which is quite interesting, and that is for many, many years of QE, we are now going into QT and higher rates. So the whole point of what's happening right now is to drain the economic system of liquidity. That is, I think, what we are seeing overall in the market right now.

So this is a deposit that has continuously increased. Liquidity has been very, very ample. That has, of course, supported real economy and now with higher interest rates potentially QT that will be withdrawn from the system.

A few other points. The cost of living has gone up and the cost of input goods for corporates have gone up. So we can clearly see that corporates needs to spend more to produce their services, and that's a working capital squeeze. A corporate only have to access to capital that you need to pay your bills to get the input goods, either you take from your cash or you ask a bank to give you the money through a loan. And we can clearly see that lending growth has not really gone up. There has been a little bit less deposits in the bank. Hence, that has been used for something, but credit exposure has gone up.

So the number of loans that we have written has increased. So this is also a part of potentially explaining that. And for the retail side, I would say, it's the macroeconomic monetary change, and it is, of course, spending more on the same basket for energy, mortgage rates, et cetera, that has also drained it, but predominantly corporate for the deposits.

Masih, anything you want to...

Masih Yazdi

Yes. I'll just add on the sort of deposit decrease during the quarter. So we can track what's happening to deposits, and we can see that we are not losing deposits to competition, especially on the retail side. So the outsource we've had during the quarter is driven by increased cost of living so that we can see that customers are using their deposits to a large degree to be able to pay for bills, and there's not money going out from SEB to competition on the deposit side.

Just adding on to your question about the Baltic business, I can't really say how much is zero interest rates. But if you look at the fact book, you can see how large share of deposits that are in transaction accounts and how large share we have in saving accounts. So you can assume that on the part that is in transaction accounts has zero rates and on saving counts, we're paying something. So that's the sort of -- that's the best guidance you can get there.

On the volatile items, we still have a couple of larger bridges on the books. The contribution from that is fairly small. I would say, if anything, during the quarter, maybe net interest income is slightly understated. And this has to do with what happened to the three months STIBOR during the quarter in the -- if you remember, early parts of the quarter, the three months STIBOR starts to take in the bank tax and the resolution fund fee that is payable by year-end.

So there was a very low STIBOR print for the beginning parts of the quarter, and a lot of fixings are made at that point. This is fairly technical, but that has corrected itself now, but it probably has led to maybe the net financial income line being slightly overstated in the quarter, and the net interest income line being slightly understated in the quarter.

On the capital side, you're correct. I mean, we are executing on the mandate we have to do SEK1.25 billion of share buybacks until the AGM. This is not a guidance for what the pace will be post the AGM. It could be same. It could be lower, it could be higher. The guidance we can give, and this was obviously confirmed by the Board yesterday is that, we plan to be within our target range by the end of 2024, whether that's going to be reached through continued organic growth, through any potential acquisitions, or whether that's going to be due to dividends or share buybacks and what combination of that, we can't say at this point, but the plan is still to be within that target range in two years' time.

Johan Torgeby

Sorry. I'll just add two things. On the deposit side, this is more a reflection. But for many, many years, as we are pitching to clients how to manage their liquid funds, there's not been an alternative because also the government bond rates have been very low or negative. And right now, this is changing. So in SEB, we are offering quite change now in terms of managing short-term liquidity. You've gone from zero to some of our investment products yielding 4%. This is not a net number, but gross number is very good that you actually now when the rates have come up, you can start looking at fixed income securities that is clearly yielding more than you would get in just a transaction account. And that's also a potential explanation and it's a very good thing because we would love the money to be more productively placed.

Magnus Andersson

Thank you. And just a follow-up there on deposits. Have you also seen amortization going up in the mortgage book? Is that part of the explanation?

Masih Yazdi

Yes, we have seen that happen. It's a very small increase from low numbers, but this has been a new trend since September that we have seen more applications for amortizations, and we are approving a larger share of those applications for every month really. So the increase started in September, and it was higher in December than it was in September.

Magnus Andersson

Okay. Thank you very much.

Operator

The next question is from Omar Keenan with Credit Suisse. Please go ahead.

Omar Keenan

Good morning. Thank you very much for making the time. I just wanted to explore the deposit volume point just a little bit more. I guess, if we look at system level trends, deposits were down about 0.3% in November. So they're still fairly flattish. So I was hoping you could perhaps comment on whether why SEB's trends look a little bit different from the system. Or did something happened in December that's a little bit different? And just related to that, we've seen quite a nice development in terms of the deposit margin, and we're expecting to get another, I guess, the market saying 50 basis point rate hike from the Riksbank. Could you help us perhaps think about the various moving parts on NII going forward in terms of what benefit from rate sensitivity we can get? What net new volumes look to be doing? And what lending margins look to be doing? Thank you.

Masih Yazdi

Okay, thank you, Omar. I really wouldn't make a big number of the deposit decrease in Q4. If you look at the full year number, we've seen deposit inflows in the bank. We've seen the largest deposit outflows in Q4 is related to the corporate business. And this has to do with that over the course of the year in 2022, some of these corporates seek up new funding from us for a purpose and some of the purposes have been to acquire other companies. And you can see that when they do the actual payment of that acquisition, they have taken out liquidity from us. They put it in the bank as deposits. And when they do the actual acquisitions, they use those deposits to do that. So that's a big part of the deposit outflow.

As I said before, on the retail side, this has to do with -- and that's a very small proportion of the deposit outflows in the quarter, that has to do with the cost of living, really. So it's really no drama in it. And since we are a predominantly corporate and financial institutions bank, there will be more volatility in our deposit base than if it will be just a pure retail bank. So I wouldn't say that we have a different trend on deposits than what you can see in the overall market.

When it comes to deposit margins going forward, it's difficult to say what's going to happen. It has a lot to do with competition, really, and how customers will behave. The increases in rates that we've seen has been very rapid. So financial actors, both corporates and households haven't really had time to act. And now we'll see what they will do. What we do know is that, we have about SEK200 billion of equity in the bank.

So if you just do it very sort of technically, if rates go up by 50 basis points, obviously, we don't pay any interest on the equity. The positive effect of that is about SEK1 billion annualized basis. So that's sort of what we can guide on, and the rest is going to be up to competition and what's going to happen in the markets.

We do see right now or our view is that, lending margins, especially on mortgages are unsustainably low. They are very depressed. And you can argue that some parts of deposits, margins are high or higher than they've been historically. So we are in a process of the market really finding a new equilibrium between lending margins and deposit margins.

And it seems reasonable to believe that, to some extent, lending margins should improve from current levels, also given that what's happened to credit spreads in the market, at the same time, as maybe deposit margins will come down. And what the net effect of this will be? It's very difficult to predict. We've had such a fast-moving environment in terms of rates. It's going to take some time to find this equilibrium, and it's just difficult to predict where that's going to be.

On lending volume side, there is subdued lending demand. We did see quite a lot of credit demand in Q4 from high-quality investment-grade corporates, adding on liquidity facilities in Q4. These haven't been drawn yet, but obviously, to some degree, these could be drawn. These are not CapEx investments.

So these are backup facilities to a large degree with shorter tenors than CapEx investments would have. But we did see quite a lot of that activity in Q4, a sort of a mini pandemic effect, if you can say. So, as you recall, in the early parts of the pandemic, we did SEK140 billion of new credit facilities over six weeks. Now we did about SEK60 billion in Q4, so almost half of that amount. So fairly large, and we'll have to wait and see how much of that will be drawn in the coming months or so.

Omar Keenan

Okay. Thank you very much. I guess, just on the deposit point, I was referring to the household deposits. If I look at the CPC deposits, they were down 2% in the quarter, and it doesn't look like system trends are showing that.

Masih Yazdi

Yes. In C&PC, more than 50% of the deposits are from corporates. So less than half of that is households. So if you look at the household side, it's a very small decline. And when we track the flows and see where the money is going, it's not going to other banks. It's going to pay bills, basically.

Omar Keenan

Okay. That's great. Thank you very much.

Operator

The next question is from Nicolas McBeath with DNB. Please go ahead.

Nicolas McBeath

Thank you. So first, a question on growth, please, in your balance sheet and your strategy here. So the credit portfolio was flat quarter-on-quarter and Masih, I see you just commented that your lending demand is currently subdued. So assuming what looks like a possible scenario for the next couple of years with very limited and possibly even negative loan growth on both the corporate and household side, how would you think about your growth strategy in such environment? Do you find it critical to continue to grow your kind of credit and lending? Or do you think you could be content with absence of growth and rather focus on protecting profitability and distribute earnings to shareholders rather than reinvesting into the business?

Johan Torgeby

If I start and just so we have the same mindset. We don't dictate how much a corporate needs to borrow. That's very much driven by every institution's desire to invest. And right now, that is subdued. We have still a recession coming our way. Many large corporates are still very cautious and careful and worried, but that is also good for loan demand, namely for the rainy day argument. So we have seen these facilities now put in place, but they're not drawn because they are drawn if there's something to happen.

The growth strategy for SEB is completely not driven by macro. It's driven by increasing our market share amongst large corporates and financial institutions. It's driven by increasing the number of clients that we service, and that's predominantly outside Sweden. So there's still a little bit of growth in Norway, Denmark, Finland. There are significant opportunities in the long run to grow this bank in Germany, Austria, Switzerland, U.K., et cetera.

And the other part of the growth strategy is to increase the proportion of any client's business to us. That's a very organic, very powerful change in how much market share you have on one client. And the data points, of course, to a fantastic 2022, and there's no reason to believe that we're not going to continue where we've increased market share and gained more clients.

Then on your kind of estimate of what will volumes be? I don't know. It's very much a macro-driven question in my book. The margins on corporates are more or less global. So there's a market price set in the international financial market, you cannot do anything about it. That has, of course, been a positive. It's supported right now by higher credit spreads than we used to have.

So that's a very positive thing that money is becoming more expensive. And therefore, also the credit curve, the difference between credit quality has clearly widened out, even though it stabilized in this quarter. That margin that we receive is, of course, very much driven, if we are efficient, if we have a low funding cost and if we're cost-efficient, which I hope to be able to say that we are, and therefore, there will be a good margin development.

Nicolas McBeath

Okay. Thank you. And then a second question, please, on your ROE aspiration. So looking at the underlying ROE in Q4, it seems to be pretty close to 15%. So, I was wondering whether you think it would be a stretch for you to aspire higher, in particular, given your -- yes, current strong capital position and maybe some further NII tailwinds going into 2023. Do you think you could aim higher with the slimmer equity base? And also, if you could please elaborate what drivers you see impacting your ROE positively and negatively from the current level over the next couple of years?

Masih Yazdi

Okay. I'll start there, Nicolas. The Board confirmed our financial targets yesterday. So the ROE aspiration continues to be 15%. I think for us, it's about trying to strike a good balance between adding value to the shareholders. So having a return on equity that is sufficiently above the cost of equity, but also making sure that we can grow the business. So there's going to be a balance there, the higher ROE aspirations you set, the more you're going to potentially limit your growth or potentially you could sort of take on too much risk as a higher ROE aspiration would -- could incentivize you to take on higher margin business and, therefore, take on higher risk.

But in the end, I mean, it's going to be about competition as well. Obviously, a lot of our peers who have move to other ROE targets, that's something we'd have to reflect upon and take into account when we set our own targets. But here and now, this is the aspiration we have. If we can get help from the interest rate environment being different than what we've been used to, that's obviously great. And hopefully, we can grow our business at this higher return on equity level for the coming years.

Nicolas McBeath

Perfect. And then final question, please, on commissions for 2023, given where stock markets are currently and the activity pipeline you see for 2023 at this point. So how do you view the commission outlook for this year? Do you expect to grow net commissions in 2023 versus last year?

Masih Yazdi

It's going to be very dependent on what happens to asset values and balance sheet growth when it comes to lending fees, for example. Compared to 2022, what we don't have going into 2023 is a further recovery in the cards business. So we've seen a full recovery there. So that's behind us. At the same time, the advisory-related fees are clearly lower in 2022 than 2021. So if asset values stabilized, it's possible that that business could pick up. So that's the potential.

On Asset Management, I mean, it's going to depend a lot on what happens to the stock market and asset prices in general. I should just note that we are a bit more geared towards fixed income than equities compared to many peers. So you should also look at what happens to fixed income prices to try to sort of track or understand what's going to happen to our assets on management and asset on the cost of business and the development there. It's very difficult to say what the fee income line will do in 2023 as it's, again, very macro dependent.

Nicolas McBeath

Okay, perfect. Thank you.

Operator

The next question is from Maria Semikhatova with Citibank. Please go ahead. Ms. Semikhatova, your line is open.

Maria Semikhatova

First, on the capital outlook, maybe near term because [technical difficulty] Okay, I have a couple of questions. First, on capital trajectory. Maybe near term, we used to see a higher market risk, risk-weighted assets in the first quarter, if you expect seamless seasonality this time around? And then maybe kind of over the year horizon, if you have [technical difficulty] the impact of IRB model overhaul.

Masih Yazdi

Yes, I'll take that, Maria. You're right. I mean, typically, market risk REA comes down in Q4 and it goes up slightly in Q1. This time around, it's more unlikely that's going to happen as the market risk REA is already elevated in Q4 compared to historical levels. So hopefully, that won't happen. Hopefully, that could come down. It's going to depend a bit about on the volatility in financial markets as those have been elevated during 2022. And more recently, that type of volatility has come down. So we'll see.

On the sort of full year, we do have the IRB overhaul. That process will likely end during the course of this year. As we've said before, based on what we apply for, based on our historical default rates, which we base our models on, we don't see that this overhaul should lead to any net effect on our capital requirements on our risk weights. But in the end, it's going to be the FSA that approves the model. So we can't say, but we think that we have a good application and we have a good -- sort of good assumptions behind this conclusion that, in the end, it shouldn't lead to any meaningful net effect for us.

Maria Semikhatova

And just to follow up, do you have a sense of where your portfolio is different from key peer? Because Swedbank provided quite a different outlook for the net impact from this process.

Masih Yazdi

I can't really compare it to peers. What I can do is to look at our historical observed default frequencies in the portfolios and the risk weights we use and look at that general data for European banks, we can see that we have clearly higher buffers in our risk weights than other banks have on average compared to the historical default rates. So given that we have larger buffers to start with, it's difficult for us to assume that we would have to have even larger buffers compared to average European banks. So that's what I base that conclusion on that we start out with clearly higher buffers than the average bank.

Maria Semikhatova

Thank you for your comments. And then the other question on asset quality outlook. Maybe first on commercial property lending. You stood out among other Swedish banks with a quite conservative approach and portfolio didn't increase. But I see that it grew in the fourth quarter. I know if you changed your view on the specific sector. And maybe you could comment what's your risk appetite for adding new CRE exposures in 2023. And then more broadly, I believe previously, you included in the report some kind of commentary on your outlook for expected credit losses. So we were at 7 basis points in 2022 to get a sense of how high can we get this year given your forecast recession?

Masih Yazdi

Okay. Yes, on the CRE portfolio, it is right. We believe that we are conservative to the extent that the accounting rules allow us to be. So we've done this bottom-up analysis and the best number we can come up with at this point is the portfolio overlay of about SEK300 million. This is not a guarantee that that's going to be sort of how much we lose in the end, it could be lower than that. It could also be higher. But the accounting rules allows you to be forward-looking to an extent, and we have been as forward-looking as those allow you to be at this point.

The risk appetite, we didn't grow CRE portfolio Q4. As Johan said before, it's that growth rate is driven by reclassification. So the underlying growth in the quarter is 0. Our risk appetite is such that we will continue to support the core customers that we have, and we will not add market share during this period of elevated risks in that market.

On the outlook on credit losses, we're not giving any guidance on that for this year. There is obviously a higher uncertainty related to that. What I would say is that, we are going into 2023, in my view, with probably the sort of cleanest and healthiest balance sheet we've ever had.

If you look at the reserves, we have against Stage 3 loans, how much Stage 3 loans we have as a share of the total book, how much reserves we have, how much portfolio overlays we have, it's a good position to be in when going into a more uncertain environment. So very comfortable in that sense that we have good buffers going into what is likely to be an uncertain environment.

Maria Semikhatova

Thank you. And just a minor clarification question, if I may, on your cost guidance. Just to check if it's based on the average FX rate in 2022 or the year-end FX rate?

Masih Yazdi

It's based on the average FX rates. That's a good point. So year-end FX rates are higher than average. So everything if they stay where they are, we're going to be sort of, not at the lower end of that interval. So that's correct.

Maria Semikhatova

Okay. Thank you.

Operator

The next question is from Andreas Hakansson with Danske Bank. Please go ahead.

Andreas Hakansson

Hi, everyone. We've gone through most areas, but a few follow-ups. On the mortgage margins, Masih, you said that you think that they are unsustainably low at the moment. But when I look at how you've been pricing your mortgages, it seems like you've been probably the most aggressive in terms of mortgage prices, and we see that the average price at the moment is even below step quite a lot below some of your bigger peers. So could you tell us a little bit about your strategy and why you're doing this?

Masih Yazdi

Yes, we can do that. I think -- I mean, first of all, it's a timing issue here. So at any point in time, we could be either cheaper or more expensive than our peers on mortgages, especially if you look at the list price, I think it's wiser to look at the actual price. So you can both change the list price or you can do something about the underlying model and yes, change those prices, what kind of discounts you give depending on what kind of customer it is.

So I think the main issue, it's a timing issue. We -- going into 2022, we had a view on the mortgage market and the real estate prices that they were a bit elevated, and there were some risks. We start to see inflation come up. And we didn't feel that this was the best point in time to advise customers to take on mortgages at the very low rates we had when we could see that prices were a bit elevated and that rates would go up. So that's the stance we took back then. Now we think the market is more balanced. Prices are down 15% or so. And now it's more visible to households, what mortgage rates will be, and they've gone up quite significantly. So we have a different outlook on the market as such.

At the same time, we have lost some customers that we didn't want to lose during 2022. So we're trying to make sure that we don't lose good customers going forward. And the plan is to come back to our back book market share. So that is also behind sort of the reasoning we've had. But I think the main issue here is that, it's a timing question, when do you change prices and what price do you change? Is it the list price? Or is it the underlying negotiated price depending on what type of customer you are?

Andreas Hakansson

Yes. I mean, I'm obviously looking at the average prices, but -- so getting back to clients, I mean, we see that you're actually shrinking your mortgage book at the moment. But are you going to do that by offering a lower price? Or are you going to do that by offering new services? Or how do you plan to get back into that market?

Masih Yazdi

In the end, it's going to be a combination that we have a total offering that is competitive. And we've done a lot with service during 2022. So, if you call into the telephone bank, you'll notice that telephone queues are very short today, and they've been short for several months now. So our service has improved quite a bit. We've improved also the access you have and what you can do yourself in the app. And then we have a slightly lower price compared to what we had about a year ago. So it's about finding the best combination of these based on what customers want. Obviously, in the end, I mean, we want to improve the service as much as possible.

We think the customers appreciate that. But obviously, there's a lot of competition in the market. Mortgage growth in the market is very, very low. It's basically zero at this point. So -- which means that a lot of banks are chasing less volumes and that increases the competition and that's one of the main reasons behind why mortgage margins are so depressed at this point.

Andreas Hakansson

Okay. Thanks. And then, Johan, when you talked about capital, you mentioned M&A. Could you tell us -- I would assume it's -- we're talking about smaller transactions. But within what areas would you be interested? Is it asset management? Is it international? Or what would fit your strategy?

Johan Torgeby

When I said it, I meant corporate finance, M&A advisory, so I didn't mean SEB M&A, but I'll answer the question as I meant that. So there is no -- in the plan we decided off with the Board yesterday, there is no M&A included. So the organic stance, the base case for what we are talking about costs, capital, everything on this call is assuming no meaningful acquisitions or disposals by SEB. That doesn't mean that things can't happen.

As things happen in the market, we always have to look at it. It's our fiduciary duty. And there are, of course, areas where we could expand. But the -- so it's very clear. There is no M&A in the current plan. Should there ever be one, we would, of course, have to come back because that would change how we view the statements that we see today.

Andreas Hakansson

That’s clear. Thanks so much. That's it.

Operator

The next question is from Sofie Peterzens with JPMorgan. Please go ahead.

Sofie Peterzens

Yes. Here is Sofie from JPMorgan. So I just wanted to go back to the cost target because if I assume the average FX rate for 2022, and I look for the euro versus SEK currently, it's almost 5% higher. So if I adjust for the latest FX rate, does it mean that I get to SEK27 billion or does it mean that I would get more to SEK27.5 billion, if I can get offer? And like if we take the kind of current FX rate, what would the cost targets for 2023 will be? That will be my first question.

Masih Yazdi

Yes. I don't know what the current FX rate is compared to the average for 2022. But you're right that it's probably sort of worse in the sense that the cost target we've given out would imply a higher cost level. So if -- so the interval we've given out is based on uncertainty around inflation, not uncertainty around FX. So if inflation is such that we would land at SEK27 billion, and then you would have to add whatever FX does on top of that. So yes, it is possible that we end at SEK27.5 billion if FX rates move in the direction of that.

But recall, if you look at 2022, the FX effect of our cost line was about SEK0.5 billion, but we had a positive FX effect on our income line of SEK1.3 billion. So whatever you do -- so we are more profitable and have a lower cost/income ratio outside of Swedish kronor than we have in Swedish krona. So, a weakening Swedish krona, although it increases the cost level of the bank, it actually improves the profit level by more. So in the end, the net effect of a depreciating Swedish krona is positive for our results.

Sofie Peterzens

Okay. That's very clear. And could you just kind of reiterate your rate sensitivity guidance? Does it still hold SEK750 million for a 25 basis point rate hike in Sweden and another SEK250 million in the Baltics? And could you also just remind us what your rate sensitivity is 25 basis point got in interest rates?

Masih Yazdi

Yes. So if you look at that guidance, that was based on that we don't pay anything on transaction accounts when rates go up. And that obviously, we don't pay anything on the equity base that we hold. So with the same assumptions, you would have the same sensitivity. The question now is, can you make the same assumptions? Is it reasonable to believe that if rates go up further than they have that we wouldn't have to pay anything on transaction accounts? And what we're saying now is that, at this rate level, that assumption is less likely to hold.

So competition in the market is more likely to lead to banks generally having to pay up for all types of deposits in line with interest rates moving upwards or downwards. So what we do have is, obviously, the equity base of SEK200 billion, which we don't pay interest on. So it's -- with the same assumptions, it's the same sensitivity. You can just question the assumptions more at this point in time. So that's the point we want to make.

There is still some tailwind from the rate hikes we've seen so far. So, obviously, the whole lending book hasn't been repriced. That's going to happen over time. It takes maybe up to two years before that happens. So I think there is still some tailwind from the hikes we've seen. But the question is, will there be further potential tailwinds if we get additional hikes at this stage? And I think that's a much more sort of uncertain issue.

Sofie Peterzens

And then you also have some headwinds on NII from higher wholesale funding costs. My understanding is that, they are also funding go in to reprice all at ones.

Masih Yazdi

Yes. Well, the question is how those potential headwinds are offset by. On the lending side, I would say that, if anything, lending margins are depressed at this point relative to credit spreads. So hopefully, going forward, we could have some improvement in lending margins. And obviously, that's related to the wholesale funding costs. So net-net, hopefully, that will be positive going forward.

Sofie Peterzens

Okay. That's very clear. And then just a final question. You did SEK1.4 billion provision for Russia writing down the equity base. Or do you still have SEK7 billion of exposure to kind of Russia? How should we think about any future write-downs? And if you don't believe there will be any more write-downs against Russia, why is that? What makes you profitable?

Masih Yazdi

Yes. So we had SEK1.6 billion of equity in our Russian business. We've written down SEK1.4 billion of that. So the maximum additional potential risk we have is SEK200 million. The deposits we have in addition to that is customer deposits that we're taking from customers and place at the Central Bank, and we have parent guarantees for those deposits.

So, even if you would assume that there will be any losses related to those deposits, which is just -- well, it couldn't happen. But even if you assume that we still have SEK1.6 billion of equity in the subsidiary that could cover any potential losses for the parent bank, we have impaired that. So, yes, I would say the maximum potential further impairment in Russia is SEK200 million.

Sofie Peterzens

But why wouldn't you see any write-downs on the asset side, considering that most other European banks have written down most of the assets that they have in Russia? Why would you only see it on your equity?

Masih Yazdi

Because it's not our assets, it's the customers' assets, it's their deposits that we take in and we place it in the Central Bank in Russia. So it's not our own assets, and we have parent guarantees for those assets. These are Nordic companies or German companies doing business in Russia, it's not our assets. If you're asking about lending, it's very different if you compare to other international banks in Russia because we don't have any Russians in Russia.

We are only there for the Nordic and Northern European companies that we already have. And therefore, there's no real exposure to be compared to if you are a bank in Russia for Russia because we have then a parent company in some of the Nordic countries or in Germany, who has a more often than not a guarantee.

So the credit risk is still going to be on the industrial company, typically speaking, from the Nordics or Germany. And therefore, the credit risk in that sense is the same as the overall bank regardless of the problems that might be created. And that's why that is a separate issue, which we feel very comfortable with compared to the equity -- the money that we own, our money, which we are not allowed to take out, and therefore, we take it -- we do the prudent thing to write most of it off.

Sofie Peterzens

Okay. Thank you.

Operator

The next question is from Rickard Strand with Nordea. Please go ahead.

Rickard Strand

Hi, good morning. So starting off with the first question on Swedish mortgages. Given that you have not hiked prices in line with the competitors recently, but at the same time, sort of a comment that mortgage margins are very low. Would you say that, that indicates that you're more likely to move your prices ahead going forward in line with the sort of peers in general?

And also a follow-up question there on sort of given that volume growth is now approaching close to 2% on sort of an annualized basis. If we start seeing volumes coming down to zero or even negative, just if you could comment how you would prioritize between sort of keeping volumes up between that and sort of keeping your -- protecting your margins?

Masih Yazdi

Yes, Rickard, I'll try to answer that. I can't give you any indication of what we'll do with prices. Going forward, that's going to happen when it happens. And so, yes, we just have to wait and see.

On volumes, we don't really look at the volumes in that sense. We look at customers. So we want to keep good customers in the bank. And whether those customers at any point in time, want to borrow or not, that's going to be cyclical. You're going to see scenarios where they're going to borrow and scenarios where they won't borrow and we won't force them to do either. So -- but we want to make sure that we're going to keep the customers that we think we can service. So at this point in time, you have very low mortgage lending growth and then that's fine. And if it goes up, then that's fine too. That's something that sort of happens in the market. That's not something we can dictate really.

Over time, we think that the mortgage market will rebalance that the depressed margins you can see today are too depressed for that business to be viable, but it's going to happen over time, and it's going to be probably a combination of something happened to deposit margins and something happened to lending margins, and we're going to find a new equilibrium somewhere at some point. But it just -- it's been such a fast-moving environment. So it's very difficult to say whether -- when and at what point this will sort of stabilize. But I'm sure that a lot of things will happen during the course of this year.

Johan Torgeby

And may I add, it's -- I understand the question, and we are having -- we're posting a claim. So let me answer the question about what we are not saying. We are not saying that we're going to be cheaper or have lower volume or less profitability in order to gain market share. That's not part of the strategy. The overall composition of return on equity or profitability in retail banking, you can see the aspiration we have. So we need to both deposit taking, savings and investment, mortgages, cards to kind of fit that bill. And we need to have a competitive offer that clients like to choose, both with the right price and the right service.

So that's how we box it in. What that's going to lead to in terms of dollars, euros and kroner next year, volume, I don't know. But it's just like Masih said, it is important that we maintain our position in the market, and this has gone so fast. And the heights you referred to, some of them were a few days ago. So we are talking about real-time, and we don't change the mortgage price every day, but there are -- there's a little bit of lag and the time -- and timing issue in this discussion.

Rickard Strand

Then a follow-up question also on the SEK300 million overlay you do on commercial real estate. I guess, this is an overlay, you have not really started to see any impaired asset quality yet. Or if you have -- or how do you expect the timing of this sort of to play out for your customers there? Where you're somewhat more concerned compared to previously?

Masih Yazdi

Yes, you're right. We haven't seen anything yet. So the underlying portfolio, both in CRE and the balance sheet in general looks very solid. Nothing has happened. As I said before, we are trying to stretch the accounting rules to the extent that we can to be prudent and take into account what potentially could happen. If I just give you an example.

So here, we have assumed that we will have defaults in parts of the portfolio and that collateral price will go down by 20%. If in a year's time, this hasn't happened, then we have to rethink this and see whether we should recover this overlay. Or if something more sort of negative has happened, then we would have to do the opposite, maybe add a bit more in overlay if nothing has happened to the other line portfolio.

So this is something we will reassess basically every quarter and whether it's going to be sort of higher or lower than this amount that we have put aside at this point, it just depends on market developments. But for now, there is no difference or no change in the underlying quality. If anything, during the quarter, as you can see, our Stage 3 loans came down and the reserves we have come down less. So we have more reserves relative to any potential issues in the balance sheet today than we had prior to Q4.

Rickard Strand

Thank you.

Operator

The next question is from Namita Samtani with Barclays. Please go ahead.

Namita Samtani

Hi, thanks for the questions. My first one is, what confidence can you give us that the investment of SEK800 million to SEK900 million has a decent return? And who is accountable for this? Because if I look at asset management flows, they've been negative for the past few years, and this has been an area where you have stated previously where investment spend has gone.

Masih Yazdi

Yes. I'll start, if Johan came support me. I think that's a good question. It's very difficult, obviously, to evaluate the investments you do, especially in the short-term. We have now allowed the cost base of the Bank to increase for four years or so after keeping it flat for 10 years. The only thing we can see at this point is that when we compare ourselves to other banks, we have seen a higher income growth in the last four years than others have, which clearly sort of is over and above the cost inflation we've seen. But it's, at the same time, it's difficult to conclude whether that income growth is fully driven by the additional investments we've done or if it's something else.

And then it's difficult to say what would have happened if you take your example of the asset management business, if we hadn't done the additional investments, how would the flows look like in that scenario. So that you should compare with, but it's difficult to know what that -- how that scenario would look like. We have sort of accountability on all of the investments based on who's responsible.

So what division is the investments going into, and then we have KPIs we follow for every part of the bank and make sure that they are following the trajectory that we have assumed that they need to follow, given what we allow them to invest. So I can assure you that we have good accountability in the Bank when it comes to the investments that we do.

Namita Samtani

And then I've just got a question on ESG, because I saw this article and Dagens industri, stating SEB is one of RWEs that German energy company, main banks for financing. But the article states, SEB's support undermines the global climate goals and violate the Paris agreement. It also states it violates SEB's policy, which excludes loans to companies whose operations are more than 15% of coal operations. So I'm just wondering, are these comments true from the article? And do you have any additional comments?

Johan Torgeby

Yes. I can take that. I would start normally by saying we don't comment on a single relationship. At this time, I'll make an exception, because we asked RWE and had it as part of the update on the sustainability representation we gave quite recently. This is a very tricky area. So there is not an answer if it's true or not. It's a matter of opinions. People think very differently about RWE or any utility who is not 100% renewable.

We have a luxury position here in the Nordics, not because we are great or better than anyone, but Sweden and Norway particularly has an extremely high density of non-fossil energy generation. We are a very large bank in Germany and no other Nordic banks is at all comparable to us.

So if you were to look at a corporate bank who is in Germany, you would not look like you are a corporate bank in Sweden. You will, by nature, have a lot more fossil dependence. And as you might have seen, gas is now being increased quite a lot, and there has been coal-fired plants, and there has been a lot of oil discussions since the invasion of Ukraine, and it's pretty clear to everyone, this is huge investments going in. This is the explanation why it is correct when you compare us to our peers around this square, what we said that we are the only large corporate and investment bank in Germany.

The financing, I actually explained on the corporate day, it was the acquisition of Con Edison Energy. So it was a $6 billion. So it's absolutely correct, we did part of that financing together with a large group of international banks, and it was 100% renewable investment, which was not a part of the narrative in the paper.

Namita Samtani

Okay. Thanks very much.

Operator

The next question is from Piers Brown with HSBC. Please go ahead.

Piers Brown

Yes, good morning. Maybe just a final question for me on the CRE overlay. I wonder if you could just explain how you factor refinancing risk into your models and your assumptions, because when I look at the CRE sector in Sweden, it looks like the main risk is not really collateral values per se, it's the possible inability of these customers to refinance, particularly in 2024, if the wholesale markets remain shut. So if you could just maybe shed some light on what sort of assumptions you're using for cost of debt for these companies as we move into next year, that would be very helpful. Thanks.

Johan Torgeby

Yes. I'll try to do that, it's probably a bit too detailed, we have to ask the risk organization exactly how they've done that. But I know what factors they've looked at. So they've looked at capital market dependency, access to equity, for example, and exactly where they've sort of put the thresholds and how much access you need to have and how dependent you need to be. I actually don't know the details.

But these are sort of, to some extent, crude assumptions that you take a portion of the book, you look at what kind of dependencies you have, and you assume that 10% of it will default and then you assume a certain decline in collateral values in that scenario. And then the model gives you a potential loss in that scenario, which, in this case, is about 300 million. So that's sort of how -- what we've done.

Just to note that when it comes to collateral values, they are unchanged to-date. So even though we've had this volatile environment for about a year or so, nothing has happened to collateral values, mainly because rents have gone up equal amount compared to discount rates for the collateral. So as I try to say, I mean, this is as much as we can do. We want to be prudent and conservative, and this is as much as we can do given the outlook we have today.

If the outlook changes and if things deteriorate, then it could be possible to take further reserves, portfolio overlays or if something materializes in the portfolio, then these overlays could be used against any potential underlying deterioration of that credit book. But so far, nothing has happened, and we are trying to be prudent.

Masih Yazdi

And may I just add, it is a cash flow, first and foremost, dependent analysis. Thereafter, it's an event of default announces where LTVs come into play. But that's after the event where you cannot, as a real estate company, meet your legal obligations to repay loans or other things. And we did show a few quarters ago, one of, I think, could be helpful, that where we put in, was it 200 basis points, we just increased the funding cost or we put STIBOR at the time we increase it to 4%. And we just check the interest cover ratio.

And you could see there that no one in that scenario we did a few months ago was breaking the one. And it's still the case. I hear my Head of IRs telling me. So that is still a valid analysis. So we have to do this, what we've done here. We have to put something on top, which is not easy to -- you cannot really calculate it. It would indicate zero increased risk. And here's the forward-looking, like liquidity risk, equity markets tells you something about what they think about the outlook, but they are not particularly part of the liquidity model or the credit risk remodel. So this is what we've done.

Piers Brown

Yes, that's interesting. And then I guess, if I look at the wholesale markets, it looks like these companies would probably need to be paying 7% plus to rollover wholesale debt. From what you're saying, the spreads the banks are asking for are putting the cost of debt from a bank perspective on a lower level. So 4%, do you think it's still a sort of realistic number for kind of sort of model the --

Johan Torgeby

No, no, sorry, we are using the credit spread, which you alluded to. We are using the reference rate. We put it up. So we increased -- if it's 7% in your example, it would be 9% or 10% that we would assume. But many of these would even pay 10% or 20%. So it's not a credit spread widening number I gave you. It's actually the benchmark number, which is a different assumption. So it's all clear.

And then the analysis we do is not on the market. So that is on our clients that we have. We have, of course, a very ample ability to service existing clients. As Masih said in the beginning on the CRE strategy, we will support the clients that we like and that we have. But we don't have an -- and that means that's very different from saying that we would increase or do more CRE. We will not -- we're very cautious continues to be that. But if we have clients that are depending us, also if they have bond maturities that they might struggle with, of course, we're going to be there. That's what we do. We do the bonds and we do the loans to support them.

Piers Brown

Okay. That's very helpful. Thank you very much.

Operator

The next question is from Riccardo Rovere with Mediobanca. Please go ahead.

Riccardo Rovere

Thanks a lot for taking my questions. Just to get back one second to NII. If I recall correctly at the beginning of the call, you stated that we have some items, some traveling between NII and NFI in the quarter so that one is a bit understated, the other one may be a bit overstated. Now knowing that this is probably a volatile item, would you be in the position to, let's say, to throw a ballpark on what you think might have been the traveling path between these two lines. This is the first question.

The second question I have is on capital repatriation. Just to understand, the SEK1.25 billion buyback consumes roughly 15 basis points of capital. It's not exactly effective in helping you achieving 15% ROE target. My understanding, and please correct me if I'm wrong, is that you intend to -- you see this SEK1.25 billion as a quarterly buyback. So we should assume this to keep going more or less at the same level every single quarter over the course of '23, provided, nothing really horrendous happens this year, do I get it correctly?

And then the other thing I want to -- then is a curiosity. Why impairment in Russia now are not six months and not at the time of first half results '22, even then sanctions have been there since a while, why now?

Johan Torgeby

Okay, Ricardo, on the NII and NFI traffic, it's difficult to quantify what the amount is. I think if you just look at market risk rates, mainly the three months' time, where you'll see that it dropped quite dramatically in the beginning of October, and it took some time for that to recover and sort of be at the past, it should be at, given the expectations of policy rates from the Swedish Central Bank. So it's that drop I'm referring to, and there were a lot of fixings on the corporate book in relation to that drop.

So those fixings were probably at lower levels than they otherwise would be. And now when the -- those fixings will be done again in December, January, it will be at sort of more correct levels. And exactly what the effect of that is, it's just -- it's difficult to say. I was just referring to the question I got whether there is anything additional in NII, I think if anything, the opposite in Q4 that it's probably slightly understated.

On capital repatriation. So the SEK1.25 billion we're doing until the AGM is not a guidance of what we will do post the AGM. It could be a higher amount. It could be a lower amount, it could be the same amount. The only guidance we can give at this point is that we plan to be within our target range of 100 basis points to 300 basis points by the end of 2024.

And whether that's going to be reached by increasing buybacks or doing anything with a dividend or growing faster or buying something, we can say or obviously, an accident happens and credit losses increased, because the environment is uncertain, we can say at this point, we only know that that's where we want to end up by the end of 2024.

And then finally, on the impairment in Russia, I think, if anything, I mean, we are being conservative in that impairment. And just to be clear on that, we still have that equity in Russia SEK1.6 billion, and we will do what we can to make sure that, that comes back to the parent company and the shareholders of the Bank. We just feel that at this point in time, it's going to be difficult to guarantee that's going to happen anytime soon.

But it's been -- it takes some time to conclude that this is a restriction that will be in place for some time, just as difficult it's been to conclude whether the war is going to continue for a long period of time. And these rules have sort of stabilized themselves during the course of the year. And we felt that in Q4, we could discuss this with the authors and allow ourselves to be prudent and make this impairment. So that's the reasoning behind it. Yes, it takes just time to understand exactly how things will pan out.

Riccardo Rovere

Right, thanks. Thanks a lot, very clear. Thanks.

Operator

The next question is from Martin Leitgeb with Goldman Sachs. Please go ahead.

Martin Leitgeb

Good morning. Thank you for answering -- for taking my questions and thank you for your time today answering all the questions. Really, just one question from my side. And I was just wondering, the strong NII trend in the fourth quarter, the strong progression in NII over the last essentially two years. Do you think the 4Q '22 NII trend represents peak NII, peak NIM for SEB? I'm just trying to squaring up all the various comments in terms of NII progression from here and that would shape -- there are a lot of moving parts. But I was just wondering from today's perspective, looking at implied policy rate, looking at the assumption in terms of mortgage pricing, deposit attrition and migration, would you expect NII on a quarterly basis to continue to edge higher? Or is there potential for this to either stabilize or even decrease from here? Thank you.

Masih Yazdi

Yes. Good question. It depends on what view you have on all the types of margins and policy rates. It's difficult to say. I guess if policy rates go higher than they are, that increases the likelihood for NII to continue to go up. If policy rates are cut, that increases the likelihood for NII to go down. In addition to that, I'll just say that we probably still have some tailwinds from the policy rate changes we've seen during 2022 as the whole balance sheet hasn't been repriced at the higher levels.

So that's pretty much the guidance I can give you. And then you have to add your own assumptions of loan growth going from here. And obviously, everything that's going to happen with margins. But yes, that's -- I don't know if Johan, if you want to add something.

Johan Torgeby

Maybe I could just step back and spend two minutes on the history. So you understand that why the benefit is coming? Is that for households and for the majority of non-financial corporates? We never introduced the negative interest rates. So we have had many years of zero or negative cash flow or profitability we wouldn't even speak to. And this is why this enormous shift is happening that as we never lowered the savings rate or the interest rate on deposits for a year or 2, when still the policy rates were going down, that was just put more and more in the rent. Now this with enormous speed and power reverses. And right now, we are normalizing the interest rate level in the economy, and we're all trying to adapt and it takes a year or 2. That's what the positive is.

So I don't know where it's going to go from here, but it is reasonable to assume that whatever has happened will not happen again, because we're not going to -- from now on, go from negative territory to significantly positive normal rates. That's just what I wanted to add.

Martin Leitgeb

Thank you very much.

Operator

The next question is from Jacob Kruse with Autonomous. Please go ahead.

Jacob Kruse

Hi, thank you. Just to follow-up on one of the questions from the floor. Would you be able to just say anything about -- in the treasury NII, how much of that was currency transfer pricing? And if there were any other effects impacting that weak treasury income line? And I guess related, when you talk about this NII versus trading income moves, if you could say anything, to what kind of magnitude you're talking about there? And then finally, on NII, just in the Baltic, the strong NII growth in Q4, does that -- to what extent does that fully reflect the rate hike already seen? And how much sort of additional tailwinds from rate hikes already happening -- would you expect to sort of see in Q1 or Q2 this year? Thank you.

Masih Yazdi

Yes. Thank you, Jacob. On Treasury, this quarter, it's a fairly small proportion of the NII drop in treasury that's related to internal funds transfer pricing. As you can see in the report, it's more now related to that the cost of short-term funding has increased, which has impacted treasury's NII negatively. On the traffic between NFI, I can't really add anything on that. It is probably slightly understated, but exactly the magnitude of that, I don't know, and it's difficult to estimate, I would say. But we'll see, obviously, in the coming quarters.

On the Baltic NII, it's probably so that there is still some tailwind there because of rate hikes we've seen. And I would assume that since ECB is slightly behind or the rate hikes have come slightly later than the RICS bank, you probably have a bit more effect from further hikes going from here into Baltic business. And as you can see, we have clearly more deposits relative to lending in the Baltic division compared to what we have in the Group as a whole. So while it's prudent to assume that further rate hikes in Sweden wouldn't add too much, it's more likely that in the Baltic business, there will be some benefits going forward.

Jacob Kruse

Okay. Thank you. And are you seeing any sort of dynamic moves there already in terms of competition or deposit flows or anything like that, that's been going on in Sweden in the Baltic business?

Masih Yazdi

No. I mean you can see in the disclosure that in the quarter in CNPC, there were some flows, fairly small, from transaction accounts to saving accounts. So we're seeing that customers are starting to understand that if they shift money from certain accounts to other accounts and maybe to some extent, lock in their deposits, they can get a better yield. So that process is ongoing and probably that's going to sort of continue for the coming year when people now adapt to positive rates and yes, try to manage their portfolios.

Jacob Kruse

Okay. Thank you very much.

Operator

The next question is a follow-up from Andreas Hakansson with Danske Bank. Please go ahead.

Andreas Hakansson

Yes. Sorry for that. It's been going on for a long time already. But just on your -- we saw a macro report from you guys coming out just a couple of days ago, where you actually started to upgrade a few of your GDP forecasts. Were these assumptions that went into IFRS 9 model? Or was it from a previous report where you were cutting GDP forecasts?

Masih Yazdi

Yes. No, it's the previous report. So it's based on what we had in -- back in November, really. And obviously, these estimates or whatever they will be revised to later in Q1 will be used for the Q1 sort of IFRS 9 overlay or macro assumptions. So you're right that there were some smaller positive revisions.

Andreas Hakansson

That's it. Thank you.

Operator

Mr. Torgeby, there are no more questions registered at this time.

Johan Torgeby

Okay. Then I'll thank everyone for spending a bit more than 1.5 hours with us. Very much appreciated, and we hope to see you soon. Thank you very much.

Operator

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.

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Skandinaviska Enskilda Banken AB (publ.) (SKVKY) Q4 2022 Earnings Call Transcript