SWDBF - Swedbank AB (publ) (SWDBF) Q1 2023 Earnings Call Transcript
2023-04-29 22:22:04 ET
Swedbank AB (publ) (SWDBF)
Q1 2023 Earnings Conference Call
April 27, 2023 03:00 ET
Company Participants
Annie Ho - Investor Relations
Jens Henriksson - Chief Executive Officer
Anders Karlsson - Chief Financial Officer
Rolf Marquardt - Chief Revenue Officer
Conference Call Participants
Andreas Hakansson - Danske Bank
Magnus Andersson - ABG
Maths Liljedahl - SEB
Rickard Strand - Nordea
Maria Semikhatova - Citibank
Namita Samtani - Barclays
Martin Leitgeb - Goldman Sachs
Johan Ekblom - UBS
Presentation
Annie Ho
Good morning and thank you for joining our presentation of Swedbank’s First Quarter 2023 Results. My name is Annie Ho, Head of Investor Relations. And in the room with me today is our CEO, Jens Henriksson; our CFO, Anders Karlsson; and our CRO, Rolf Marquardt. Let’s begin as usual with our presentation and then follow up with a Q&A session.
And with that, I hand over straight to Jens.
Jens Henriksson
Thank you, Annie and warm welcome to this presentation of Swedbank’s result for the first quarter of 2023. And it’s a very strong result in uncertain times. The quarter was defined by the war in Ukraine, slower economic development, rising interest rates and turbulence imports of the banking sector. In this Swedbank stands strong. Our liquidity is strong, our capital situation is strong, our credit quality is good, and our proven business model delivers. Swedbank is a sustainable bank, and a sustainable bank is profitable bank.
A few weeks ago, the world’s central bank governors and finance ministers met at the annual spring meetings in Washington, D.C. And the IMF is forecasting global growth below 3% this year, but the uncertainty is unusually high. The rapid transition from long period of low rates to high interest rates is creating problems and vulnerabilities. The growth in Estonia, Latvia, Lithuania is fluctuating around zero. And in Sweden, our economists expect a drop in GDP of 1%. Inflation has begun to fall in all our home markets, but from very high levels. As a result, real wage growth was sharply negative in 2022 and will continue to fall in Sweden 2023.
In Sweden, employers and industrial unions nevertheless reached a 2-year collective bargaining agreement with annual wage increases of 3.7%, and this is a major success for the Swedish wage formation. And with the very strong public finances and competitive industry, Sweden will be in a strong position when the economy turns around next year. And in these uncertain times, Swedbank delivers strong quarterly profit of SEK7.6 billion and a return of equity of 17% with a cost/income ratio of 0.37.
Compared with the last quarter, net interest income increased by 9%. The margin on deposits continued to rise, but at a significantly lower – slower pace. The margin on mortgages in Sweden continues to fall during the quarter by 14 basis points. Net commission income increased by just over SEK200 million. Net gains and losses was again strong and other income was up. Expenses decreased by SEK80 million due to continued cost control.
On the other hand, we reported an administrative fine from the Swedish Financial Supervisory Authorities of SEK850 million in the quarter due to mistake during an IT change in 1 system 1 year ago. In addition, we have reserved SEK40 million as we now can assess the financial consequences of our discussions with the U.S. Office of Foreign Assets Control which have been ongoing since 2019.
Swedbank’s capital position is strong and we have a buffer of 390 basis points relative to the capital requirement. During the quarter the annual general meeting decided upon a dividend of SEK9.75 over to our owners, savings banks, insurance companies, mutual funds, other investors, individual savers and foundations that in turn distribute funds to projects, that makes our societies stronger. Half of our return is reserved for our owners and the other half is used to develop our business.
Our credit quality remains good due to our thorough and conservative origination standards. And the provisions for individual exposures amounted to SEK10 million in the quarter. But due to the worsening macroeconomic outlook, we have credit impairments of around SEK800 million in the quarter and beyond what the model tells us our expert adjustment has been raised by SEK200 million. As a result this extra reserve now totals close to SEK2 billion. And our exposure to anything property related is in line with the bank strategy and risk appetite. Our customers have taken – continue to take measures to handle the worsening of the economic conditions.
Cyber threats continue to be an important issue in society and we are well prepared. Investments and hard work with our IT systems have produced results. The bank’s digital availability is above target. Digital fraud is a societal problem that hit many customers, and that is the reason we, together with other Swedish banks, have launched the campaign [Foreign Language] or Hard to be Scammed.
The work to reach a sustainable return on equity of 15% by 2025 is underway. One way will be through helping our small and mid-sized corporate customers to grow sustainable. And to better meet their needs, we have reorganized the bank’s corporate services. Consequently, Large Corporate and Institutions, LC&I, is now changing name to Corporates and Institutions C&I.
During the quarter, corporate activity varied by country and sector. In Sweden, corporate lending increased slightly, while it decreased in Norway due to drop in utilization of revolving credit facilities and our Norwegian oil portfolio. Also, we had a client transfer to our strategic partner as our bank and this is in line what we communicated in our 15/25 plan. In the Baltics, the demand for business loan is stable. We are focusing on existing customers and are there for them while maintaining a thorough and conservative lending origination standard. Corporate deposits increased slightly on a seasonal basis while deposits from private customers decreased. Savings accounts with interest rates are attractive to our customers.
In Sweden on-demand savings accounts pay 1.1%, while you for instance, can get the 18-month fixed term deposit that pays more than 3.5%. That’s a strong offer in tough competition. And we are keeping pace with the market and as always, are committed to having the best full service offering. We are proud of our extensive savings options and I’ll be giving renewed vote of confidence by the ITP occupational collective pension plan. And there we can now provide new customers with advice on a broad range of topics.
The mortgage market in Sweden is essentially at standstill, while mortgage volumes are still growing slightly in Estonia, Latvia, and Lithuania. The competition is tough in all our 4 home markets, but we are maintaining our leading positions and pricing strategy. And in a shrinking mortgage market, we focus on our existing customers. During the quarter we have seen an increase of amortization – extra amortizations, and as a bank firmly rooted in the Swedish savings banks movement, we embrace this. And we are certain that it will benefit us in the long term. Our cost customer promise is to always provide customer guidance on their terms.
As you know, sustainable personal finances are always based on knowledge. At the same time, our financial health index shows that many people are feeling financially constrained or vulnerable. And we would like to see more people becoming financially stronger by balancing their expenses, building a savings buffer, adding insurance protection and saving for retirement. We have therefore set as a target that we at Swedbank by 2030 want to enable 1 million people in Estonia, Latvia, Lithuania and Sweden to strengthen their financial health. And we will reach that target by meeting more customers face to face and greatly increasing the number of digital advisory sessions with practical advice. That work is already underway, according to 15/25. And we are providing easier access to more advice and digital channels on savings, pensions and insurance. And our investment in new cloud-based communication platform now delivers results with shorter telephone phone cues and stability in Latvia. And that platform will now be rolled out in all our home markets during the year.
Swedbank’s climate position is clear and fully aligned with the Paris Agreement’s 1.5 degree goal. And as a financial player, we have a responsibility and also great opportunities to contribute to climate transition. We have studied the potential to improve energy efficiency of properties in our home markets, and this would contribute both to European energy security and reaching the EU’s climate targets.
In February, I had the privilege together with the Executive Director of IEA to inspire and discuss with all the EU’s energy ministers at their informal meeting in Stockholm. I pointed out that with investments it will be possible to forcefully reduce energy consumption for buildings in our 4 home markets, and here we at Swedbank can make a difference. In Estonia we are working with a University to offer our corporate customers the opportunity to train sustainability specialists. In Latvia we have the business council focused on sustainability. In Lithuania, the focus on sustainable innovation in a program we launched together with ROCKIT, and in Sweden, we have established a collaboration with Hemma to enable more households to buy solar panels or a sustainable heat pump.
During the quarter we have also facilitated the payments of the government’s electricity support to nearly 4.3 million households in Sweden. And our award-winning Virtual Assistant has handled 0.5 million customer queries relating to the payments of the government’s electricity support, resulting in quick responses and efficient processes for both customers and the bank. Swedbank fulfilled the assignment quickly, securely and according to plan, and we are now preparing for the next payment.
Of this, I am very proud, as I am of the quarterly result. And that means that it’s time to give the floor to our CFO, Anders Karlsson. The floor is yours.
Anders Karlsson
Thank you, Jens. And this has indeed been another good quarter – this has indeed been another good quarter with a return on equity of 17% or 19% if we exclude the fine and earnings per share growth of 11%.
So, let’s go into the financials in more detail, starting with deposits and lending. Customer deposits were stable, and there was a positive FX impact of SEK6 billion. Volumes in private savings accounts were stable in Swedish Banking, while transaction accounts decreased by SEK7 billion. This was driven by increased cost of living and extra amortizations compared to last quarter as well as net inflows into equities and funds on the back of a positive stock market development. We continue to see migration from on-demand savings accounts to term savings and in this quarter, it amounted to SEK11 billion.
Deposits in Baltic Banking decreased by SEK6 billion, excluding FX due to seasonality. In Q4, we saw large increase from salary bonus payments and distribution of government’s funds. In the Corporate segment, deposits were up with an increase in short term deposits of SEK23 billion in Large Corporate and Institutions and a decrease of SEK10 billion in Swedish Banking due to higher OpEx and financing costs. The total loan portfolio decreased by SEK10 billion excluding an positive FX impact of SEK3 billion. In Swedish Banking, SEK4 billion out of the SEK7 billion decrease was from private mortgage lending. The trends from last quarter continue, where new mortgage market volumes are very limited and extra amortizations by our customers have been on a higher level than usual.
In Baltic Banking, mortgage lending increased by SEK1 billion excluding FX, while corporate lending was stable. In Large Corporate and Institution, the decrease of SEK4 billion excluding FX is driven by Norway with repayments of RCFs in the property management sector, client transfers to asset bank and a small reduction of the oil portfolio. In Sweden corporate lending in LC&1 increased slightly.
Now looking at the revenue lines, which were all higher quarter-on-quarter. Net interest income increased by SEK1 billion quarter-on-quarter driven by a continued expansion of net interest margin as a result of higher deposit margins in Swedish and Baltic Banking. Overall lending margins were lower for private and slightly higher for corporates. The factors impacting NII are similar to those seen over the last couple of quarters, increasing market rates and the level of passthrough we can maintain on our lending and deposits. In terms of outlook, our macro research team forecasts further rate hikes in the first half of the year from the ECB, and the Riksbank even after the one we saw yesterday.
Let me reiterate our belief that the NIM expansion is expected to narrow, the higher the policy rates go. In this context, we will continue with our pricing strategy and strive to strike an optimal balance between volumes and margins, subject to changes in risk, market rates, market growth and competition. Over to net commission income, where all key commission lines were higher. Card commissions were higher, thanks to Mastercard discount of SEK100 million during the quarter. Asset management performed well on the back of higher average stock market levels. In Sweden, Swedbank Robur saw inflows of SEK5 billion, which mostly went into equity funds. And over the quarter, Robur increased its total assets under management market share from 21% to 21.5%. Securities and corporate finance improved due to higher ECM and DCM activity.
Turning to net gains and losses, which was strong. Fixed income and FX sales and trading performed well on the back of high client activity. And within treasury, the key positive component came from revaluation effects of funding-related swaps. Other income increased by SEK32 million, primarily driven by a revaluation effect, resulting in a higher net insurance in Baltic Banking. Total expenses ended at SEK6.4 billion. Excluding the fines that Jens mentioned, expenses were SEK5.5 billion, which is SEK80 million lower quarter-on-quarter.
Our underlying cost development is as expected. We have strict cost discipline. We have an investment plan and inflation has been the key headwind. You can see if you compare this quarter with the first quarter 2022, an increase of cost of 12%, but stripping out a couple of items affecting that comparability such as the Baltic winter allowance, which was SEK90 million, ending in March; FX, which amounted to around SEK110 million; and restructuring cost related to Pay, it’s around SEK60 million. The reasons for the increase were higher salaries, IT maintenance and IT depreciation. This is in accordance with what we communicated previously. The cost/income ratio went from 0.35 to 0.37, or 0.32 if you exclude the fines quarter-over-quarter.
Now, over to you, Rolf, to talk about asset quality and credit impairments.
Rolf Marquardt
Thank you, Anders. Economic development is increasingly impacted by inflation and interest rates. This is putting pressure on many households and is weighing on consumption as well as the wider economy. In this situation, Swedbank’s asset quality is solid. In the quarter, credit risk indicators were stable, reflecting that our customers are – generally have a good ability to manage the changing conditions.
When looking at payment behavior, past due loans increased somewhat for private customers in Sweden, but were at very low levels, while they were stable in the Baltic countries. Past due loans for corporate exposures were stable in all home markets. It is reasonable to expect that some customers gradually will find it more difficult because of this worsened macro situation, which may lead to individual credit losses. This is what is embedded in the provisions we have made in this quarter and previous quarters. In the first quarter, impairments were once more almost exclusively related to the updated macro forecasts. Credit impairments ended at SEK777 million, out of which updated macro forecasts made up SEK348 million.
Credit migrations and stage transfers added SEK278 million. Out of this, Swedish Banking accounted for SEK170 million. This was mainly explained by migrations in construction and retail. We also saw migrations in private, predominantly with very low risk. Large Corporate and Institutions added SEK86 million and Baltic Banking, SEK21 million. Credit migrations were also impacted by the macro update, which caused some Stage 2 transfers.
Moving to individual assessments, which ended at SEK10 million. The export portfolio adjustment was increased by SEK198 million to SEK1,937 million. The overlay relating to property management was increased by SEK310 million. This is a cautious move to reflect the potential sector implications from the macro development. At the same time, smaller reductions were made in various sectors.
Our strategy in property management is to focus on companies with strong cash flows and collateralized lending. The average LTV for the property management portfolio was 53%. The sector has continued to do well in 2022 and early 2023. Vacancy rates have been stable and rents have been increased. But there are also challenges in this sector. Interest rates and inflation have started to feed through into the interest coverage ratios, but they are still at solid levels. Companies are managing their liquidity and balance sheet to adapt to the new conditions. This includes divestment of properties, capital injections, bond buybacks, canceled dividends and CapEx reductions. Taking all this into account, we are comfortable.
I would also like to briefly cover our mortgage portfolio. As you know, this is a truly low-risk portfolio. On Swedish mortgages, we have lost in total SEK1.8 billion over the last 40 years, the Swedish Banking crisis included. The average LTV is 57%. The distribution is also sound with less than 4% of the lending volume with an LTV exceeding 70%. As I initially mentioned, we have seen a slight uptick in overdue payments, but they are at very low levels. This is also in-line with past experience when interest rates have increased without causing credit losses. Overall, we are comfortable with our asset quality.
And with that, back to you, Anders.
Anders Karlsson
Thank you, Rolf. Turning to liquidity and capital, Swedbank’s liquidity position is strong. We have a liquidity reserve of around SEK700 billion, of which 52% is in cash deposited at central banks, while a further 38% are invested into 1-week Riksbank certificates. In addition, we have an over-collateralization in our recovered pool of 206%, equivalent to additional issuance of around SEK720 billion. I refer you to Slide 24 in the appendix for more details.
Our CET1 capital ratio stands at 18.3%, while the buffer above the minimum regulatory requirements, are around 390 basis points. Regarding expected future capital requirements, the countercyclical buffer in Sweden will be raised by another 1 percentage point in the second quarter this year. The capital target range of 100 to 300 basis points remains, and our capital positions continue to be strong.
I now hand over to you, Jens, to conclude.
Jens Henriksson
Thank you, Andres. And I understand that there was some technical difficulties in hearing everything. I apologize for that, but I’ll summarize it very neatly. So Swedbank stands strong in uncertain times. And we delivered a strong profit with a return on equity of 17% and a cost/income ratio of 0.37. Our liquidity and capital position is strong. Our credit quality is good. Our proven business model is delivering as promised. A sustainable bank is a profitable bank. You all know that our vision is a financially sound and sustainable society. And during the quarter, we’ve taken two clear initiatives. We give our customers the opportunity to strengthen their financial health through an ambitious target for advisory services, and we contribute in the fight against global warming by financing investments through energy-efficient properties or to once again summarize the quarter in two sentences: a sustainable bank is a profitable bank, and our customers’ future is our focus.
Thank you. And with that, I give the floor back to you, Annie.
Annie Ho
Thank you very much. Let’s open the floor for Q&A. I’ll hand over to the operator.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Andreas Hakansson from Danske Bank. Please go ahead.
Andreas Hakansson
Thank you and good morning, everyone. Starting with asset quality, since I think that’s been the focus of some people this morning, and you stand out having taken more provisions than some of your peers. When I look at your development in Stage 2 and Stage 3, I mean, Stage 3 didn’t move. But Stage 2, we saw quite a big increase, not at all on commercial real estate, actually fell, but on retail banking. Could you tell us what drove that increase? And how much provisioning do you really see against that increase? That’s the first question.
Rolf Marquardt
Thank you, Andreas. So the – Yes, correctly, the move in Stage 3 was very limited where it remained at the same level. This is a very technical reason actually, because this is a stage migration from Stage 1 to Stage 2 in mortgage lending, and that is lending with very low level of risk. And the reason behind it is that, when the probability of default levels at the point in time once get impacted by the macro update and come to a certain level, they would be pushed into Stage 2. And the impact from that was SEK23 billion in move, but that also led to an increase in provision of less than SEK20 million, and that shows you the underlying asset quality. And what is actually behind that is also that, during COVID when we had very low interest rates, a lot of new loans with low risk came in. And when the macro scenarios have been updated, and in particular, when interest rates have been increased and interest rate forecasts have been hiked, then that has impacted the macro update and led to that migration. But the underlying credit quality is very strong.
Andreas Hakansson
And do you think there’s any difference between you and the other banks, given that you have taken a bit more provisions or do – you’re just being prudent or do you see some changes or differences in your loan portfolio?
Rolf Marquardt
Okay. So when it comes to – so what I just commented was the stage migration in the mortgage portfolio. But then when then turning into the macro update and the macro impact on provision levels in this quarter or the impairments related to that, I’d like to start in the credit quality end when we look into the bank and what we see on individual exposures. And then we see a really solid situation where we have very limited changes or no changes when it comes to past due loans, when it comes to watch list exposures, when it comes to non-performing forborne measures. So, that is what we see when we look into the bank and what has happened so far. But then turning in another direction, which is how we are supposed to reflect changes in macro through IFRS 9 and how that feeds into potential future credit losses on a portfolio level. And that is – and then we find ourselves in a time where we have repeated changes in the macro forecast. So we had one in Q3 when the situation or the forecast deteriorated. And then once more the same happened in Q4, it naturally led to additional provisions. Now in the first quarter, this has been updated once more. And what has changed is actually the expectations we have on interest rates, so higher for longer, and that is what is behind this.
Andreas Hakansson
Then Anders, just a quick question, you said on your NII outlook that when rates go up, the NIM will expand slower, but that – it’s still going to expand. That’s the message. But it’s just going to be slower than what we saw in the first rate tax, of course?
Anders Karlsson
Correct, Andreas.
Andreas Hakansson
Thanks. Perfect.
Operator
The next question comes from Magnus Andersson from ABG. Please go ahead.
Magnus Andersson
Yes. Good morning. First of all, kind of a follow-up on the NIM question and the situation we have. Given that deposits in Swedish Banking continues to shrink, we had a peak there in June. I mean if you have a situation where deposit margins now will flatten out and eventually start to shrink, do you think that you will be able to offset that with asset pricing? I’m thinking 3-month mortgages, for example, where the – if I use the marginal funding cost, the margins are obviously unsustainably low. And secondly, I know that you have this corporate lending book also that is discretionary price that – you could say something about that? That’s the first question. And secondly, more of a broader base, we can all see, if I look at Slide 2 in your presentation, that you expect rates – short-term interest rates to be significantly higher than you did at your CMD in the beginning of December. And for example, you’ve talked then about the 40% cost/income ratio, you’re now approaching 30%, which is – in underlying terms which is an all-time low. So does this change – or how does this change your scenario? How do you think about that?
Anders Karlsson
Thank you, Magnus. Two long questions. See if I remember it. First, when you look at the balance sheet structure of Swedbank and you look into what’s happening to the deposit side, it’s been – on the savings account side in Sweden, it’s been stable. The migration we have seen within that part of the balance sheet has been from on-demand savings accounts to fixed term. When you look at the transaction accounts, they are down for natural reasons. As I said, cost of living is increasing. We have seen extra amortizations. And just to remind you, we pay zero on those accounts. When you – so as far as I’m concerned, whether it will be offset – we will always strive to have a profitable lending margin as well as a savings or deposit margin, but it becomes more difficult in an environment where market rates are becoming higher and competition will most likely heat up. Then you have Baltic Banking, which is an entirely different story where they have, by tradition, a large portion of their savings in transaction accounts. And as you are aware of – on the asset side, you have an automatic re-pricing effect since lending is connected to Euribor, 6 months. And we actually get a fair amount of money for the surplus liquidity that we place with ECB. So even if it becomes more difficult, there are still some potential for NIM expansion primarily on the liability side. And on your second question...
Magnus Andersson
Sorry, you just pay – you still pay zero on those SEK186 billion in the Baltics?
Anders Karlsson
Yes. On your second question, I think we should be very clear on the fact that that is a cost income target through the cycle long-term, that we believe is a level you should be at if you have an ambition to have a sustainable return on equity of 15% or more. It will vary over time. Now we are in a position, as you know, Magnus, where income has increased significantly. For me, it’s much more important to ensure that we have a strict cost discipline and that we invest into things that will support the 15/25 journey.
Magnus Andersson
Yes. Okay, thank you.
Operator
The next question comes from Maths Liljedahl from SEB. Please go ahead.
Maths Liljedahl
Yes. Good morning. Thank you. Follow-up a little bit more on the NIM and behavior. And if we focus on the Baltics, you mentioned there that there is still zero interest on deposits and still we see deposits relatively stable. Do you see any difference in behavior of people in the Baltics relative to Sweden, for instance, where people are initially starting to amortize more? That’s the first question. And the second, if you could just update us anything how you’re thinking of capital? Because you are obviously very well capitalized even though we are awaiting some more messages from the U.S., but I mean we see that other banks are buying back shares now and continue to do so. How are you reasonable, because you are obviously very well capitalized and that actually hampers ROE development as well? Thank you.
Anders Karlsson
Thank you, Maths. If we start off with the first question, Baltics have – as I said, as a tradition, have traditionally and historically been putting most of their savings into transaction accounts. The ones that can afford to put aside money are doing that, and they are moving into fixed term deposits. When it comes to amortizations, the amortization is much more aggressive in the Baltic countries when it comes to mortgages compared to Sweden. So I do not expect extra amortization on top of what you see. And on your second question – or at least we haven’t seen that. On your second question, you’re perfectly correct. We have a strong capital generation and we will continue to have a strong capital generation. I think we were quite clear during the Investor Day that we have no ambition whatsoever to run the bank with excess capital, if not needed. But as you rightly pointed out, we have one uncertainty still outstanding. And when that is behind us and the sky is clearer, we will definitely revert to you and the investors on what to do on the capital side.
Maths Liljedahl
Okay. Thank you. Very clear.
Operator
The next question comes from Rickard Strand from Nordea. Please go ahead.
Rickard Strand
Hi. Good morning. First question then on asset quality in the Baltics, loan loss provision remains very low in the Baltic operations still. But just wanted to hear if – sort of given the very high inflationary environment in the Baltic region, what could potentially sort of change this picture and force you to take larger provisions here?
Rolf Marquardt
Thank you, Rickard. So, when we look at the Baltic banking situation, it looks solid, and we have seen very limited changes so far. These countries have been through a long period of very high inflation. And although income has been increasing, that has been outweighed by inflation. But what we see is still that customers have good margins to cope with this and have managed well. And the sentiment is fairly good. So, the development is good. What you should also take into account is that the level of indebtedness is lower than we see in the Nordic countries and in Sweden. So, they start from a good level. So, so far, we have no worries about that and see no signs.
Rickard Strand
Thanks. And then maybe it’s too early, but I just want to hear if you have any sort of initial takes on what the potential windfall tax in Lithuania and Latvia could impact you?
Jens Henriksson
Thank you for that question. Could I just say a few words about that, first, let me start with an important thing that we are extremely proud to be the largest retail banking in Lithuania. And we have a long-term commitment to Lithuania as we have for Estonia and Latvia, and these are our home markets. During the last 15 years, we had an average return of equity of 10.2% in Lithuania. And during a time with negative interest rates, we have not charged our private customers for deposits. And we already have the banking tax in Lithuania. And on top of that, rush through a hefty investor tax when our prudent business model delivers, certainly sends the wrong signal to everybody that invest in Lithuania. And I share the opinion of the ECB that the tax reduces the incentive to finance the real economy and will thus be negative for Lithuania both in the short and long-term. The only silver lining I can find is that the very construction makes it hard to make it permanent. And we also got the promises from the government that it would only last 2 years. But since the final details are not done, I mean they are discussing this in parliament right now, it’s too early to estimate the tax cost. And I will get back to you on that. And finally, we are also considering legal actions.
Rickard Strand
Okay. Thank you.
Operator
The next question comes from Maria Semikhatova from Citibank. Please go ahead.
Maria Semikhatova
Hello. Thank you for the presentation. A couple of questions. First of all, if we could start about your property exposure, you continue to provision conservatively, you added to these expert portfolio adjustments over the quarter. Could you maybe comment how much of the overlay you have as of the end of the first quarter for property exposures? And maybe some general comments with this overlay, if this is for the largest borrower, so you identified some valuable exposures? And if there is anything you can say on scenarios? Maybe you looked at price declines or extra interest rates stress test? And then on the stress test that you included in your presentation for 20 exposures, just wanted to check how much this is in terms of your CRE book? And then separately on margins, I appreciate your comments, but maybe specifically for the LC&I division, we see quite sluggish development quarter-over-quarter. I understand it’s quite bulky exposures, but it’s different developments relative to peer, kind of if you see any reasons to expect some margin expansion given the hikes in – specifically in the LC&I segment, or this is mostly done? Thank you.
Jens Henriksson
Thank you. Let me start before I will give the floor to Rolf, so he can go into more details. But overall, we have a property management exposure in the lending book of SEK239 billion in Sweden. And that is the lowest among the three large banks in Sweden. Our exposure is in line with our strategy and risk appetite. And we have for a long time worked with conservative credit origination standards and a focus on the customers’ debt service tolerance and cash flow. We follow our customers closely. And during the last years, they have taken measures to strengthen both liquidity and the balance sheet. And as Rolf said in his introduction, the average DST ratio for our 20 largest property management customers is above 7%. And on top of this, we have collateral with an average LTV of 53%. Looking forward, we are ready to support our core customers’ future if it’s in line with our strategy, risk appetite and leads to well-balanced growth in line with the overall market. Rolf?
Rolf Marquardt
Yes. And then on to the provisioning and how large part of the management overlay, that is related to property management. So to begin with, we have a total provision for the sector of SEK1.4 billion. And that is, to a very large extent related to taking account of the macro situation and the impact on a portfolio level, not related to individual exposures we have. The individual provisions we have is SEK200 million. The part of the management overlay that is related to property management is SEK720 million. And then regarding the stress test we have in the slide pack, that covers the 20 largest property management companies of ours, and that represents a total credit – they represent a total credit risk exposure that is 30% of the total CRE exposure.
Anders Karlsson
And on your last question, when it comes to margin development in LC&I, as you know the duration of the corporate loan book is much longer than our private. So, it takes time. But what we see is that when the company take a traditional bank term loan, we have increased the margins, but that will gradually come in over time.
Maria Semikhatova
And just maybe a quick follow-up because one of your peers mentioned that credit spreads, specifically on lending improved significantly in the quarter. Just maybe you could comment on your exposure if you are seeing the same increase in spreads on CRE and other corporates?
Anders Karlsson
But the point is that when I talk about the back book, and the back book has a duration – new lending has been muted. So, when something is up for re-pricing or we have new originations, we see margins coming up, that’s my point. But it’s – if you look at the back book and the margin development there, it will take time before you see any large visible signs of it.
Maria Semikhatova
Then for LC&I book, what is the average duration, around 2 years, 3 years?
Anders Karlsson
Yes. With the exception of revolving credit facilities, I would guess it’s around 2.5 years to 3 years.
Operator
The next question comes from Samtani Namita from Barclays. Please go ahead.
Namita Samtani
Hey. I have got two questions, please. Firstly, how are you seeing Swedish mortgage applications trend compared to this time last year? How much of a decline are you seeing? And have you been tightening your lending criteria, or does it still stay the same? And secondly, you spoke about transaction deposits in Sweden declining due to cost of living and extra amortizations, which is understandable. But do you believe on savings accounts, you may be losing deposits because you are not as competitive as pays on pricing? So, for example, if I look at a basic savings account, the rates, I think as a starting rate Swedbank pays 110 bps versus SEB at 150 bps, or Handelsbanken at 135 bps.
Anders Karlsson
Okay. If I start with your second question first, and then we will come back to your first question. What I said is that our savings accounts in Sweden has been stable. We have seen migration from on-demand to term, and that is a part of our strategy. The ones that have the ability and need for a higher yield, we will most try to put on to the fixed term, which is a very competitive one. We have not seen much of outflows from the savings accounts over the last six months, but we are closely watching the competition. When it comes to transaction accounts, as I have said – just to give you a flavor of the change in cost of living related to extra amortizations and interest rate costs year-over-year, in our portfolio, the extra amortizations have increased by SEK3 billion from – compared to Q1 2022, and the cost increase has been SEK10 billion due to higher mortgage rates. So, that’s a fact. We watch the competition. And as I have said previously, we will act when we find it necessary.
Rolf Marquardt
And then on to your question on origination criteria, and then I would say, no, we have not changed our origination criteria. But what we have done is to update the affordability calculation that is an important part about the credit approval process. And we have updated it to cater for increased inflation and cost of living. And then we also have the stress interest rate that we do apply. And then the rule is the higher of 6% or the 5-year list price plus 2%, which today would represent approximately 6.5%, and that had implications for how much a person could actually borrow.
Namita Samtani
Thank you very much.
Operator
The next question comes from Martin Leitgeb from Goldman Sachs. Please go ahead.
Martin Leitgeb
Yes. Good morning. First of all, congratulations for the good set of numbers and many thanks for taking my questions. Just two follow-ups, please, on net interest income. I was just wondering, one of your peers flagged that some of the strength in net interest income progression might be temporary as customers adjust to a higher rate environment, and what I believe is meant with that as customers might shift from transaction account into either savings or time or choose to amortize more of the loans. Whilst you are flagging in earlier comments that you would expect a continuation of expansion in NIM from here, I was just wondering what’s driving that? Is that an assumption that the deposit composition is likely to remain more stable within Swedbank? And then secondly, I just wanted to ask whether there was any considerations with regards to paying interest on transaction accounts? Thank you.
Jens Henriksson
Could I start first? We do not have any intention to put rates on transaction accounts. And then you can go there, Anders.
Anders Karlsson
Yes and thank you. Indeed, it was a good result. When we look at the – and I think I know who you referred to, but I will not do the mistake of mentioning them. But when I look at the deposit structure that you can find in the fact book, and we start off with Swedish Banking, around 25% of the savings in the private side is transaction accounts. If I go back to the time when we had higher interest rates in 2006, ‘07, 35% of the savings were transaction accounts. So, we do not foresee any major migration from transaction accounts to savings accounts in Sweden. But as I have said, what we see is the ones who have the ability will migrate from on-demand savings accounts to term. When it comes to Baltic Banking, again, the tradition has been over the years to put the money into transaction accounts rather than savings accounts. But having said that, we have taken on the responsibility to develop those markets and to educate people in other types of savings, but that is a long-term goal. So, I do not foresee any massive migration in the Baltics either from transaction to savings accounts. And to remind you, I think that the customer base composition is different between the different players in the market.
Martin Leitgeb
Thank you very much.
Operator
[Operator Instructions] The next question comes from Alex Dimitrios [ph] from Credit Suisse. Please go ahead.
Unidentified Analyst
Hi. Thanks for taking my question. So, just on the property management, so would you be able to just provide some more color on what you are seeing in terms of CRE properties, prices and the underlying assets of these customers? And just secondly, what events or triggers would you need to see to have more concerns over this portfolio? Thank you.
Rolf Marquardt
So, regarding price development and what we see in transactions, we see that many of the transactions that are – have been carried out over the last six months are – and that is what is externally reported then at book value in most cases. But we also realized that there has been a price write-down of approximately 4%. That’s what we have seen so far. When we talk to our internal research team covering the real estate sector, they expect price drops of 10% to 15% based on the changes we have seen so far in the conditions. So, that is what we are seeing. So, so far a quite calm development, I would say, and also, of course a diluted activity. But the activity is still there and has been important for the change that is ongoing and has gone on during the half – last 6 months or 12 months. And I didn’t really hear the second question well enough. So, could you please repeat that?
Unidentified Analyst
Sure. So, just what events or triggers would you need to see to have a bit more concerns over this portfolio?
Rolf Marquardt
I mean these companies have to deal with the situation and are dealing with the situation of sharply increased interest rates. But at the same time, they also have increased trends. Vacancy rates are really solid so far and at stable levels. So, what it would take to change this situation is, of course if this continues for very long, and we would have a deeper recession where you sort of have a macro impact, that starts to really impact and feed through those numbers when it comes to net operating income, I would say, and cash flows.
Unidentified Analyst
Thank you very much.
Operator
The next question comes from Johan Ekblom from UBS. Please go ahead.
Johan Ekblom
Thank you. I think we have covered quite a lot of ground. But just very quickly, trying to understand the divisional trends in NII, are there any material changes in treasury allocations or FTP pricing that can explain maybe why we saw somewhat weaker NIM trends in large corporates, for example, or is that broadly unchanged from last quarter?
Anders Karlsson
I don’t think you should look too much into that. I think it was a correction in the quarter. But the underlying trend in large corporates is, as I have said, when there is re-pricing, or if there is new loans coming in, there is a certain margin expansion possible to do.
Johan Ekblom
Perfect. Thank you.
Jens Henriksson
And thank you everybody. And as I have said before, we stand strong in uncertain times. And our proven business model is delivering as promised. A sustainable bank is a profitable bank, and that’s a good way to end the call. Thank you for all your questions and looking forward seeing you again in conjunction with next quarter. Until then, take care.
For further details see:
Swedbank AB (publ) (SWDBF) Q1 2023 Earnings Call Transcript