Swedbank AB (publ) (OTCPK:SWDBF) Q3 2022 Earnings Conference Call October 27, 2022 3:00 AM ET
Company Participants
Annie Ho – Head of Investor Relations
Jens Henriksson – Chief Executive Officer
Anders Karlsson – Chief Financial Officer
Rolf Marquardt – Chief Risk Officer
Conference Call Participants
Maths Liljedahl – SEB
Magnus Andersson – ABG
Namita Samtani – Barclays
Maria Semikhatova – Citibank
Andreas Hakansson – Danske Bank
Johan Ekblom – UBS
Rickard Strand – Nordea
Martin Leitgeb – Goldman Sachs
Riccardo Rovere – Mediobanca
Jacob Kruse – Autonomous
Annie Ho
Good morning, everybody. Thank you for dialing in to Swedbank’s Third Quarter 2022 Results Presentation. My name is Annie Ho from Investor Relations, and with me in the room today is Jens Henriksson, our CEO; Anders Karlsson, our CFO; and Rolf Marquardt, our CRO. We’ll have the usual format today, we’ll start with our presentations, and then have Q&A. So, please, Jens, go ahead.
Jens Henriksson
Thank you, Annie and good morning to everyone and a warm welcome to the presentation of our Swedbank’s result for the third quarter 2022. We live in truly turbulent times with an ongoing war, pandemic, and climate change. And a few days ago, Finance Ministers and Central Bank Governors from all over the world met at the IIMF’s Annual Meetings in Washington, and the tone of the meeting was dire.
The global economy is now experiencing a broad-based and sharper than expected slowdown with inflation higher than seen in several decades or to quote the IMF, and I quote, ‘the cost of living crisis, tightening financial conditions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all [weigh] [ph] heavily on the outlook’. The IMF forecast a slowdown of global growth this year to 3.2% and 2.7% next year. And two days ago, our macroeconomists presented their latest outlook.
To Sweden, the forecast is an economic contraction of 1.1% next year, while Estonia, Latvia, and Lithuania will have zero growth. And growth returns in 2024 in all our home markets. We are facing a situation with great challenges for both companies and individuals despite resilient home markets with strong public finances, well-managed firms, and high household savings.
In these turbulent times, Swedbank stands strong. We’re helping companies and individuals with advice and liquidity. A sustainable bank is a profitable bank. By being profitable, we contribute to a financially sound and sustainable society. By being profitable, we can support our customers, distribute dividends, and continue to develop the bank and contribute to financial stability for our customers and society in large.
I am proud to present a strong result in the third quarter with a profit of SEK 5.7 billion. The return on equity in the quarter amounted to 13.9% with a cost to income ratio of 0.38. The bank’s positioning and business model gives a strong development in net interest income. Mortgage margins have declined while deposit margins are up. And at the same time, we are proud to give our customers interest on their savings accounts from the very first krona in Europe.
We have a long-term perspective on our financing. The ratio between lending and deposit has shrunk from 170% three years ago to 140% today. And this is beneficial for us now that we are on a more normalized interest rate level. Net commission income increased due to higher income from [cords] [ph] and our stable and well run asset management in Robur.
Expenses were somewhat up due to a weak krona and high inflation and especially in the Baltics. And we expect a slightly higher expenses for the full-year, compared to the cost cap of SEK 20.5 billion that we set almost two years ago in a low inflation environment. Credit quality is strong and it’s now that our thorough and conservative credit process is tested for real, and we have not yet seen any material changes.
During the quarter, we even made individual recoveries. The impairment of SEK 600 million are macro and modern driven. Our management overlay of SEK 1.7 billion beyond what the model gives remains in these turbulent times. And our exposure towards everything that is property related is in-line with the bank’s strategy and risk appetite. Our liquidity and capital position is strong and we have a buffer of around 420 basis points relative to the Swedish FSA’s capital requirement.
The geopolitical tension has grown during the quarter. The public discussion about threat scenarios and cyberattack is intense, and Swedbank continues to invest in security. We are stable and well-prepared. The mortgage business is resilient despite the activity in prices in Sweden declined in the quarter.
In Estonia, Latvia, and Lithuania, prices have been stable, thanks to growing standards of living and demand for modern housing. And Swedbank is the mortgage leader in all our four home markets and new lending in Sweden during August was even above our back book. It is worth remembering that the mortgage business has been stable throughout business cycles.
Since 1982, 40 years ago, accumulated credit losses have amounted to SEK 1.7 billion. The corporate business has developed positively. Our ability to provide credit and connect customers with the right investor in the capital market has proved beneficial. It is now easier for corporate customers to digitally order account statements, handle card related issues, and access rights. And that gives our advisers more time to spend on qualified advice.
Monthly savings are stable and we’re working actively with our broad savings offering. This fall, many customers have wanted to talk to us in-depth about their financial situation. We are redistributing and adding staff to support them. At visits are steadily rising so far this year by nearly 30%. Customers like using the mobile bank and availability in our digital channels remains high.
We are a digital bank with physical meeting points. And during the year, we’ve onboarded more than 50,000 customers digitally and out of which 12,000 youngsters were added in the quarter alone. Our asset management company, Robur, continues to gain attention for its sustainability work and is ranked Number 1 in Sweden and the Nordics in Morningstar Sustainability Rating. And as the first Nordic Bank, we’ve expanded our framework for sustainable fundings with social assets.
We want to help our customers invest in social projects that contributes to society. Fraud continues to be a societal problem that puts customers at risk, and the collaboration and information exchange between us and the police and other government authorities has deepened, and so as the collaboration against money laundering. The economies in Estonia, Latvia, and Lithuania remain resilient, despite energy prices pushing inflation higher.
Activity dropped slightly in the quarter, but the labor market remained strong. Baltic state-owned energy companies, they need short-term liquidity to bridge higher costs. For the agricultural and transportation sector, the need for liquidity had also grown. At the same time, we’re advising firms to see opportunities to develop services as renewable energy, for an example, growth in importance.
In spite of volatile markets, we’ve seen savings through the mutual funds introduced in the Baltics in 2021 continue to rise, and this will in time increase the financial health in all three countries. Our purpose is to empower the many people and businesses to create a better future. And in our Baltic coal markets, we now helped over 36,000 Ukrainian refugees to ease their way into society by becoming Swedbank customers.
Trust in the bank is strong in Estonia, Latvia, Lithuania, and Swedbank was once again named the most loved brand in the Baltics. In Sweden, customer satisfaction has increased, but we still have room for improvement before we catch up with the rest of the industry.
And with that, I hand over to our CFO, Anders Karlsson to give us more details. The floor is yours, Anders.
Anders Karlsson
Thank you, Jens. Now, let’s go into the details of the quarterly result beginning with lending and deposits. The total loan portfolio increased by 28 billion this quarter, excluding a positive FX impact of 5 billion. Corporate lending increased by 19 billion where LC&I grew by [10] [ph] and Baltic Banking by [7] [ph].
Lending in large corporate and institution was related to utilities, manufacturing, and property management. It was a mix of increased revolving credit facility utilizations and traditional bank lending. Baltic banking increased by 7 billion and it was mostly driven by short-term lending to the utility sector. For example, to state-owned companies purchasing natural gas.
Private lending increased by 9 billion predominantly from mortgage lending in Swedish and Baltic Banking. Regarding the Swedish housing market, house prices, and number of transactions have been decreasing as a natural reaction to the economic outlook. Customers are also being more prudent through increased extra amortizations. We continue to be market leader. And this quarter, Swedish mortgage lending volumes increased by 6 billion.
Regarding customer deposits, private deposits increased by 2 billion and corporate deposits decreased by 16 billion. So, overall, a decrease of 14 billion in the quarter, excluding a positive FX effect of 6 billion.
Now, looking at the revenue lines, starting off with net interest income, which increased by 18% quarter-on-quarter. The strong development was driven by higher volumes and an expansion of net interest margin. As I said last quarter, the magnitude of the NII impact from increasing rates depends on how we are executing on our pricing strategy.
In doing so, we are balancing between business opportunities given the economic outlook and the overall impact on profitability, given our balance sheet composition. We strive to have competitive prices while increasing the net interest margin. and this quarter we have been able to achieve that.
Let me give you some details of the key components for NII development in a more normalized rate environment. Baltic Banking is fully funded through deposits. The loan to deposit ratio in the quarter was 66%. The deposit base amounts to around 340 billion, which are administratively priced, while 230 billion of lending is 6 month Euribor linked, and consequently reprices automatically at rollover dates.
Excess liquidity can currently be placed at 75 basis points with ECB. In Sweden, we have around 1,000 billion of administratively priced lending and around 650 billion of administratively priced deposits. And there is a 40/60 split between transaction and savings accounts.
Over to net commission income. Card commissions were seasonally higher due to summer spending and travel. This [indiscernible] to the economic outlook impacted sentiment in the capital markets, subdued activity in brokerage, and corporate finance reflected this. However, Asset Management proved resilient and ended the quarter with a stable result.
Turning to net gains and losses, which recovered significantly compared to last quarter. This was driven by a reversal of valuation effects from previous quarters in treasury’s hedging operations, as well as FX sales and client trading in LC&I. Treasury’s liquidity portfolio continues to be negatively affected by widening credit spreads, although to a lesser extent than last quarter.
Other income increased by 191 million, net insurance, Entercard, and the savings banks all performed well this quarter. Regarding expenses, which were slightly higher in the third quarter. In previous quarter, we spoke about the FX effect on the full-year expenses and how it is positive for net profit. We are also starting to see some impact from inflation on the cost side, especially in terms of increased energy expenses.
Amidst this backdrop, we remain committed to transforming and investing in our bank. We have continued to invest in IT resilience and cybersecurity. And this quarter, we also started the implementation of a new cloud based omni-channel communication platform to improve availability. Excluding FX effects, we now expect the full-year costs to be around 1% above the 20.5 billion cost cap that was set two years ago.
AML investigation costs, which are excluded from the cost cap and estimated to be 500 million for the full-year, were 152 million for the quarter and approximately at the same level year-over-year. In the quarter, we also had impairments of intangible assets. 263 million relates to an impairment of an internally developed software and 181 million was an impairment of goodwill as a consequence of the revised business model in Norway.
Now, over to you, Rolf, to talk about asset quality and credit impairments.
Rolf Marquardt
Thank you, Anders. I would like to start where – and go back to where Jens started regarding the macro development. We find ourselves in uncertain times. Economic prospects have deteriorated since the second quarter and downside risks have increased. We expect that this may impact us to a certain extent, which is reflected in our updated macro scenarios and provisions, but we can also conclude that we start from a strong position.
Our customers, both on the corporate and the private side generally have good margins to cope with the headwinds in the form of increasing interest rates, inflation, energy prices, and related effects. An important foundation is our origination standards. which focus on strong cash flows and on collateral, particularly in property management and mortgage lending.
Against this background, we assess that our credit quality remains strong. The provisions for the third quarter ended at 602 million. This exceeds what we have seen in previous quarters, but is explained by the updated macro forecasts and technical adjustments to the implementation of the new definition of default, which was approved by supervisors during the third quarter.
The macro impact was 333 million. This is due to the updated macro scenarios, which were downward adjusted for all home markets. The implementation of the new definition of default added 207 million. This is part of our introduction of the IRB overhaul and it increases the number of customers in default, causing credit migrations, although the underlying credit quality is unchanged.
A large part of this is a one-off character. Rating and stage migrations of 171 million were mainly Stage 2 migrations. A part of these migrations were connected to the changed macro scenarios. Regarding individually assessed credit losses in Stage 3, we released 20 million. The release of 87 million in other is mainly amortizations by customers with elevated risk.
Export portfolio adjustments were unchanged, but reassessments have been made of specific sectors reducing the reserves for oil and offshore and increasing reserves for property management, manufacturing, and retail. When looking at the development for the first 9 months of 2022, we can conclude that we year to date have added 835 million in reserves, reflecting revisions of macro scenarios. We have kept the export portfolio adjustment of 1.7 billion and we have made net releases on individually assessed exposures of 97 million.
Now on to property management lending. Business conditions in this sector was largely unchanged in the third quarter. We take note of the fact that many of these companies have shored up liquidity during the quarter to manage maturities in the coming 12 to 18 months. As mentioned earlier, a key foundation here is our origination standards and lending strategy focusing on strong cash flows and collateral.
As we specified last quarter, our origination criteria includes that net operating income should at least be sufficient to cover interest rates and amortizations of 6% to 8%. The average debt service tolerance ratio for our 20 largest property management customers exceed 7%, and the average interest coverage ratio is [4.7] [ph].
On top of that, we have low LTV levels. The average LTV for commercial real estate is 52% and 55% for residential real estate. This provides headroom in a situation where valuations start to come down. Against this background, the bank is well-positioned also under stressed conditions.
So with that, back to you, Anders.
Anders Karlsson
Thank you, Rolf. Turning to capital. Our capital position continues to be strong with the CET1 capital ratio of 18.5%. Our capital requirement rose by around 60 basis points in the quarter, mainly from two effects: The implementation of the 1% increase in the countercyclical buffer in Sweden, which resulted in a 75 basis points increase on group level, and we received a new SREP from the Swedish FSA with a net change to the Pillar 2 requirement and Pillar 2 guidance was 18 basis points lower than previously.
Consequently, the buffer stands at around 420 basis points above the minimum regulatory requirements. The capital target range of 100 basis points to 300 basis points remains. And regarding expected future capital requirements in the near-term, the countercyclical buffer will be raised by another 1% in the second quarter of 2023 as previously communicated. And we are still awaiting approvals for our updated IRB models from our regulators.
With that, I hand over to you Jens to conclude.
Jens Henriksson
Let me briefly summarize the quarter. We live in turbulent times and we expect a cold and harsh winter. Swedbank stands strong in this situation. We reported profit of SEK 5.7 billion, a 13.9% return on equity with a cost to income ratio of [0.38] [ph]. Our business model for the many customers with savings and financing is now showing its strength.
Next time we meet is on December 6 when I will host an Investor Day where we will present our plan to reach 15% return on equity. I can’t enough emphasize the importance of the sustainable bank being profitable. It is good for our customers, our employees, our shareholders, and society at large. And our societal engagement is substantial. Therefore, I’m very excited that the weekly allowance day is now established in the Swedish calendar. From now on, on October 28, we celebrate [indiscernible].
And with that, I give the word back to you, Annie.
Annie Ho
Thank you very much. Let’s open the lines. Operator, would you mind? And before we do that, actually, if I could remind everybody to stick to two questions per turn, that would be great.
Question-and-Answer Session
Operator
[Operator Instructions] The first question from Maths Liljedahl from SEB. Please go ahead.
Maths Liljedahl
Yes, good morning and thank you. Two questions then. If we allude one to net interest income and sensitivity and thanks for the split on deposits, but would you say that the NII sensitivity stands for the next coming 25 basis points, if we have a parallel shift or has that changed over the quarter? That’s the first question. And then, I have a question on this new default definition and you said that this was a one-off character, but should we expect now under going forward that we will have a more volatile development in terms of classifying default ratios as such or how should I read this going forward? Thank you.
Jens Henriksson
Thank you. And to start with your first question, you have been provided with the sensitivity to fifty basis points in the fact book and you have also been provided with the assumptions underlying that. What you need to play around with yourself is the pass through on the asset side and the pass through on the liability side. What I can say though is that, it will most likely be more and more difficult to differentiate between lending and deposits as central bank rates are increasing. But again, it’s up to you to play around with the sensitivities and to be clear on that, our ambition and we strive for a further expansion of net interest margin.
And then over to you Rolf.
Rolf Marquardt
Hi, Maths. So, a few words on the new definition of default. and some background here. So, this is part of the implementation of IRB overhaul. What this means and what is the difference with the new definition is that it does contain more automatic triggers when it comes to, for instance, when we have granted amortization holidays and so on. And that would automatically pass some customers into Stage 3 when they become non-performing forborne.
So, and what is also important to keep in mind here is that this is part of the implementation. It’s actually the first step that we take when it comes to the implementation of IRB overhaul. What will then happen is that we will gradually start to implement PD and LGD models and so on. And normally, what we would have done is to adjust LGDs as a consequence of this, but that is something – there is a timing issue here because that will happen later. And that would partly have mitigated this. When it comes to the future volatility, that’s a bit hard to assess, but I wouldn’t say that it should increase that very much.
Maths Liljedahl
Okay. Thank you. Very clear. The next question is from Magnus Andersson from ABG. Please go ahead.
Magnus Andersson
Yes, good morning. Two questions then. First of all, on volumes, we can see that your appetite for property management loans in Sweden has increased quite significantly since year-end 2021 and you’re now at the 15% annual growth rates. I was just a bit curious how you see the risk reward situation there if anything is happening to lending margins? Yep. And secondly, if you are taking on any new clients gaining market share deliberately or if it’s primarily lending to existing names? So, that’s the first one. And secondly, just to follow-up on the sensitivity analysis, Anders, you used to give us a split between Sweden and the Baltics for the first 50 and the additional 50 basis points. I know that the sensitivity has increased somewhat compared to situation in Q2?
Jens Henriksson
Thank you, Magnus. It’s Jens here. We have a property management exposure in the lending book of SEK 233 billion in Sweden. That exposure is in-line with our strategy and risk appetite. And we are confident in that we, for a long time, have had good credit origination standards and a focus on our customers depth service tolerance and cash flow.
As Rolf said in his introduction, the average debt service tolerance ratio for our 15 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, further if it’s in-line with our strategy, risk appetite, and leads to well balanced growth. Andres?
Anders Karlsson
Thank you. Yes, Magnus. Hello. There are a couple of things to keep in mind when you when you play around with the numbers, but roughly speaking, Baltic Banking stands for 1.6 billion of that sensitivity. And what you need to keep in mind are a couple of things: One is that the asset side is six months Euribor. So, it’s gradually repricing if rates are moving up or Euribor are moving up.
And secondly, we have left most, I would say, the lion part of flooring effects behind us. Thirdly, we are actually receiving interest on the excess liquidity and fourthly, when you play around with the Baltic Banking balance sheet, you need to keep in mind that they typically only have one account in the Baltic Banking. The customers have one account, they do not have us in Sweden a couple of different accounts, but 1.6 with the assumptions in the sensitivity.
Magnus Andersson
So, 1.6 out of…?
Anders Karlsson
3.5.
Magnus Andersson
[3.5 of 3.6] [ph]. Yeah. Okay, good. And just – yes, sorry to follow-up on the commercial real estate there. If anything happened – happening on lending margins, the new business you’re writing now, I guess that there is an uptick from what you have previously in the book?
Anders Karlsson
I think there is prospects for that, but it’s gradually coming in. It’s not something that you should write home about currently.
Magnus Andersson
Okay. Thank you very much.
Operator
The next question comes from Namita Samtani from Barclays. Please go ahead.
Namita Samtani
Hi, thanks. I’ve got two questions, please. Firstly, Anders gave a deposit beta of 7% last quarter. Can you tell us what it is now? And secondly, could you disclose how much of the lending margin headwinds you expect to see in Sweden on mortgages given mortgage repricing has not really been able to keep up with the rate rises? Thanks.
Jens Henriksson
Sorry, I think I got your question. And when it comes to the lending margins for mortgages, it’s down 11 basis points.
Anders Karlsson
And then I think you said something about the deposit beta. I will not guide you on any specific deposit beta and what we are aiming at and our ambition is to pass on more of rate increases on our lending side then on our liability side, i.e. NIM expansion, that is our ambition and that is what you should focus on.
Namita Samtani
Thank you very much.
Operator
The next question is from Maria Semikhatova from Citibank. Please go ahead.
Maria Semikhatova
Yes, thank you. Two questions from my side. First on margins. On the slide where you show the impact of margins, is it possible to break it into deposits and loan margins? So, we could see what was the size or the magnitude of the negative impact on the lending side. And the second on commercial real estate portfolio. Thank you for your comments on the largest borrowers. Just wanted to get a sense of how concentrated your portfolio? Maybe you could share what percentage of the book is to this largest companies in Sweden? And if it’s possible to provide how much of post-model overlay is currently for property management companies?
Jens Henriksson
Thank you. I think that breaking down the margins into landing and deposits is a function of where you put the ruler i.e. internal FTP. My experience with FTP is in a – in a quickly rapidly changing interest rate environment is that you get a lot of difficulties with it and lag effect. That’s why I’m focusing on the net interest margin rather than talking about fund transfer pricing.
So, that is my first answer. So, when you look at the NII split, you see the margins, primarily if you would like so with the ruler coming from deposit margins, but the combination of treasury and the margin development is what you should look for. So, that’s my answer to this question.
Rolf Marquardt
And then on to your question regarding the concentration of the CRE portfolio, so, I don’t have the exact number, but I would say in the range of 35% to 40% of the portfolio is covered by these 20 companies.
Maria Semikhatova
And then on post model overlay for property management, how much is out of 1.7 billion is for this sector?
Rolf Marquardt
So, I will soon come back on that one.
Maria Semikhatova
Okay. Thank you. And just maybe to clarify, I understand your point on internal funds transfer, but when you said that Swedish mortgages margins were down 11 basis points, what funding assumptions you have on this?
Jens Henriksson
I don’t have that on the top of my head. That’s – we said that it’s down 11 basis point. What I said is, and I think that is important to have in the back of your head, that we – as rates are moving up, we foresee that we will not be able to differentiate as much as we have been doing during the year so far, but our ambition is to expand net interest margin, i.e. to pass more onto lending than on to the liability side.
Rolf Marquardt
And now back on the question, sorry, on the expert portfolio adjustment, 250 million of the – out of the 1.7 billion is related to property management.
Maria Semikhatova
Thank you.
Operator
The next question is from Andreas Hakansson from Danske Bank. Please go ahead.
Andreas Hakansson
Hi and good morning everyone. Two questions, a bit of follow-up on both actually, but just having to come back to the mortgage margins? And yes, I see that your cover bonds is now 38% of the outstanding mortgages. So, it’s a significant increase in deposit funding. You’re probably the least wholesale funding independent Bank in Sweden now when it comes to mortgage lending, do you feel you have an advantage when it comes to the pricing side? And would you be tempted using that advantage to price more aggressively or you’re rather going to see your margins expanding? First question.
Jens Henriksson
Thank you, Andreas. You’re perfectly correct that we are to a much larger extent than other players funded by deposits. So – and I think that is beneficial on the current conditions. We do not have any ambition to change our pricing strategy on mortgages to gain more market share in this environment.
Andreas Hakansson
Okay. That’s clear. And then just detail, I see that Stage 2 in CRE has moved up quite a bit, but you haven’t seen an increase in Stage 2 provisions for CRE, should that tell us that it’s basically just macro assumptions that’s driving the change rather than any potential changes in LGD or anything else?
Anders Karlsson
Yes, that’s correct.
Andreas Hakansson
Okay. That’s all. Thank you.
Operator
The next question is from Johan Ekblom from UBS. Please go ahead.
Johan Ekblom
Thank you. If you can just briefly come back to the net interest income, just kind of one clarification and one brief question, the sensitivity that you provide given that the assumptions are static, is the increase quarter-on-quarter just the reflection of balance sheet growth or is there anything else going on there? And then if we get something from the ECB on changes to tiering or reserve remuneration is the 100 billion, 110 billion excess that you spoke about the Baltics, the right number which you think about as being impacted
And then the second question is just on the cost. I mean, we’re clearly seeing some headwinds this year, but as we look into next year, what’s your thinking around inflationary pressures, etcetera. I’m guessing we’ll get maybe more at the Capital Markets Day on plans for investments and savings, but if we’re just focusing on, kind of the current cost base and what pressures you see there, that would be helpful? Thank you.
Rolf Marquardt
Well, I can start saying a few words on cost guidance. When we get back and present plan to reach the 15%, well, you will hear more then and really looking forward to answer questions then. And on cost guidance, for next year, we’ll do that either in conjunction with the Investor Day or Q4, we haven’t yet decided.
Jens Henriksson
Thank you. And on your first question, I’m not entirely sure I understood it correctly, but if you’re talking about the TLRO, it’s a very small portion. We have €2.5 billion outstanding that we are – we have met the conditions and we are now looking into whether that should be prolonged or not depending on the terms and conditions. The 110 billion that I talked about is pure excess liquidity and that could be placed with ECB.
Johan Ekblom
Thank you. And on the sensitivity, the increase quarter-on-quarter is that just balance sheet growth?
Jens Henriksson
Yes.
Johan Ekblom
Thank you.
Operator
The next question is from Rickard Strand from Nordea. Please go ahead.
Rickard Strand
Hi and good morning. Starting off with the question on asset quality. In the Baltics, given the very high inflation, environment we have there, could you share your view on the risk you see there sort of rising loan losses in this environment? Are you more worried about household or corporates and what the key parameters that you focus on, if that’s how long the inflation extended or something else or unemployment or something else?
Anders Karlsson
Hi, Rickard. Yes, okay. So, the development in the Baltic countries with a very high inflation of course, do put pressure on households and companies to a certain degree. When it comes to private individuals, we have also seen very large salary increases that to a certain extent offset this.
So, that’s the headwind and that’s very obvious and energy prices is driving here obviously. When it comes to the lending we have to these customers, the ones that are more sensitive are those that have come late into this cycle, so late cycle and into certain degree, but having said that, I think that what we have seen now so far in the figures is actually nothing in terms of deteriorating payment behavior.
It’s looking good and stable. And generally speaking, we do not have any worries about that. So, margins are good within that sector. And the same goes for corporates. We have seen no signs so far of deterioration. and they have good margins, but having said that, of course, times might get tough.
Rickard Strand
Thank you. And then second question on corporate margins. I had some of your peers have talked about the potential of repricing. lending – the lending book at higher margins ahead given that the price of money has gone up in the bond market, etcetera. How do you see that for your corporate loan book? And also if you could talk about the potential from that perspective, both on the large corporates versus the SMB lending you have?
Jens Henriksson
Thank you. I think there are numerous answers to your question. Obviously, when markets are now – finally, I would say, pricing credit risk at least more correct than they did before. There is obviously a potential for repricing at some point, but if you look at the corporate book, it has a fairly long duration. I think the SME book is having a duration of around 2.5 years. So that would gradually come into the books if there are possibilities there.
On the large corporate side, I think that there are two elements to it. One is new lending, where I definitely see that there is a potential for repricing. The other one is old revolving credit facilities that were written before this happening where there will be opportunities when they are up for renegotiations, but there is a mix of these, which means that what I essentially say is, yes, I agree with the prospects, but it will take time.
Rickard Strand
Thank you.
Operator
The next question is from Martin Leitgeb from Goldman Sachs. Please go ahead.
Martin Leitgeb
Yes, good morning. Thank you for taking my questions. Just two on the back of earlier comments on the expectations for further NIM expansion. Just firstly on mortgages. I was just wondering if you could help me understand how big an impact churn of mortgages is. So, essentially mortgages rolling onto a new pricing? How quickly does your mortgage book churn and what is the difference between new business rates and back book rates? And secondly, I was just wondering to the extent you can comment on how corporate deposits are currently priced in Sweden? And have you seen any attrition from on-demand accounts into savings? Thank you.
Rolf Marquardt
Okay. Thank you. There was a lot of questions in two. So, if I forget one, you have to repeat it, but if I start with repricing of mortgages, we have a book which consists in Sweden to 40% of three months and 60% of fixed. The three months are essentially repricing on a monthly basis throughout the quarter. The fixed one is, sort of gradually coming in. So, that’s sort of a difference.
When it comes to your question on competition or churn, if we come back to what Jens said, people are very interested in discussing their financial situation under these uncertainties. People tend to stick with strong banks. We do not see any increase in churn. What we do see is that the market is slowing down. We see that it takes longer-time for sellers and buyers to meet. We see prices coming down and we see some extra amortizations. So, I would say that the competitive landscape and no campaigning. So, at this point, the competitive landscape is not in any way disturbing.
On your third question, I think it is difficult to compare list prices with average prices in a fast moving interest environment. But what you can do is, you can look, we have increased our list prices on three months 195 basis points during the year, and then you can compare that to what you see on average prices in the – where you can find that information. And last, but maybe not least, we changed our pricing on administratively set lending and deposits at 23rd of September.
So that is gradually rolling in during this quarter and had nearly no impact on Q3 results. And then you might have had a fourth question, but I don’t remember that one. So, that you need to repeat in case I forgot something.
Martin Leitgeb
Yes. Could actually just come back to the other point on mortgages, I was just curious one of your peers made a comment with regards to potential headwind in terms of [NII progression] [ph] arising from mortgage pricing. And I was just wondering if you look at it on a mortgage pricing, less handling cost perspective with mortgages churn, is this a similar headwind for you or due to the lower quantum of covered [indiscernible] funding, is this lack of concern for you?
Rolf Marquardt
I can’t comment on what SEB said. The only thing is, he had – he defined his ruler. I think that the ruler, i.e. the FTP is of less interest. I’m looking at an expansion of net interest margin. So, I’m coming back to my earlier comments. We will continue to strive to expand net interest margin further, but as rates are coming up, the differential between assets and liabilities in terms of pass through will be less and less. It will become more difficult in an environment where rates are continuously coming up. That is what I said, but the ambition is quite clear.
Martin Leitgeb
Thank you very much.
Operator
The next question is from Riccardo Rovere from Mediobanca. Please go ahead.
Riccardo Rovere
Good morning, everybody. Thanks for taking my question. I was just wondering; I was looking at the fact book where you provide the funding structure. And I know that deposits are kind of flattish over the past six months, [1.3 trillion] [ph] or so, while that securities and sub debt is up fairly substantially. So, I was wondering if there has been any prefunding on the debt securities side given [indiscernible] financial conditions, and if so, eventually, a flattish deposit could be linked to customers are starting to roll in the deposit base to cope with higher inflation costs and so on higher spending or am I reading too much into that? Thank you.
Annie Ho
Hey, Riccardo. Sorry, we’re having a little bit of difficulty hearing you, but if your first question was about funding and debt securities increasing, we did do a couple of benchmark transactions in the third quarter. We did a Tier 2 [indiscernible] and also a senior non-preferred 5-year $1 billion. I hope that answers your first question. But if you could repeat your second part, that would be helpful.
Riccardo Rovere
Yes. The second part was on the deposits that are flat. I was wondering whether you see signs that people, your customers are starting to erode the deposit base to cope with higher spending cost or am I reading too much into that?
Rolf Marquardt
Okay. Thank you. Then I understand Riccardo, in the quarter, private deposit in Swedish banking were stable. And private deposits in Baltic Banking were increasing. What you saw was corporate deposits going down. So, we haven’t seen much of what you’re looking for. So, I think you read too much into it.
Riccardo Rovere
Yes, that’s very clear. Thank you.
Operator
The next question is from Jacob Kruse from Autonomous. Please go ahead.
Jacob Kruse
Hi, thank you. Just first to get back on the mortgage and margin question, could you say something about where the current margins on your – the business you’re writing, how they compare to the average back book margin that you have? And then my other question was on commercial real estate, it looks like your LTVs that you disclosed are quite a bit higher than those disclosed by the other Swedish banks so far, is that – do you think that this signals that you’ve written a bit more aggressively or is this a mix change or how do you view that difference? Thank you.
Anders Karlsson
Hi, Jacob. So, on the LTV, side. So, the LTV we have on the 20 largest companies is 46%. So, that is in-line with what our peers have been communicating the last days, but then the [52] [ph] that covers the complete portfolio. So, in my mind, we have not been more aggressive than our peers in this area.
Jens Henriksson
And on your first question, I think we’re coming back to this philosophical question about FTP, but my point still is that we have repriced our mortgages consequently, not as much as market rates have increased, but to a fairly large extent. What I’m focusing on is ensuring that the pass-through on the lending side exceeds the pass-through on the combined liability side.
Jacob Kruse
Yeah. But when you talk about the ruler, I guess your back book or your front book would have the same philosophical ruler without having to compare to how other banks may think about it? And could also just check, when you talk about these Top 15 clients or Top 20 in the CRE book, what proportion of the volumes roughly are we talking about here?
Anders Karlsson
So, the 20 – so the 15 largest that is approximately 35% of the total book. And the [20%] [ph] is a bit further and I don’t have the exact figure.
Jens Henriksson
And on your second question, I don’t have that information to you.
Jacob Kruse
Okay. Thank you.
Operator
There are no more questions.
Jens Henriksson
That was the last question. Then I just want to say that, summarized, Swedbank stands strong. 13.9% return on equity with a cost income ratio of 0.38, and our business model for the many customers with savings and finance is now showing strength. Looking forward to see all December 6, until then take care and I’ll see you guys. Bye.
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