SBAB Interim Report January–June 2022

Q2 2022 (Q1 2022)

• The second quarter continued to be dominated by geopolitical concerns arising from Russia’s invasion of Ukraine.
• The Riksbank decided to raise the repo rate on two occasions during the quarter as a result of increased inflation. This has led to dramatic changes in market interest rates and increased uncertainty.
• The housing market is showing signs of slowing down and a decline in housing prices was noted during the quarter.
• Positive growth continued in lending and deposits. Total lending increased 2.6% to SEK 491.3 billion (478.7) during the quarter. Total deposits increased 5.0% to SEK 154.4 billion (147.0).
• Net interest income rose marginally to SEK 1,088 million (1,084). In the first quarter, the resolution fee was moved from net interest income to a new line in the income statement (imposed fees). The resolution fee was SEK 44 million (48) for the second quarter.
• Credit losses amounted to SEK 12 million (17), primarily due to credit loss allowances linked to growing uncertainty in the operating environment and the increase in interest rates. Confirmed credit losses remained low and totalled SEK 1 million (2).
• Operating profit grew 11.9% to SEK 641 million (573), mainly due to improved net income from financial transactions. The new risk tax implemented during early 2022 amounted to SEK 65 million (65) in the second quarter.
• The return on equity amounted to 10.4% (9.5) and the C/I ratio was 32.7% (33.7). Return on equity, excluding the risk tax, amounted to 11.4%.
  

Financial information

1) During the first quarter of 2022, a new line item was added in the income statement, imposed fees, placed after the item net credit losses. Imposed fees includes Sweden’s new risk tax as well as the resolution fee that was previously reported in net interest income. This impacts the comparability of net interest income with previous years.

CEO statement from Mikael Inglander:

Inflation in Sweden, already high before the outbreak of the war, has grown even higher. The Riksbank decided to raise the repo rate in April and again in June, while clearly indicating that further hikes are coming. Overall, the situation has led to substantial changes in market interest rates and a highly uncertain future.

The war in Ukraine has lead to a great deal of human suffering for many people, which we deeply regret. It has also led to widespread disruption and volatility in the national and international financial markets and the situation is expected to continue to affect the global economy and global financial markets for a long time to come. Since the war started, economic growth has stalled. Bottlenecks and rising prices for input goods, in combination with the uncertain situation, has led to lower investments. Further restrictions in China are disrupting supply chains. The situation has led to increased inflation in Sweden and other parts of Europe, which has in turn led to strong measures from central banks. In the end of April, the Riksbank decided to raise the key interest rate from zero to 0.25%. In June, the Riksbank decided to further raise the key interest rate to 0.75%, while the Executive Board of the Riksbank announced that it would be raised again in the future, to close to 2% by the beginning of next year.

Changed circumstances

The higher interest rate means increased costs for market financing for SBAB and for other banks. Over time, the increased costs need to be reflected in prices for customers so as not to affect the banks’ financial position or earnings. During the second quarter, we raised mortgage rates several times on all maturities. SBAB’s economists expect that within a few years the variable mortgage rates will hover around 4%, while the longer fixed mortgage rates will be close to 5%. Adapting the interest rates on our lending according to borrowing costs is a natural part of our business model. Transparency and attractive terms and conditions represent central components of our customer offering and, as usual, we continuously adjust our interest rates to reflect the prevailing market circumstances. However, we expect a certain amount of stress on the margin for mortgages going forward, something I’ll return to later on.

The housing market is showing clear signs of slowing. Increased mortgage rates lead to higher costs of living for households, which indirectly changes their ability to spend or save elsewhere. Normally, this also leads to lower housing prices and has effects on housing sales. During the quarter, we noted a downturn in housing prices, primarily for apartments and houses in major metropolitan areas. Even if this has only been going on for a few months, it is a strong indicator of a downward trend. Uncertainty is high and, given continued interest rate increases, further price declines are to be expected. It is not yet possible to point out any major effects on housing turnover aside from a normal slowdown connected to a weaker economy. The average advertising time has increased and is now at a seasonally normal level and bid premiums have fallen back, which should be viewed in relation to the substantial price increases and high bid premiums of the last few years.

The situation is very different than the one we were in when the zero interest rate was introduced. After several years of favourable market conditions for our core business, we are currently in a rather turbulent period that will put pressure on our earnings. SBAB’s future performance is characterised by increased uncertainty related to the interplay of market interest rates, margins, prices, our competitiveness, transaction volumes and responses from our competitors.

Good volume trend and credit quality remains strong

At the end of the second quarter, total lending amounted to SEK 491 billion, up approximately 11% year-on-year. The residential mortgage stock is growing in line with our expectations. We are addressing the changing dynamic and increased competition in the residential mortgage market with a simple, transparent customer offering tied to competitive terms. At the beginning of the year, we noted that our retail customers were increasingly reacting to the growing uncertainty by choosing fixed maturities for mortgages. This trend continued during the second quarter. Lending to companies and tenant-owners’ associations continues to grow at a somewhat faster pace than we had initially expected at the beginning of the year. Going forward, we expect a somewhat more restrained development due to the uncertainty prevailing in the market. Our corporate customers, primarily property companies, are expressing greater doubts about new construction projects, due in part to rising interest rates and difficulties sourcing materials as supply chains fail in the wake of the pandemic, the war in Ukraine and increased restrictions in China.

Despite the growing uncertainty, we have not yet seen any noteworthy changes in the credit quality of our lending portfolio. Our assessment is that, overall, residential mortgage customers have healthy margins to cover repayment of their mortgages even in a worse economic climate. This is also confirmed by external and internal stress tests. SBAB has limited exposure to particularly vulnerable sectors negatively affected by the war in Ukraine and has extremely limited exposure to corporate lending where the collateral does not consist of a residential property. We are therefore carefully monitoring developments and making ongoing assessments and analyses of the credit risks in our lending portfolio. Net credit losses totalled SEK 12 million in the quarter and essentially consist of increased credit loss allowances. Confirmed credit losses totalled SEK 1 million.

Deposits increased approximately 5% to SEK 154 billion during the quarter. In the beginning of June, we chose to increase the interest rate on savings accounts for retail customers with 0.25% to 0.75%. In July, we raised it again to 1.00%. Our goal is to act in relation to developments in the fixed-income market, just as we do in our lending. We are convinced that our attractive savings interest rate, in combination with clear and favourable terms, is a competitive alternative compared the majority of the large banks offering zero interest. In connection with increasing the interest rate for retail customers, we also raised the deposit interest rate for companies and tenant-owners’ associations.

Stable earnings performance and clear priorities moving forward

Earnings for the first half of 2022 totalled SEK 1,214 million. A result which we are pleased with. Our key financial metrics remain strong, even if they are somewhat weaker compared to previous years. The new bank tax implemented during the first quarter and a certain amount of pressure in the lending margin had a negative impact on SBAB and will continue to do so. Pressure on margins pertains to short-term challenges in offsetting rapidly growing funding costs by raising interest rates for customers at an equivalent pace. In the longer term, it comes down to increased competition in the residential mortgage market from new and established providers. We have not yet seen any major changes in terms of the margins in corporate and tenant-owners’ associations. Lower lending margins going forward should be offset in part by higher deposit margins. Net interest income for the first half of the year amounted to SEK 2,172 million, a year-on-year increase of approximately 5%.

Costs are increasing according to plan, due to the investments we made for future competitiveness and to manage an increasingly complex regulatory and technologically driven business. Costs for the first half of 2022 amounted to SEK 729 million, which represents a year-on-year increase of 6%. We do not see any reason to make any significant changes to the priorities we established for operations at the beginning of 2022. We are continuing to focus primarily on finishing the projects that we deem the most important, not least replacing our core banking platform. Thereafter, we intend to further streamline customer interactions through digitalisation, differentiation and even more refined processes.

Conclusion

I was pleased to accept the offer to become the permanent CEO of SBAB during the quarter. We have a strong position in the market and I’m entirely convinced that we, despite the changed market conditions, have every opportunity to achieve our vision of delivering the best residential mortgages in Sweden.

I would like to take the opportunity to thank all of our employees for the work they’ve done during the first six months of the year. I’d also like to wish a lovely summer and vacation to all of our customers, partners and employees. Take care of each other.

Mikael Inglander
CEO of SBAB