SBAB Interim Report January–September 2022

Q3 2022 (Q2 2022)

• On 20 September, the Riksbank raised the key interest rate by 1 percentage point to 1.75%. This is the largest increase since the inflation target was introduced in the mid-90s. This has led to raised market interest rates and increased uncertainty for households and companies.
• The housing market continues to show clear signs of slowing. Housing prices fell on a broad front across the entire country during the quarter.
• Positive growth continued in lending and deposits. Total lending increased 1.5% to SEK 498.6 billion (491.3) during the quarter. Total deposits increased 10.8% to SEK 171.0 billion (154.4).
• Net interest income grew to SEK 1,155 million (1,088), mainly due to higher lending and deposit volumes. This was, to date, the highest net interest income for a single quarter.
• Credit losses totalled SEK 20 million (12) and pertained mainly to increased credit loss allowances related to the disbursement of building credits as well as to risk migrations in the retail segment due to increased interest expenses for households.
• During the first quarter of 2022, a new line item was added in the income statement, imposed fees. Imposed fees include the new Swedish risk tax as well as the resolution fee that was previously reported in net interest income. The risk tax totalled SEK 65 million (65) and the resolution fee amounted to SEK 46 million (44) for the third quarter.
• Operating profit grew 15.3% to SEK 739 million (641), primarily due to an increased net interest income and a more positive outcome for net income from financial transactions.
• The return on equity amounted to 11.7% (10.4) and the C/I ratio was 29.4% (32.7). Return on equity, excluding the risk tax, amounted to 12.7%.
• SBAB’s capital and liquidity position remains strong. The CET1 capital ratio was 12.8% (12.7) at the end of the quarter.

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:

We find ourselves in a time of increased general uncertainty and global unrest. Substantial interest rate increases, rising energy costs and an economic slowdown entail challenges for essentially every part of society, in one way or other. Despite the uncertainty in the wider world, SBAB once again posted a strong performance and a favourable volume trend.

On 20 September, the Riksbank raised the key interest rate by 1 percentage point to 1.75%. This is the largest increase since the inflation target was introduced in the mid-90s, and more than what many forecasters – including our own experts – initially expected. In parallel, electricity and energy prices continue to climb while food, input goods and services become increasingly expensive due to high inflation.

Household costs have increased significantly during the last few months. We regularly adjust the calculation we use as a basis for granting loans to private individuals to reflect prevailing circumstances. We use a calculation of household costs that assesses a customer’s repayment capacity in the short and the long term. As a bank and creditor, we have a long-term responsibility to ensure that our customers can make their interest and amortisation payments. During the quarter, we updated our standardised household costs in the calculation. The change corresponded to a significant increase approaching 10% for some households. The calculation also uses a stressed interest rate to prepare for higher interest rate levels in the future. At the end of October, we decided to adjust this interest rate.

Housing prices in the secondary market have fallen approximately 10% since March 2022, more in the major metropolitan areas than out in the countryside, and more for houses than for apartments. Given the continued increases in the key interest rate, and higher mortgage and market interest rates, we expect further price decreases. If mortgage interest rates continue to rise to around 4% to 5%, our experts believe that it is reasonable to expect housing prices to fall another approximately 10% from current levels.

Prices for new housing have not fallen significantly. However, the rate of sales has slowed drastically recently. Even if the supply is not particularly high compared with a few years ago, we expect price pressure for these homes during the next year. Going forward, decreased demand for housing from households and more expensive production costs are expected to lead to housing production decreasing to approximately 40,000 homes annually, compared with approximately 70,000 homes in 2021.

The weak housing market is expected to continue well into next year. As households adjust to higher costs for many products and services – and higher mortgage interest rates – uncertainty in the housing market is expected to decrease and activity is expected to gradually increase again. Inflation is expected to approach the Riksbank’s target by the end of 2023, at the same time as the economic downturn is estimated to take root alongside growing unemployment. At this point, we expect that the Riksbank will start to ease its monetary policy and to move towards an equilibrium interest rate of approximately 2%. Future developments are highly uncertain and the coming time might be challenging for some of our customers. We are ready to help and take responsibility.

On the corporate side, we have been working for quite some time on a long-term strategy to grow together with prioritised customer groups. We focus on larger customers with diversified revenue streams, strong balance sheets and good liquidity. In parallell with decreasing yields and increasing debt in the property market, we have for some time implemented more stringent requirements in lending. In connection with developments in the bond market, we have also added additional resources to better analyse our lending portfolio based on capital market dependence and refinancing risk. We are confident about our exposure, even if we are aware that risks and uncertainty have grown recently. In this context, it is also important to mention that our strong growth in the corporate segment has not affected our overall risk profile. Quite the opposite – the credit quality in new lending has been on a par with, or sometimes even better, than our existing portfolio.

Increased interest rates for mortgages and savings
Total lending increased 1.5% during the quarter to a total of SEK 498.6 billion. Retail lending increased 0.6% and lending to corporates and tenant-owners’ associations increased 3.7%. We are expecting a slight slowdown in the residential mortgage market going forward due to the weaker housing market. We expect the strong performance to continue in the corporate segment, though not as strong as the last few years, in part because many property company customers are having difficulties obtaining financing at favourable terms in the bond market.

Deposits increased substantially, rising 10.8% in the quarter to a total of SEK 171.0 billion. This is a very welcome development. Our goal is to have a competitive offering and, overall, to act in relation to developments in the fixed-income market. I have mentioned this several times before, but want to bring it up again: transparency and attractive terms and conditions represent central components of our customer offering and we continuously adjust our interest rates, for lending and deposits, to reflect the prevailing market circumstances.

During the quarter, we adjusted our mortgage rates several times on all maturities. In parallel with this, we adjusted the interest rate on our savings accounts upwards. We are convinced that our attractive savings interest rate, in combination with clear and favourable terms, is a competitive alternative compared to many other players, not least the major banks. SBAB enjoys a great deal of trust from the market and during the quarter we increased our marketing initiatives to raise the visibility of our offering.

Deposits are an important piece of the puzzle when it comes to our ability to provide a competitive offering in terms of residential mortgages and housing financing since it comprises an important and significant share of our total funding. The share of lending funded by deposits amounted to just over 34% at the end of the quarter, and it remains our ambition to retain and, if possible, to increase this share going forward.

Strong results despite increasing uncertainty
Earnings for the third quarter were strong. Our net interest income increased 6.2% to a total of SEK 1,155 million. This was, to date, our strongest net interest income for a single quarter. Profitability remains in line with our long-term goal of achieving a return on equity of 10%. We continue to notice pressure on margins on residential mortgages. However, over time we expect this trend to be partly offset by somewhat higher deposit margins. Credit losses totalled SEK 20 million in the quarter and essentially consisted of increased credit loss allowances related to the disbursement of new building credits as well as to risk migrations in the retail segment due to increased interest expenses for households. Costs continue to increase according to plan. Percentage-wise, costs are growing somewhat slower than previously, due in part to clearer prioritisation in operations. We are continuing to focus on wrapping up our work with replacing our core banking platform.

The future is uncertain. In challenging times, it is important to act responsibly, with the long term in mind. As people and a society – particularly during the pandemic – we have shown an incredible ability to adapt to changing circumstances. I believe, and hope, that this situation will be no different. Our capital and liquidity situation is strong and we have ample opportunity to support, assist and help our customers as we best know how. Finally, I would like to thank all of our employees for a successful quarter. I would also like to thank our customers for their trust – take care of each other out there this autumn.

Mikael Inglander
CEO of SBAB