Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for the first quarter of 2025. My name is Claus Ingar Jensen, and I'm Head of Danske Bank's Investor Relations. With me today, I have our CEO, Carsten Egeriis, and our new CFO, Cecile Hillary. We aim to keep this presentation to around 20 minutes, and after the presentation, we will open up for a Q&A session as usual. Afterwards, feel free to contact the investor relations department if you have any more questions. I will now hand over to Carsten. Slide one, please.
Thanks, Claus. I would also like to welcome you to our conference call for the first quarter of 2025. Despite the fact that the past month has seen increased uncertainty regarding the global economic outlook, the first quarter has been solid. With a net profit of DKK 5.8 billion, equivalent to a return on shareholders' equity of 13.3%, we've had a good start to the year. The macroeconomic backdrop in Q1 was strong, primarily in Denmark, where GDP growth reached 3.7% in 2024, and the economy has continued along the same path in the first quarter. When comparing to the first quarter of last year, the result came in 2% higher, mainly due to an uplift in fee income, where we continue to benefit from expanding our customer interactions. Overall, total income reflects strong customer activity, particularly for our corporate customers.
Operating expenses were stable on the back of prudent cost management and improved efficiency, and our cost-to-income ratio was in line with our target level of 45%. Compared to the previous quarter, the result for core income was in line with our outlook of slightly lower income from the expected decline in market rates. The lower fee income was driven by the usual seasonality for primarily investment and capital markets-related fees, whereas the underlying trend derived from customer activity continued to add momentum. Credit quality continued to be strong and supported by favorable macroeconomic conditions. Loan impairment charges in the first quarter were maintained at a low level and below our outlook for the full year. For the first quarter, it reflects only a few cases with actual credit deterioration and no impact from model-driven charges. As such, we also maintain our outlook for the full year.
Let me give a few comments on the macro environment. This is slide two, please. There is no doubt that the geopolitical environment has become more complex since the beginning of April, and the situation around tariffs has affected consumer and business sentiment. We are looking into a rapidly changing geopolitical agenda, but based on what we currently know about the magnitude of a global trade war, we estimate a limited direct effect on the Danish and the Nordic economies. I would like to update you on three important takeaways for us at Danske Bank. Firstly, the current macroeconomic backdrop is strong, and this is the case for all our markets in the Nordic region and for Denmark in particular. If we apply the impact from a potentially prolonged trade war to our recent economic outlook, we have a solid starting point to weather any potential slowdown.
Secondly, as it will also appear from today's financial report, the credit quality of our loan portfolio continues to be strong, based on a very diversified credit exposure with limited direct exposure to tariffs. We also maintain a strong level of post-model adjustments, and we have prudent macroeconomic scenarios modeled in place. In addition, our strong capital and liquidity positions add to the picture of a very robust balance sheet. Thirdly, as part of our prudent risk management, we've launched several actions across the bank to monitor and to assess the situation and to identify corporate customers most vulnerable in the current situation. These actions are also comparable to the initiatives that we've taken during both the COVID pandemic and also in relation to the invasion of Ukraine.
I strongly believe that this forms a strong background for us to manage a potential slowdown in growth and, most importantly, to support our customers in challenging times. Let me give a few comments to the business units before handing over to Cecile. This is page three. Personal customers. In personal customers, we saw stable financial performance. Total income declined 6% from the level in the same period last year, in part due to the divestment of PC Norway. Adjusted for PC Norway, total income was stable quarter on quarter and supported by growth in fee income and solid customer activity. Relatively flat net interest income supported the top line, with a 2% decline quarter-over-quarter, driven by declining rates and mitigated by steady deposit inflows, up 3% year-over-year.
Fee income increased 3% versus the same period last year, as customers take advantage of our fund and our advisory offerings. We saw strong credit quality and prudent cost management, and both the return on allocated capital and the cost-to-income ratio remain on track to meet our 2026 targets. In terms of lending, the development in home loans was generally stable, as the market begins to return to more normalized levels of activity. In Denmark, bank home loans grew 11% from the level for the same period last year, and mitigating a decline in volumes at Realkredit Danmark. Customers continue to choose our Danske Bolig Fri home loans, as its greater flexibility fits their needs, and this is a testament to the strength of our holistic offering across the group.
That said, we're also committed to increasing our share of the market at Realkredit Danmark, and we continue to implement a number of initiatives to increase our competitiveness, including recent pricing adjustments. Finally, we saw continued deposit growth, especially within private banking, as well as net sales growth in investment products across both our retail and private banking customers, reflected in the AUM result for the quarter. This clearly shows our ability to expand our offering and customer franchise to support customers' financial needs, regardless of the market environment. Slide four, please. In business customers, the financial performance reflected solid growth in lending in the context of an expanding customer base. Total income increased 1% year-over-year and 7% quarter-over-quarter, with an uplift across each of our core income lines.
Net interest income increased 3% year-over-year, driven by growth in lending, as well as continued expansion of our customer base in the mid-size segment and subsidiaries of multinational corporates. We also saw an uplift in fee income year-over-year across our markets, supported by sustained customer activity and our subscription-based service model. Return on allocated capital now exceeds our 2026 target of 21%. The cost-to-income ratio likewise continues to be ahead of our 2026 goal, based on prudent cost management, while we continue to invest in and build our business. Lending grew 3% year-over-year, driven by activities across all our Nordic markets, while deposits declined by 3%, due primarily to build up ahead of a large bond repayment at a client.
We continue to execute on our strategy, and in Q1, we made further improvements to our digital offerings and launched upskilling programs in sales and advisory services to enhance our advisors' ability to support customers efficiently across the region. Slide five. In the first quarter of 2025, LC&I continued the strong performance that we saw in 2024. Total income was up 13% year on year, driven by solid customer activity and higher volumes, and contributed to a return on allocated capital of 23%. It was also satisfactory that lending volumes grew 6% year on year, supported by activities in Sweden and Norway, as we continue to execute our strategy to grow the franchise outside our home market in Denmark.
We typically see some seasonality in the first quarter across our wholesale offering, and this was also the case in the first quarter of 2025, with total income 13% lower than in the fourth quarter last year, given lower capital markets activity and after record high performance fees of DKK 0.7 billion in Q4. Fee income came in 16% higher in the first quarter of 2025 compared to the same period last year, driven by solid customer activity. Notably, in DCM, some of the largest corporate issuers in the Nordics trusted us with significant capital markets transactions. Our leading cash management offering continued to increase our market share in the first quarter of 2025, adding eight new house bank mandates. Lastly, total assets under management grew 7% year on year, driven not only by higher asset prices, but also by robust net sales.
Net trading income increased more than 50% relative to the level in the preceding quarter, driven by customer activity in fixed income and FX, but was 6% lower year on year due to adjustments of the methodology for calculating the fair value of the derivatives portfolio. With that, let me hand, and I am pleased to hand over to our new CFO, to Cecile, for the group financial results. This is slide six.
Thank you, Carsten. As Carsten just mentioned, we saw a solid financial performance in Q1. Net profit for the group was up 2% year on year, with a decline of 4% quarter on quarter, mainly due to seasonality effects relating to fee income. Total income for the first quarter came in at DKK 13.9 billion, in line with the result from last year, and represents further good progress towards our financial ambitions for 2025 and 2026. In Q1, total income decreased 4% relative to the preceding quarter as a result of slightly lower NII and lower fee income due to seasonality effects, primarily for investments and capital markets activities. Net trading income increased in Q1, mainly due to seasonally higher customer activity, whereas income from insurance activities saw a negative impact from a provision of DKK 0.2 billion related to a legacy pension plan.
Excluding this one-off, insurance income was in line with expectations, and claims in the health and accident business were in line with the level a year ago. At DKK 6.3 billion, operating expenses were 1% lower compared to the same period last year and 6% lower than the preceding quarter due to year-end seasonality. Finally, due to continually strong credit quality, loan impairment charges were maintained at a low level with a minor charge of DKK 50 million in the first quarter. Slide seven, please. Let us take a closer look at the key income lines, starting with net interest income. Overall, NII remained stable despite the impact on deposit margins from lower rates, fewer days, and the remaining impacts from PC Norway.
When comparing net interest income, not only with the same period last year, but also with the preceding quarter, NII has benefited from improved lending margins based on lower funding costs and from a continually positive development in volumes. This is particularly evident on the corporate side. In addition, our deposit hedge has mitigated the impact from rate cuts on deposit margins and the lower return on shareholders' equity. With respect to NII expectations for the full year, I would like to stress that they are based on the current rate environments, with forward rates as of the end of April and subject to balance sheet developments. As such, we reiterate our expectation of NII of above DKK 35 billion in 2025. Now, let us turn to fee income. Slide eight, please. Fee income continued the positive trajectory we've seen in previous quarters.
Compared to the level in the same period last year, fee income rose 8%, driven by all categories of fee income. As I mentioned in my comments on the income statement, seasonality effects for primarily investments and capital market activities have an impact when we compare Q1 with the preceding quarter. Fee income from everyday banking activities increased by 7% year-over-year and by 8% compared to Q4, as we continue to expand business relations with our customers. Fee income related to lending activities was stable relative to the level last year, as higher contribution from strong corporate lending activity was offset by lower retail lending activity. The quarterly developments were impacted by lower contribution from refinancing auctions in Q1. The continued customer activity was also clearly visible in fee income generated from our capital market activities, which was up 32% from the level last year.
The decline from the preceding quarter was mainly due to lower ECM M&A activities. However, strong DCM primary market activity was able to offset much of the quarterly effects. Finally, investment fees, where we saw an increase of 7% year-over-year, based on a good trend in our asset management business and on continually strong strategy execution in our private banking activities. When comparing to the previous quarter, please be mindful of the annual performance fee income in Q4, which amounted to DKK 0.7 billion. Assets under management in Q1 were slightly down, however, partly mitigated by positive net sales within the retail as well as the private banking segments. Slide nine, please. Next, let us look at net trading income. Overall, trading income added positively to the results, both year-over-year as well as quarter-over-quarter, with an increase of 15% and 58%, respectively.
The increase was driven by LC&I, with higher customer activity in the secondary fixed income markets, offset by xVA valuation adjustments. There was a further uplift in group functions due to negative market value adjustments in the first quarter of last year. That concludes my comments on the income lines. Let's turn to expenses. Slide 10, please. Looking at the cost development for the first quarter, I am pleased to report that our focus on cost management and improved efficiency continues to yield results. The trajectory for operating expenses is progressing according to our full-year guidance of up to DKK 26 billion, and the cost-to-income ratio at 45.2% is in line with our 2026 target. Compared to the level in the first quarter of last year, costs were down 1% as structural cost takeouts mitigated the impact from wage inflation, performance-based compensation, and the planned investment ramp-up.
Relative to the preceding quarter, costs were down by 6%. However, please bear in mind the seasonality we have for higher costs in the last quarter of the year. Slide 11, please. Let us look at our strong asset quality and the trend in impairments. Our well-diversified and low-risk credit portfolio continued to perform well, with a benign macroeconomic environment, including healthy and steadily improving household finances. Impairments in Q1 amounted to just DKK 50 million as actual single-name credit deterioration and stage migration were negligible. Increasing geopolitical and economic risks from tariffs do have an impact on consumer and business sentiments in the context of the Nordic economies. The outlook remains benign across our markets, and especially in Denmark. We have maintained our prudent approach with a severe and prolonged downturn scenario that includes a decline of around 40% in property prices.
In addition, we have kept our significant PMA buffer and repurposed part of the allocation from commercial real estate and construction towards global tensions. As tail risks related to commercial real estate ease, this reallocation mitigates the potential impacts of tariffs and trade uncertainties. We will continue to review our macroeconomic scenarios in conjunction with a PMA buffer, but given the current state of our strong asset quality, we remain comfortable with a full-year guidance for impairment charges. Slide 12, please. Our capital position remains strong and was further supported by another quarter of healthy capital generation post-dividend accrual. At the end of Q1, the reported CET1 ratio increased to 18.4%, up from 17.8% in Q4. The reduction in risk exposure amounts in Q1 also contributed to the positive developments in the CET1 capital ratio.
Our prudent front-loading of CRR3 in Q2 2024 was more than sufficient to mitigate the implementation that took effect on January 1st. Operational risk REA ended up being lower than initially anticipated due to improved data quality and governance. Credit risk REA also benefited as other mitigating actions decreased the effects of implementing CRR3, discounted otherwise higher credit volumes. Accordingly, we have released the CRR3 buffer. We continue to operate with a healthy CET1 buffer versus the regulatory requirements as we steadily progress towards our stated capital target of a CET1 ratio above 16%. The ongoing share buyback program we announced in February is being executed and will continue to provide support throughout the year. Now, let us turn to the final slide and our financial outlook for 2025. Slide 13, please.
As previously mentioned, we reiterate our outlook for net profits to be in the range of DKK 21 billion-DKK 23 billion, with no changes to individual lines. Finally, our financial targets for 2026 also remain unchanged, subject to our current economic and market expectations. Slide 13, please, and back to Claus.
Thank you, Cecile. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you are listening to the conference call from our website, you are welcome to ask questions by email. A transcript of this conference call will be added to our website within the next few days. Operator, we are ready for the Q&A session.
Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We will now take the first question from the line of Gulnara Saitkulova from Morgan Stanley. Please go ahead.
Hi, this is Gulnara. Thanks for taking my questions. First question on the end of the probation period. Now you are approaching the end of this three-year probation period with the U.S. Department of Justice. Can you clarify whether this unlocks any strategic or operational flexibility for you? How should we think about the potential uses of the excess capital that will free up at the end of the probation? Would you prefer to top up shareholder return, support loan growth, or new product rollout? The end of the probation period could potentially open the door for M&A opportunities. The second question on the market share in Denmark. You previously acknowledged market share losses during the AML crisis period. What exact initiatives are you implementing to win back lost customers? How are you measuring success of those efforts?
What type of annual growth would you target for the coming years? Thank you.
Thanks, Gulnara. Morning. Let me take those questions. Let me start by the end of the probation period question, which, as you state, ends at the end of this year. As I have also previously said, we'll look at excess capital as we go into 2026. I think all the options that you mentioned are options. We would clearly like to grow our business even further. That is certainly first priority, to grow our business and to continue to make improvements on profitability and the returns we're making. I think that is a strong return for investors on that capital to continue to invest capital at the improvement rates of return that we're seeing. We are also open to looking at, as I've previously said, inorganic opportunities in the Nordics within our focus segments and within the strategy that we've set.
There is also an option to look at capital distribution, and we'll continue to look at all those options. This is something that we will continually update on as we get into 2026. In terms of the market shares in Denmark and initiatives to win back market share, that's at the very heart of our strategy. We said that we had a strategy to really grow market share, both to be a leading bank for our large corporate institutional, be leading bank for large corporate institutions in the Nordics. There we have a strong position in Denmark, and we continue to see good progress there to gain market share in business customers, particularly with focus on customers with more complex needs. There in Denmark, we continue to see that we're doing more business with our business-focused customers.
That is also what you see when you look at the improvements that we're seeing in the fee line. Then in personal customers, which is perhaps where the loss in market shares has been most pronounced, there we are seeing improvements. For example, we've seen improvements in market share on the investment side. This is a very important area for us. It goes to show that we are also taking market share and increasing net customer flows in private banking and also in our focus customer segments within personal banking. That link with the increasing market shares in investments and also in bank lending is pleasing. At the same time, we would like to see more progress, for example, in market shares in the more traditional mortgage product area, like Realkredit Danmark.
We have a large number of initiatives focused on that, both from an advisory technology, but also a product positioning perspective.
Thank you.
Thank you. We will now take the next question from the line of Sofie Peterzens from JP Morgan. Please go ahead.
Yeah, hi. Thanks both for taking my question. My first question would be that if we had not had the uncertainty of all the trade wars, would you have considered upgrading any of your 2025 guidance lines? For example, if I look at the loan impairment charges of DKK 1 billion versus just DKK 50 million in the first quarter and Danske having close to DKK 6 billion of overlay provisions, it just seems like it is quite conservative. Would there have been any upgraded guidance if there had not been any trade wars? That would be my first question. My second question is on net interest income. It was very helpful that you said NII will be over DKK 35 billion in 2025. How should we think about NII on a quarterly basis? When do you expect net interest income to trough on a quarter-on-quarter basis?
Also, when we look at the NII performance in some of the business areas, like business banking or SEI, it was up a lot quarter-on-quarter, but group functions was quite negative, down DKK 300 million or around DKK 300 million. How should we think about the kind of progression in the operational areas and kind of group functions, both in 2025 and on a quarter-on-quarter basis? Thank you.
Thanks, Sofie. I think, look, way too early first quarter to talk too much about what will happen for the rest of the year. Your question around if the uncertainty around trade wars had not happened, what would then have happened? I think very difficult to say. I think in general, we have a solid asset quality. We guided to around DKK 1 billion of impairment. We hold that guidance. I would say there was still uncertainty even before the uncertainty around trade wars and Liberation Day. I mean, those uncertainties were also included when we talked to you all when we did our year-end results and guided for the year. On NII, I think we said previously that we would sort of peak at, well, first we said Q3, then we said Q4, but I think we got it roughly right.
We have been able to guide roughly well on NII. I think quarter-on-quarter, if you look back over the last couple of years, you now see NII coming down somewhat, but clearly in a way where both our hedge, our deposit hedge, but also volumes activity is offsetting lower rates. In terms of the sort of business unit versus group functions, I mean, you should note that there are some dynamics both around depositives from the deposit hedge, but also the margin compression coming from the shareholders' equity, which clearly comes down as rates come down, and then the allocation of that into the business units. I think in general, you should think about NII as coming down somewhat steadily quarter-on-quarter, but offset by volumes activity and the hedge. That is also, again, why we feel comfortable with the above DKK 35 billion. Cecile, you want to add?
Just on the staff functions, indeed, I mean, there's nothing there to be read. I mean, what we do each quarter is obviously focus on allocating, as Carsten has mentioned, the NII and all the drivers of the NII, including the deposit hedge, etc., to the business units. That can create obviously some changes at the central level. Other than that, it's what you would typically expect. Sometimes we've got some movements due to, for instance, market value of FX swaps, but only the usual. There's nothing to be read there.
Okay. Sorry, the NII trough will be in the third quarter or fourth quarter this year?
I mean, you already see NII coming down somewhat, right, from last quarter, although it is fairly flat. As I said, you would sort of see a slight decrease, which I think is also in line with above 35 that we are given. I think it is a gradual kind of slight reduction. Obviously, there can be changes quarter-on-quarter in lending activity and the like.
Thank you. That's very helpful.
Thank you. We will now take the next question from the line of Namita Samtani from Barclays. Please go ahead.
Morning, and thanks for taking my questions. Firstly, just on capital return, is it still only around 100% of earnings payout possible per year? I just wonder because you've got tons of capital now, like CRR3 was a tailwind. You could even get a reversal of the commercial real estate buffer, plus a couple of add-ons in your CET1 requirement. I'm trying to ask, can you do above 100% payout? Secondly, the DKK 35 billion NII guidance, what assumptions is that based on terminal rates and loan growth? Thank you.
Thanks, Namita. On capital returns, look, as we also showed last year, yes, you can pay above 100% theoretically. Last year was due to the sale of PC Norway. I think the primary question both for us and our regulator is that we have a strong capital base that can withstand severe stress. Really, the discussions with regulators is around stress testing and ensuring the capital is robust under severe stresses, both Danish FSA stresses and EBA stresses and so forth. There is no hard and fast rule around that. I think, as I said previously, we'll continually look at our capital position, our buffers, and what the options are for excess capital, but with a primary focus on organic growth.
On the assumptions that sort of go into the DKK 35 billion, above DKK 35 billion NII, I'd say it continues to be the same assumptions in the same way that we've guided the market, is that we look at latest sort of market implied rates, and then we look at the dynamics of our balance sheet and the growth, as well as sort of the balance sheet effects and the hedges. We haven't changed anything in the way we're guiding. As I said, I think we've been fairly good at understanding sort of the dynamics of the balance sheet and how that linked through to NII over the last many quarters. We continue to feel under the current environment and market implied rates comfortable with this guidance. Yeah, Cecile?
Just to give a few more details there as well, I mean, obviously, you've got NII sensitivity, around DKK 500 million for one first year, DKK 300 million and DKK 200 million, respectively, for year two and three, based on 25 basis points parallel shifts. Obviously, and as we've seen clearly in the first quarter, the rates coming down, it hasn't been a parallel shift. There's been actually some steepening. All of this matters, particularly as we have obviously a deposit hedge. The shape of the curve also matters. However, obviously, looking forward, again, we're basing our guidance on the current market implied rates and the other assumptions on volumes that Carsten mentioned.
That's very helpful. Thanks very much.
Thank you. We will now take the next question from the line of Johannes Thormann from HSBC. Please go ahead.
Morning, everybody. I'm someone at HSBC. Some questions from my side as well, please. First of all, your cost mix changed a bit over the last years. Now, seeing continued increase in IT costs and other costs going down, especially due to regulator costs coming down this quarter. Is this something we should factor in also for the next years? Second technical question, just on the tax rate for the full year in the future, what is your best guess for that level? Last but not least, the more strategic one, your insurance business, yeah, delivered several disappointments, partly due to legacy cases in the last years and quarters. What is the benefit of keeping this business instead of selling it to a partner and distributing his product? Thank you.
Thanks, Johannes. Let me take the last question, then I'll hand over to Cecile for the cost and the tax question. Look, first of all, we agree that there has been a number of negative one-offs over the last quarters in our insurance business, mostly led and driven by the unfortunate trend in society around more illness, which has increased provisions for the health and accident insurance. We're working hard to get that back to break even, but clearly, there are timing differences between repricing those contracts and the provisions. Strategically, we like the business. It's a very important product for our customers. Actually, if you look at the underlying results of Danica, the increase in premiums, the increase in customers, our ability to do more between the Danske Bank Group and Danica, we see this as a significant opportunity. We see good progress on that.
We believe that as that business transitions more from the guaranteed insurance products, where clearly there is market risk and larger capital implications, to more unit-linked type of insurance products, this will be a business that can accrete to the overall group returns and, again, be an important part of the product set that we have for our customers. Cecile, you want to take costs?
Yeah, let me take costs first. Costs, obviously, we're at DKK 6.3 billion, down year on year and quarter on quarter. In fact, if I think about the components within costs, I think about three different parts. The first one is the sort of run the bank. The second part is everything to do with investments, indeed, digital and non-digital, including obviously the IT costs that you mentioned. The third is around our financial crime and resolution type costs. If I look at the way that each of these components has evolved, they've evolved according to our expectations. In terms of run the bank, clearly, we're facing, like everyone else, the pressure on the wage side in particular and some compensation. However, these are mitigated through our actions. That's exactly as we expected it.
If I think about our digital and non-digital investments, they're also progressing according to what we announced in the context of the Forward 28 strategy in 2023, with investments of about DKK 3 billion a year rising to DKK 4 billion a year. We're in that higher category now, which is exactly, again, as we expected. When it comes to the financial crime and legacy costs, clearly, they continue to come down. They come down, again, as far as certainly financial crime costs, according to our expectations. We've got a targeted cost at the end of this year of about DKK 1.7 billion. We're expecting to get there. Just to remind you that this came down from DKK 2.3 billion a year in 2023. All of this is progressing. Obviously, that has allowed us to reiterate our guidance of DKK 26 billion at the end of the year.
We're on track there. Obviously, you know our cost-to-income ratio guidance of 45% in 2026 as well, which we are guiding towards. That is on the cost side. Just to take also briefly, obviously, your tax question, I'll refer you to our investor presentation on page 59 with effective and effective tax rates prior to year-end adjustments of just above 25%.
Okay, thank you.
Thank you. We will now take the next question from the line of Shrey Srivastava from Citi. Please go ahead.
Hi, and thank you very much for taking my questions. My first is that in light of the better rear scene today from the CRR3 reversal, does your guidance for a 1% impact from sort of regulation from 2022 to 2026 still hold?
Yeah, thanks for that question. I think roughly speaking, that still holds. We're not going to change that. There may still be small adjustments here or there, but I think we should assume that that's broadly in line.
Okay, understood. Thank you. My second question is actually on personal customers, Sweden. If you look within personal customers, the Swedish business actually seems like a relatively bright spot. I'd like to ask, what are the exact sort of initiatives that are seeming to sort of start to bear fruit in this business? Thanks.
Your question is on personal customers, Sweden. Is that right?
Yes, yes.
No, look, I mean, as part of our strategy, we set out to reposition personal customers, Sweden, to be more focused on sort of the mass affluent segment, particularly focused on doing more business with our partners there because a lot of the business is originated through third-party partners, as well as looking to do more business between our PC and our BC business in Sweden. A slightly more focused, differentiated business than the strategy that we previously asked, which was more, let's say, a mass market personal business. The focus is on driving profitability back towards a place where we're accreting and adding value to overall returns. This will be done through increasing share wallet within that customer base and, of course, also acquiring new customers, again, within those focus segments. I would say it's still early days, but we do see some green shoots.
We will continually update that. As I said, also during the strategy presentation, it will take a couple of years to get that business, let's say, on track in terms of what we would like it to be. We continue working on that.
Understood. Thank you very much.
Thank you. We will now take the next question from the line of Jan Erik Gjerland from ABG. Please go ahead.
Thank you for taking my questions as well. I have a follow-up on the hedges. It looks like the hedges sort of increased from DKK 636 million to DKK 767 million this quarter. Is this sort of a trajectory where we should think about it increasing in size, although not fully mitigating the positive margin loss this quarter, mainly because of the large drop we have seen in the interest rates? How are you on this DKK 150 billion of investment? Is this the full return, or is it more to come when it comes to an increase or a further decrease going forward? Second, on your bank lending, it seems like you are moving upwards very positively. Could you shed some more light into what kind of categories or industries you're sort of seeing this sort of good benefit?
Finally, on the cost side, the long-term financial crime cost, how large should it really be down the line, you think, versus the DKK 1.7 billion you mentioned towards the end of this year? Thank you.
Thanks a lot. On the hedges, I think you should think about the DKK 150 billion as roughly the size of the hedge. It can vary a little bit quarter on quarter. This is, again, because we are, of course, managing the triangulation, if you will, between the size of the hedge and the associated capital volatility and what requirements there are around interest rate risk in the banking book from a regulatory perspective. We feel DKK 150 billion, thereabouts, is the right hedge size and provides us with the sort of earnings hedging that we would like. You could say that there is some more yield pickup in that portfolio, which is also why we feel comfortable with how we think about the NII offsets as rates come down and the offsets on the hedge as we look over coming quarters, as mentioned before.
Bank lending, look, I mean, it's broad-based. What we're seeing and what's also part of our strategy is to grow in the business-focused segments and business customers. There we've seen growth broad-based. We also see ourselves growing well outside of Denmark, which has been an important focus for us. The same goes on the LC&I side, where you've seen pretty strong year-on-year growth. I would say it's broad-based, but as I also mentioned in the speech, particularly outside of Denmark and Sweden being an important market for us, where we've increased growth in terms of cash management mandates, which has also, in many cases, yielded bank lending opportunities as well. Broad-based, both in terms of geography within the Nordics, in line with our strategy, but also sort of sector and segment-wise, there's no particular sectors I would call out.
Lastly, on the cost side, you ask on sort of the financial crime costs. Look, there is some further opportunity as we look into 2026 and 2027. I think about those opportunities as being more sort of now going into more business-as-usual opportunities to look at how we can leverage technology, how we can leverage various different productivity-related opportunities. We are focused on that, not just in financial crime, but across the business.
Okay. Just one follow-up on the 150 billion. You said that the running yield is still picking up. For how long do you think it will continue to move upwards when it comes to this versus your reinvestment into the bonds?
Yeah, I mean, you should think about it that there are some opportunities over the coming quarters, but we're not going to put a quarter to it.
Okay. Thank you.
Sorry, just to add to the deposit hedge, obviously, think about it in terms of we're obviously investing and there's a rollover in bonds. We've got slightly above a three-year average life, right? That is how you should think about it. Obviously, it's not a mechanical just sort of three-year bond reinvestment. I mean, we've got some shorter bonds, some slightly longer bonds. In a nutshell, it will continue to increase and pick up throughout this year and next year and beyond, but it's not linear.
Okay. On the bank lending, have you seen any changes in the customer sort of behavior or interest in doing bank lending with you after the sort of the turmoil and the tariff rate situation?
Look, I think in general, we still see pretty good activity and reasonable pipeline. I think on the bank lending side, still sort of cautiously optimistic that as inflation normalizes and interest rates come down in the Nordics and with various different things happening around needing to invest in supply chains and production and also spending in infrastructure, defense, green transition, and so forth, we still remain cautiously optimistic. That is also what we see from our clients. There are clearly some sectors and some customers that are harder hit than others from the uncertainties. You also see that, I think, just in the recent week with some downgrades on guidance from certain companies that are particularly hit with the trade uncertainty. I would say across sectors and broad-based, still optimistic around activity, but certainly some customers and sectors hit harder than others.
Thanks for your comments. Appreciate it.
Thank you. We will now take the next question from the line of Mathias Nielsen from Nordea. Please go ahead.
Thank you very much. Following on the last question from Jan Erik, maybe could you also say a bit about how this has started on the asset management side? What have you seen on site in Q2 so far? Obviously, the market development that we can figure out ourselves, but maybe also what are the discussions with clients? Have you seen any significant changes to your flows on that part? The second question. We also see some of your peers now reversing some of those PMAs. It seems like you're just moving around the different brackets. You could either say it in a positive way, you seem more cautious and conservative, while the others are more aggressive. If you take the negative approach, you also say you hold a lot of capital buffers that way around as well.
What should we think about those PMAs? When should we think them to be released? It seems like it's just moving around the brackets instead of actually seeing any releases.
Yeah. Thanks, Mathias. Let me take your last question first. Look, I think we've shown over the last quarters that, in fact, we will review our PMAs regularly. We have, in fact, released some of our PMAs in the last few quarters. I think I've been asked before also on these calls sort of what is the right level or the normalized level, perhaps is a better word, on PMAs. What I've said is I think our PMAs are now at the higher end of what a normalized level of PMAs would be. I think that is expected given the large uncertainty that there is right now. We're prudent, we believe. Yes, it's a reallocation this quarter. In other quarters, we've actually seen net releases of PMAs. We'll continue to look at these.
For us, it puts us in a good position to continue having a lot of flexibility around how we manage the dynamics around the uncertainty and the credit book. On asset management, I mean, no question that there has been a change in dynamics and flows in the first quarter and first four months of the year. We have seen our large institutional customers reallocate from the United States to Europe and other jurisdictions, more hedging of U.S. dollar to diversify and de-risk. I would not say that there is a huge conviction around whether there are any particular geographies that are going to outperform.
I think in general, there has been a view that we're probably too heavily allocated towards the U.S. and with kind of European equities perhaps being somewhat undervalued, but also with confidence that a normalization of inflation, lower interest rates, more focus on competitiveness, more focus on growth, more government spending in Europe. I would say that it's, I would say that's the kind of thinking that we're seeing from our clients. That's why we're seeing some of this asset reallocation. There is also clearly some level of, let's say, diversification and maybe being slightly more careful given the uncertainty around how this trade restructuring of global trade plays out.
Maybe I would just add on the assets under management. Obviously, it's still early, clearly in the second quarter, but there's nothing that, as far as Fincom is concerned, the impact obviously of AUM on Fincom, there's nothing that we're seeing that shows sort of a massive change from what we've seen in the first quarter.
Maybe a follow-up question on the flows changing a bit from where they're placed. Is there any difference in your margins across Europe versus U.S. equities? And maybe also, do you see yourself having a competitive advantage on the European equities being placed in Europe? You actually could see a bit higher flows from the capital being reallocated towards Europe?
How I think about at least sort of currently is that clearly there is opportunity to advise our clients as repositioning happens and activity happens. We can be there, we can give them advice. Also, given particularly the Nordic differentiation we can have around fixed income equities, but also our focus on sort of alternatives, there is an opportunity there. I would more say, broadly speaking, when there is repositioning and there is volatility with the sort of setup we have, the focus we have, the capabilities we have, we think there is opportunity. I would not say that there is going to be a big change in sort of margins with this repositioning if you just look at Europe equities versus U.S. equities. Where there is opportunity is more advising customers on more illiquid alternative asset sides where margins are typically higher.
Thanks a lot.
Operator, can we have the last question, please?
Of course. We will now take the last question from the line of Martin Gregers Birk from SEB. Please go ahead.
Thank you so much. First question is on the mortgage margins. Danish mortgage margins, I see one of your competitors today is out lowering front-book mortgage margins. Given your performance in RD over the past many quarters and many years, I wonder why isn't that you? That's my first question. On my second question, just coming back to the talks with Axis Capital, I guess you have a lot of buffers these years that are moving around. Could you please give us an update on your commercial real estate buffer and the buffer that you hold for your hold to maturity portfolio and also sort of the last remaining bit of your Pillar Two add-on from the DKK 10 billion buffer that the FSA gave you years ago? Thanks.
Yeah. Hey, Martin, thanks for those questions. We are and we actually have taken some actions on being more competitive on the RD side, particularly in where we think that we can really differentiate and which plays into our focus on customer segments with more heavy advisory needs. We have recently changed pricing on the below 60% interest-only product, which again, we believe is a product that plays well into where we're focused. We're not looking to sort of and obviously, I'm not going to give any views on forward pricing, but in general, we're just looking at where does it make sense for us to price more competitively so we can capture a share wallet in the customer segments where we believe we can differentiate ourselves. That's what I would say about kind of mortgage pricing and what we've done so far.
On buffers, CRE buffer, clearly that's one that, as you know, there was a commitment to re-look at that from the Systemic Risk Council in Denmark. We, of course, believe not surprisingly that that's a buffer that is not needed, and particularly not with inflation and rates where they are now. We continue to lobby for that buffer being removed. We will see what the timing will be around that. On the other kind of Pillar Two add-ons, and you mentioned specifically some of the add-ons from Estonia, those are add-ons that we continually speak with the regulators about. Of course, there is an expectation that at some point in time, those will be reduced.
I think I've also said before that usually the time for those type of buffers to be released takes time because there is a lot of monitoring and control testing around ensuring that control processes are robust. You could also say that given that we're still in the probation period, once we get out of that probation period, it is even more, I think, relevant that we continue to look at those buffers.
Okay. Thanks. Just maybe a follow-up on mortgage pricing. I mean, obviously, the initiatives that you have taken, but if you look at RD's performance over the past many years, it's just been steadily going down, measured on mortgage shares, market shares, sorry. If you look at what the TK is offering, I mean, they're offering a pricing that is second to none. When I look at now, I listen to you guys reiterate your NII guidance. Based on my numbers, it has never been cheaper in relative money to match TK pricing. Why isn't now the right time to finally turn around RD and start to get some of those market share gains?
Again, we look at it both across bank lending and RD lending. Bank lending, we've taken market share. We're pleased with that product. It's a product that our clients have increasingly taken on. Margins also solid there, returns acceptable. Like I said, we will continue to look at RD, and we have repriced some products where we think it's relevant. We continue to look at our customers from sort of an overall value proposition perspective. We'll continue to do so. We believe that we can continue to be competitive against Credit. Thank you very much all for your interest in Danske Bank. Really appreciate the questions. As always, please reach out to Claus and the team in investor relations if you have any other questions.