Good afternoon and welcome to SEB's Q2 2025 Pre-Close Call. My name is Paweł Wyszyński and I head up the Investor Relations team at SEB. This call is being recorded and the script used for this call will be published on the Investor Relations website after the call. During this call, we will address the macro environment, the P&L lines, risk exposure amount, and capital. Following this, there will be a Q&A session. We will only answer questions related to already disclosed information as well as publicly available data and refrain from answering questions on the current quarter. If you want to ask questions, you must log on via the Teams app or your browser and raise a hand.
Starting off with the macro environment, the average three-months timer is lower in Q2 compared to Q1, and the Swedish central bank lowered the policy rate by another 25 basis points with effect from late June. Following these cuts, SEB changed some of the bank's lending and deposit rates in Sweden. The majority of our rates are available on SEB.se, and I would encourage you to visit this website continuously as we show most of our offering there, and that is where the most up-to-date information is located. The average three-month arrival is lower compared to Q1, and the European Central Bank cut deposit facility rate by 50 basis points during the quarter. This mostly affects our Baltic operations and mostly the deposit side. You can find the relevant deposit rates and changes on the domestic SEB websites for each of the three Baltic countries.
Regarding sensitivity to policy rate changes, we would point out the simplistic view is to look at the Q1 2025 numbers, mainly our equity, SEK 235 billion, the private and corporate transactions accounts within BRB, SEK 176 billion, and the Baltic private and corporate transaction accounts, SEK 192 billion, and the rate sensitivity for low rates on this total of roughly SEK 600 billion. All of this data is available in our fact book, and together with the rate changes available on our websites, I believe there is plenty of data to capture the interest rate sensitivity for SEB. Before turning to the P&L, I just have an FX remark. Both the P&L and the balance sheet are affected by FX movements. The P&L is affected by the average FX during the quarter. All else equal, a stronger SEK leads to lower income and lower costs.
The opposite applies for a weaker average SEK. Compared to the first quarter, 2025, on average, the SEK strengthened somewhat versus the EUR and even more so versus the $USD . This would mean somewhat lower income, mainly on NII and NCI, and somewhat lower costs. The balance sheet is affected by ultimate FX rates, where a stronger SEK reduces assets and the risk exposure amount. As our equity is SEK denominated and is not hedged, a stronger SEK affects the common equity to one capital ratio positively. The opposite applies for a weaker SEK. Ultimo SEK looks stronger versus the USD so far in the quarter, while it looks a bit softer versus the EUR. This would imply a fairly small FX effect on REA.
In the Q1 2025 investment presentation you can find on sebgroup.com, Slide 43, the currency split of risk exposure amount was 46% in SEK, 32% in EUR, and 10% in USD. A plus minus 5% change in SEK versus other currencies affects the CET1 capital ratio by around 40 basis points. I will now turn to the profit and loss lines. On net interest income, regarding lending deposit volumes, we have earlier stated that the Statistics Sweden numbers do not define data in the same way as they are reported for the SEB Group, and I will hence not go into more details on the Statistics Sweden data. The one day more this quarter will, simplified, impact the NII divided by the number of days of around SEK 100 million positively. The stronger SEK would have an adverse effect on NII.
Regarding the moving parts on NII in Q2 2025, I would point you towards the Q1 2025 transcript from the results call where our CFO went through the effects. On a group level, he commented that if we look at the development compared to the fourth quarter, there is a negative impact from fewer days as well as negative effects from the stronger Swedish krona. Together, these effects amount to SEK 300 million. However, we did see a strong performance in markets NII within fixed income as the yield curve steepened in the quarter. We expect that some of the positive tailwind from the fixed income unit within markets seen in Q1 should abate in Q2. Our CFO talked about the divisions.
Looking at how this plays out in corporate and investment banking, NII saw a small decline reflecting fewer number of days and the FX effect mainly versus EUR. The offset, in fact, here was a notable contribution from markets NII. Within business and retail banking, in addition to the day count, the decline of around SEK 300 million compared to Q4 reflects lower deposit margins from the lower rates as well as some compression on mortgage margins where market dynamics remain positive. The Baltics division saw a similar decline in the quarter of around SEK 300 million with about a third attributable to day count and FX and the remaining attributable to lower effects of lower interest rates. Moving on to net fee and commission income.
A large part of the net fee and commission income derives from assets under management and assets under custody and is hence correlated to the general stock market development. Let's see how the quarter will close, but looking at the average quarter to date for the OMX Nordic 40, OMX S30, and the MSCI World indices, a simplistic approach indicates a negative quarter-on-quarter impact from net asset values. Turning to advisory and security-related fees, we stated in connection to our Q1 report end of April that early Q2 observations are that there has been a wait-and-see mode introduced in the market. The very high volatility and uncertainty we have experienced since we started to talk about potential trade wars have clearly had an effect in a wait-and-see stance introduced.
We also stated that the strong performance in the first quarter is supported by primary and secondary market activity across both FICC and equities. Advisory fees were also strong while lending fees remained softer in light of broader loan demand context. As for activity during the second quarter, we do not provide any guidance, but as always, general market conditions, macro trends, and geopolitical developments typically have an impact on the demand of our products and services in this area. Moving on to net financial income. We have earlier said that our best guidance for this line is the average outcome that we have achieved over the last 16 quarters, since it is an income line hard to predict.
That average was about SEK 2.4 billion per quarter as per Q1 2025, and I can just repeat what I said on the fee line and pointing to that we have already said in connection to Q1, i.e., early Q2 observations were that there has been a wait-and-see mode introduced in the market. Moving on to net other income. Not much to add here, more than it was lower than the usual run rate in the previous quarter. Moving on to total expenses. In Q4 2024, we presented the updated cost target of at or below SEK 33 billion, plus minus 300 million, and assuming 2024 average FX rates. This number was unchanged with updated FX rates when we reported the Q1 report. Since then, the Swedish krona has continued to strengthen. Operating expenses for the first quarter included around SEK 160 million in implementation charges linked to Air Plus.
The SEB share price impacts the cost base as well, where a higher share price increases costs all else equal. The SEB share price compared to the Q1 closing has so far been rather flat, hence there should not be any larger effect stemming from share price movements as of today affecting the cost base. Moving on to net expected credit losses. We wrote in our Q1 2025 interim report that new provisions were partly offset by reversals of provisions and the reduction of portfolio model overlays, of which SEK 1 billion remained at quarter end. We also wrote that overall asset quality was stable despite an increase in expected credit losses. The increase is related to a few counterparties in different countries and industries. Moving on to imposed levies.
Repeating what we said in conjunction with the Q1 result call, we expect imposed levies to be around SEK 3.4 billion for the full year 2025, with the first half of the year expected to be somewhat higher than the second half, as the basis upon which some of these levies are calculated on is a moving average. Moving on to tax. In conjunction with the Q1 report, we said that going forward, a tax rate of 21% is a good proxy for forecasting. Moving on to the capital and risk exposure amount. SEB's current share buyback program amounting to SEK 2.5 billion is expected to be concluded no later than July 14, 2025, as stated in the press release on April 28.
In connection with the Q4 2024 result, SEB conducted the full share buyback approval received from the FSA of SEK 10 billion until the end of January 2026 from the CET1 capital. Risk exposure amount is affected by, among other things, FX movements, and given the appreciating SEK in ultimate terms quarter to date for the $USD, but depreciating in terms of EUR, the effect should be rather small. You also need to think about the fact that lending volumes on a system level are growing again, and lastly, do not forget about market risk. This concludes our initial comments in this pre-close call. Please monitor how the FX rate closes at the end of the quarter for the most up-to-date data.
Before we move on to the Q&A session, I would like to highlight that we enter our silent period on July 1 and that our Q1 2025 interim report will be published on July 16 at 6:30 A.M. CET. With this, we wish you all a good day, and I open up for any Q&A, so please raise a hand. I think Namita, you are first up.
Thanks, Carl. My first question, you know the fixed income NII. When you say abate, do you mean that it just sort of flattens, or are you saying that it could reverse? Abate is meaning that it's going to not be as strong as in Q1, so something lower. Okay, got it. And secondly, when Malmer on the call said NII flattened either in Q2 or Q3, what were the rate assumptions? Like, was it the rates in Sweden at 2 and ECB 1.5?
That's a good question. It was the forward rate that we looked at, that what kind of forward rates do we have in Q2 or Q3? We did not disclose those forward rates. I guess what I can say is that those forward rates have changed somewhat, so they are somewhat lower compared to what we thought when we reported the Q1 report. If anything, that would push out the likelihood of NII bottoming out more to Q3 rather than Q2. Again, I am sure this will be something we will follow up at the conference call in connection with the Q2 numbers. Okay, thanks very much. Thanks. We have Magnus. Yes, hi. Just to follow up, and sorry if I missed it, I am not in the office, but did you ever quantify the NII contribution from the fixed income unit within markets in Q1?
No, we did not, so that's a good question. I won't now either, but I guess you could triangulate it given that we did quantify the temporary effect that we had on NII in Q4, and we said SEK 100 million-SEK 200 million. And then we said in connection with the Q1 report that the effect from the timing effects was somewhat offset by the markets effect. I guess that gives you some kind of a ceiling how high that effect could be. Sorry for being cryptic, but given that we have not disclosed it, I have a difficult time disclosing it here as well. Okay, thank you. Thank you. Nicholas?
As you mentioned, the cost target for 2025 is based on the FX rates by the end of the year, I guess, but you did not update those despite the SEK strengthening in Q1.
Just thinking, how would you think about the potential for updated cost guidance reflecting the continued currency movements in Q2, as you mentioned, given that you did not adjust those in Q1?
That is a good question. We did adjust them in Q1. They were unchanged. That might seem counterintuitive, as you say, as the Swedish krona strengthened. The way we look at it is not the end-of-period FX numbers. We do not look at how the FX rate looked at the end of 2024 and then adjust it compared to that. As I have stated, and as we write, we use the average FX rates during 2024. Every kind of in Q1, we compare to what the average rates were in Q1 2024. Now that the half year has gone, so H1, we will compare to the average FX rates in H1 2024.
That's how we do the comparison.
All right, that's clear. If you could just remind us about the potential timing effects on the NII in Q1. Did you say there are still any timing effects, or were those kind of neutralized in the first quarter? We said that there were some left, or the way we said is pretty much that a large part of the timing effects were offset by the strong NII in markets. We didn't comment fully on it, but given that comment, it's fair to assume that there were something small left, but I guess it was not worth pointing it out to a larger extent as we did in Q4. Okay, perfect. Thank you.
Okay, do we have any more questions? I don't see any hands at present. If not, then thank you.
We will go into silent period as of July 1. If you have any more questions until then, you know where to reach us. Thank you so much, and have a good summer holiday.