Good morning, and thank you for dialing into Swedbank's first quarter result presentation. My name is Magnus Alvesson, Acting Head of Investor Relations, and I have with me here our CEO, Jens Henriksson, and our CFO, Jon Lidefelt. Jens and Jon, we'll start with the presentation, and then there will be an opportunity for questions. Jens, I hand over to you.
Thank you, Magnus. Swedbank has once again delivered a strong result in uncertain times. We are creating value for our customers and shareholders in both good and bad times. When I presented our results three months ago, I said that the global economy was weak, but that falling interest rates were cautiously beginning to have a positive impact on economic development. Since then, uncertainty has increased. During the quarter, the European Central Bank and the Riksbank cut their policy rates, while the Federal Reserve held its rate unchanged. Economic activity was strong in Lithuania, while the development in Estonia, Latvia, and Sweden was more cautious. After the end of the quarter, uncertainty has reached new heights.
Twice a year, the world's decision-makers meet at the IMF, and the foundation for the meeting is the IMF's World Economic Outlook, which a week ago stated that, and I quote, "Global growth is expected to decline and downside risk to intensify as major policy shifts unfold." End of quote. The situation is so uncertain that the IMF presents three different forecasts for the global economy, but in all cases, they foresee lower global growth for both 2025 and 2026. Even in this new situation, our four home markets stand out. Strong public finances, low government debt, real wage growth, innovative companies, profitable banks, and lower rates mean that our home markets remain well prepared for the future. Despite downward revisions in growth for Sweden and the Baltics, it is expected that growth will be higher in both 2025 and 2026 than in the Eurozone and the U.S.
In these uncertain times, Swedbank stands strong. Today, I am proud to report the return on equity of 15.2% and earnings per share of SEK 7.26 for the first quarter. Net interest income continues to be robust, and the decrease we see is explained by lower market rates, fewer days in the quarter, and currency effects. Net commission income is down due to falling stock prices, seasonally lower activity in the card business, and here as well, day and currency effects. Costs decreased on a seasonal basis during the quarter, and our cost to income was 0.35. Strict cost control is producing results. Swedbank has a conservative and thorough lending process, and our credit quality is thus solid, and during the first quarter, we had credit impairment reversals of SEK 140 million.
We have a strong capital position with a buffer of 4.5 percentage points, and our liquidity position is strong. The fact that Moody's raised Swedbank's credit rating after the quarter ended is one testament to the bank's strength. Swedbank is the leader in mortgages in all our home markets, and we maintain our position in tough competition. During the quarter, we cut our mortgage rates. Lending increased in Estonia, Latvia, and Lithuania, while it decreased somewhat in Sweden. Deposit volumes were unchanged in the Baltics. In Sweden, deposit volumes increased slightly. After a positive start to the year, global stock markets have fallen, and during the quarter, we saw outflows and reallocations within savings. In times of uncertainty, staying close to our customers, providing advice, and emphasizing the importance of long-term savings is central for us, being a bank rooted in savings bank traditions.
Despite market volatility, the Premium and Private Banking business area has generated good customer inflows, and a large portion comes from the corporate segment. Corporate lending decreased slightly on the Baltic markets. However, we see that the demand for sustainable loans remains stable, and energy efficiency improvements are high on the agenda. In Sweden, corporate lending increased, and our focus on the corporate business and partner strategy is producing results. Together with SpareBank 1 , we are establishing a new Nordic investment bank, SB 1 Markets. This partnership will enable us to better meet the needs of our corporate customers through increased industry expertise, as well as expanded equity research and equity trading. We invest for a better and stronger Swedbank to sustainably deliver on our customer promise of an easier financial life. Thanks to our investments in technology and processes within Swedish Banking, we have improved availability for our customers.
In March, we adjusted the opening hours for dropping customer visits at our local branch offices so that our employees can spend more time meeting with the customers in scheduled appointments and by phone. The efforts are producing results with an increase in scheduled advisory meetings and significantly reduced waiting times for customer service by phone. At the end of the quarter, more than 50% of incoming calls were answered within three minutes, compared to the meager 20% at the beginning of the quarter, and our goal is to reach 80%. Facilitating the transition to a sustainable society is a significant business opportunity for Swedbank. Being named the most sustainable brand among Swedish banks encourages us to continue driving change by helping our customers transition, and it's a strong testament to our sustainability efforts.
We are now taking further steps to integrate sustainability more deeply into the bank's business processes by moving Group Sustainability to the CFO office. In our annual report for 2024, we reported in accordance with CSRD one year before it comes into effect. The bank's sustainable asset register continued to grow and amounted to SEK 136 billion at the end of the quarter, and we have successfully issued two green bonds, and a third of our arranged bonds were classified as sustainable during the quarter. When it comes to financial health, that's a topic very close to our hearts. We continue to help raise general awareness of financial concepts and promote better financial decision-making in our home markets.
In the Baltic countries, we have launched My Budget for children and young adults, and in Estonia, we invested EUR 10 million in the educational foundation that we established at the end of 2024. Strengthening financial health is especially important in these uncertain times. With that, I give the floor to Jon, who will deep dive into the financials.
Thank you, Jens. Before I go through the numbers for yet another strong quarter, let me just reiterate our commitment to ensuring long-term shareholder value and hence have a diligent focus on long-term income growth, cost and capital efficiency, as well as on asset quality. Let me then start with lending and deposits. The overall loan portfolio increased by SEK 9 billion, excluding a negative FX effect. Corporate lending volumes in the Swedish business areas increased by SEK 10 billion, excluding FX. Also, this quarter, we saw a positive development in terms of customer activity as a result of our increased focus on corporate business in Sweden. In the Swedish mortgage market, we continued with our pricing strategy and maintained focus on the balance between volumes and long-term profitability. Mortgage volumes decreased by SEK 2 billion during the quarter. In Baltic Banking, lending continued to grow.
Private lending increased, supported by improved housing affordability, while there was a small decrease in corporate lending. Customer deposits increased in the quarter by SEK 6 billion, excluding FX. In the Swedish business area, the increase was primarily due to corporate deposits growing by SEK 6 billion. In Baltic Banking, deposit volumes were stable following a fourth quarter inflow from public funds and a payment of a 13th month's salary in Lithuania. Turning to P&L, NII declined in the quarter by SEK 785 million, driven by lower market rates, fewer days in the quarter, and FX effects. As expected in contrast to previous quarter, timing effects contributed negatively this quarter. Lending income decreased due to lower customer rates, stemming both from central bank rate cuts in the quarter and from roll-in effects. Lower deposit rates and funding costs, as well as higher business volumes, mitigated the decline.
Mortgage margins in Sweden have remained stable when excluding negative timing effects in the quarter. Deposit margins decreased in the quarter due to transaction accounts already being at zero interest rates. Our NII sensitivity is unchanged, however, reminding you that the NII peak should not be used as the starting point since all contracts were not repriced at that time. Hence, the theoretical starting point is higher. Let me also remind you that the full repricing of the loan book takes at least three months in Sweden and six months in the Baltics. Over to net commission income, which decreased in the quarter, mainly driven by seasonally lower card commissions. Asset management commissions were affected by fewer days in the quarter and by FX, as well as market developments. Furthermore, we saw a decline in payment processing due to higher commission costs.
However, during the quarter, the strong performance related to insurance and corporate finance continued, and earnings from savings service concepts increased. Net gains and losses decreased in the quarter following a strong fourth quarter outcome. The decrease was mainly due to negative valuation effects in treasury, mitigated by positive valuation effects due to equity investments. Business-related NGL was, however, slightly higher in the quarter, driven by fixed income sales and trading. Other income increased by SEK 95 million. Net insurance income increased despite the negative revaluation effect. Both higher premium income and lower claims had a positive impact during the quarter. Income from partly owned companies was also higher. Total expenses were seasonally lower and decreased by SEK 625 million in the quarter, amounting to SEK 6.1 billion. The decrease includes VAT repayment, which lowered costs by SEK 205 million.
This was a result of a decision by the Swedish tax authority and is related to the tax year 2017. We will, as a consequence of this, also review possible VAT repayments for other years. A one-off donation to the Estonian Education Foundation added SEK 113 million to the expenses. Despite annual salary increases, staff costs were stable in the quarter, and as the number of employees continued to decline. Looking ahead, I will continue to ensure a strong cost discipline and a focus on efficiency. Moving to bank taxes, which increased in the quarter, driven by changes in the Latvian bank tax. Credit quality remained solid. During the quarter, we made credit impairment reversals of SEK 141 million. The reversals were mainly explained by exposure reductions due to customer repayments, while individually assessed loans increased provision somewhat. The post-model adjustment was stable and amounted to SEK 715 million.
I feel comfortable with our strict credit origination standards and the solid collaterals that secure our lending as we go into times with increased uncertainty. Turning to capital and liquidity, REA increased by SEK 5 billion and ended the quarter at SEK 877 billion. The implementation of CRR3 increased REA by SEK 20 billion, while credit growth added SEK 3 billion and FX subtracted SEK 9 billion. The remaining reduction in REA by SEK 10 billion was primarily driven by improvements in asset quality and shortening of loan maturities in corporate loans. Our CET1 capital ratio was 19.7%, meaning we have a buffer of around 450 basis points above the requirement. The implementation of CRR3 reduced the buffer by 46 basis points, while profits added around 30. Our liquidity position remains strong. Back to you, Jens.
We live in uncertain times marked by geopolitical tensions and economic conflicts. In this context, Swedbank stands strong. Return on equity was 15.2%, cost to income was 0.35%, our credit quality is solid, and as you just shown, our capital buffer is strong at 4.5 percentage points. On June 4th, we will host an I nvestor Day where we look forward to presenting an updated strategic plan for the coming years. We create value for our customers and our shareholders in both good and bad times. Our customer's future is our focus. With that, back to you, Magnus.
Thank you very much. Let's begin with. Thank you very much. Let's begin with the Q&A session, and please remember to keep to two questions per turn.
We will now start the question and answer session. You may press star and one on your telephone. The first question from the phone comes from Andreas Håkansson with SEB. Please go ahead.
Thank you and good morning, everyone. Two questions then. First one on costs. I'm happy to see that your FTEs are declining quite rapidly now. When I look at the different divisions, it seems like the largest decline is in Swedish Banking, which for me feels like a front office or client-facing division, while in the much larger Group Functions division, the FTE decline is quite much smaller, especially on a percentage way. Could you just elaborate a little bit if we have more potential in the future to reduce FTEs in the Group Functions section? Let's start with that question.
Thank you for that question. Of course, that is an area where we continuously work with, but it's difficult with all the new regulations, and we spend quite a lot of money and resources on that. When you go into Swedish Banking, the key point there is that we've changed the way we work, and that has meant that we can be better with, as I talked to, as I said in my introduction, we've been quicker on the phone and having more advisory meetings.
Okay, hopefully we come back to that on June 4 then. On the net interest income, let's just a small detail on NII before Anjali starts to focus too much on it. In your NII page on page 11 in your fact book, you have this derivative line that's just over SEK 1.2 billion in the quarter. Could you just confirm that that's related to your swaps with your funding versus your lending? That's nothing funny. That's just the way of doing the normal business.
Thank you, Andreas. When you look at that, you need to, from the funding perspective, you should mainly look at the expense side. On the income side, you have mainly items related to LC&I. From a funding perspective, it's only the liquidity reserve that is there. On the expense side, you have the costs for the wholesale funding items that you can find there, and you also have for derivatives. Then you see how much of that is moved out to NGL. That is a note below. There you can see how the lower funding cost is coming through during the quarters. That's correct.
The derivatives, that's mainly swaps, right?
The derivatives are mainly swaps, but they also have derivatives related to the LC&I business also on the expense side.
That is why you have the total derivatives that is moved out. You need to look at the derivative lines in combination with debt securities at issue and the other wholesale funding lines there.
Okay. On the NII, could you just tell us a little bit on the timing effects? You said they were negative. Could you give us some size? If we now have a stabilization of rates, both Stibor and central bank rates, should timing effects be flat from here? Is that how we should think about it?
It will get very theoretical if I should try to get the timing effects quantified. I gave you the deep dive last quarter to explain the dynamics and also show the size of different components in here. You have, as I said, it takes roughly three months from the last Central Bank rate cut in Sweden before we have repriced the loan book. In the Baltics, it takes six months. That should give you an indication of the timing effects. Also reminding you that you need to take into account that when you look at the peak that we had in Q4 2023, the rate peak was very short during the quarter. The full book was not repriced there. You also need to take that into account.
Okay, thank you.
The next question from the phone, Gulnara Saitkulova with Morgan Stanley. Please go.
Hi, good morning, and thank you for taking my questions. My first question on the client activity and the sentiment. Are you seeing any noticeable change in the client behavior at the start of Q2, either in terms of the risk appetite, liquidity preferences, or demand for lending? What hint can this give us about the early signals about the confidence heading into the second half of the year? How do you think the recent developments on tariffs affect your Swedish and Baltic banking business outlook? The second question, follow-up on the NII, one of your peers mentioned earlier today that Q2 and Q3 could be reasonable assumptions for their NII bottoming out. Would you consider this is also similar for you, or do you think Swedbank can see NII trough later? Thank you.
Thank you for a good question. As I pointed out in my introduction, the uncertainty has increased after the quarter closed. The question is, looking forward, how will this affect us? Let me divide it into three parts. The first is the direct effect on companies exposed to increased tariffs. We have gone through the large and medium-sized export companies in our loan portfolio, and so far, we can only see limited effects. The second effect is the macroeconomic effect from lower growth due to increased uncertainty. The latest forecast for Sweden by our economist is 1.5% this year and 2.7% next year. That means we would still have higher growth in our home market, Sweden and three Baltic countries, than in both the Eurozone and the U.S.
Because all our four home markets have strong public finances, low government debt, real wage growth, innovative companies, and profitable banks. The third effect comes from interest rates. When the quarter ended, we expected, or actually our economists expected, the Swedish Riksbank to keep interest rates unchanged during this and next year. Right now, I would say that one or two more 25 basis point cuts are priced in in the market. As you know from our fact book, and you and yours talked about, our interest rate sensitivity is around SEK 3 billion from a change of 50 basis points along the whole curve. In April, we've seen somewhat lower loan demand due to increased uncertainty. We have also seen some outflows from U.S. and global equity funds into deposits, fixed income funds, and European equity funds.
Reminding you, in these uncertain times, Swedbank stands strong. We are profitable, well capitalized, and have a clear strategy. We have an appetite for healthy loan growth while sticking to our conservative lending standards and focusing on profitability. You want to follow up, Jon?
I think I will not assume probably no guide on NII, but I gave you sort of the time that it takes to roll it through, roughly three months for the Swedish and six months for the Baltics. When we will bottom up will hence depend on future rate development, and you have to make your own assumptions of those, as you'll have to do on volume growth and margin development. I have given you all the mechanics to do that based on your own assumptions.
Thank you very much.
The next question comes from Riccardo Rovere with Mediobanca. Please go ahead.
Thanks. Thanks for taking my question, and good morning, everybody. Just one or maybe two questions, if I may. The first one is on credit losses, reversals of credit losses this quarter. Now, maybe given the macro uncertainty, maybe this should not be, let's say, the run rate going forward. In general terms, since macro uncertainty increased over the past few weeks, do you see any reason why asset quality should deteriorate in the coming quarters? If tariffs were to be enforced and stay for a reasonable period of time, how much time would you reckon would be needed to see an impact on your asset quality? It's going to be six months, maybe 12 months, or maybe more than that.
The second question I have, I know you know probably nothing about that, but with regards to the use of capital, because your buffer remains in the 450 basis point region, at the end of 2025, should we expect you taking a decision similar to what you have done in 2024, because you cannot eventually wait forever, whatever it comes out from the U.S.? Thanks.
Thank you. I think let's see if I start, and then you see if I miss something. It's all about being close to your customers. It's about understanding them. What I said in my answer on the former question was that first, we've looked into our large and medium-sized export companies, and we can only see limited effects from the tariffs and the uncertainty. Of course, it's the macroeconomic development. You know that we have strong credit origination standards, and this is something that's important for us. You are tested in times like this. I have nothing to add there. Let's see if you want to end up.
On capital. The first thing to keep in mind is that with the new dividend policy of 60-70%, it means that the upper bound, namely the 70% of the profits, will be withheld for dividend purposes. During the quarter, Jon just showed you that lending increased with SEK 9 billion before FX effects. If you add up loan growth, profits, withheld dividends, and CRR3, our capital buffer ends, just as you said, with 10 basis points below Q4, giving us that buffer of 450 basis points. We still have a capital buffer range between 100 and 300 basis points. In 2025, we targeted the mid of it, i.e., 200 basis points in 2025. That stands. The question you're asking is, when can you expect capital release so that we reach this target?
Of course, there are always uncertainties related to what the regulators might do. The biggest uncertainty is, of course, the U.S. investigations. We have no information on when they will be concluded. We have no information on whether we will get any fine. If we do get the fine, we have no information about the size of such a potential fine. Do you want to add anything?
Hi, Ricardo. I think, as Jan said, I mean, in times like this, when uncertainty comes, of course, we put extra measures in place to safeguard and be on our toes, both for credit and for liquidity and for other things. Having said that, as also Jan said, both our liquidity position is very strong, and we have a conservative view there. Our credit quality is very solid, and we have had for a long time prudent and conservative origination standards. You asked about the credit reversals. If you look in there, and if you look at the slide that I went through, you need to look at the individual assessment and the other points where we had repayments and write-offs. You need to look at them in combination. The move is among our existing customers that have been in stage three for a while.
In some cases, there have been increased provisions, but at the same time, we have also had repayments and shortening of maturity for some of them. All in all, if you look at that, our risk level on the individually assessed in stage three has actually come down somewhat. That is the reason for the credit reversals. I do not want to speculate about what the future will have, but keep in mind that we have a prudent liquidity, capital, and credit standing when we go into the uncertain times. We feel comfortable from that perspective.
Okay, thanks. Very clear. Thank you very much.
The next question comes from Bettina Thurner with BNP Paribas. Please go ahead.
Yeah, hi, good morning, and thanks for taking my question. If I can start off with a bit of a bigger picture question for the Baltics. If I remember correctly, on the investor seminar last year, you mentioned that one of the macro trends that is helping the Baltics grow at the moment is that you have a lot of manufacturing in those countries now. To look at this in the light of these trade tensions and the conversations that you're having with clients there, how much is this impacting them? Is it mainly European companies manufacturing there, or do you also have a lot of US exposure? Just a comment on the sensitivity of the Baltics to these jitter in general?
I think that's a question probably I should answer, but Jon, you were head of Baltic Bank, so I leave that reform hand to you.
Thank you, Jens. What you have seen for the last couple of years is that, as also Jens alluded to in the intro, Lithuania has been standing out, growing a lot, while the other two Baltic countries have been lagging behind a bit. Lithuania has been doing good, largely due to they have a lot of exports to Poland, for instance, and Poland have been growing and doing good, and have also good prospects for the future. The export to U.S. is rather limited from all Baltic countries, so it is European countries. When you come up to the north, Estonia has been lagging a bit due to both that they have increased taxes a couple of times in the last couple of years.
That has had a dampening effect on the economy, but also partly due to the composition in exports that has gone to Finland and Sweden, which has also been lagging. That is part of the dependency. Latvia, as we've talked about many times, have still been very cautious, going back to that they were severely hit from the financial crisis. We have from time to time seen positive signs, but then we have had COVID, inflation, and now the uncertainty. They have not really taken off. Having said that, the companies in the Baltics are very well capitalized. They have a far lower leverage than most normal companies in Western Europe. They stand strong in that respect.
That's very helpful. Thank you. If I can ask a bit more of an NII question. I understand that you don't want to quantify the timing effects that we're seeing at the moment, but if you can then maybe look back to Q4 2023, when you said we shouldn't consider that as the peak NII, if I remember correctly, it was also at a stage where the sensitivity for any hike was quite reduced because you had a lot of headwinds from the public mix shifts, competition, etc. Can you maybe help us quantify what the real peak would be, or if there was a lot of upside that would be seen at the time? Thank you.
It would also get very theoretical since there are many moving parts. My point with underlining this was just that if you mechanically take that as a starting point and then add what has happened since then, you will end up too low since everything was not repriced in there. I will not go in further on it, unfortunately.
Okay, I understood. Thank you.
The next question comes from Markus Sandgren with Kepler Cheuvreux. Please go ahead, sir.
Morning. Just coming back on costs. Now you've been cutting headcount for the last couple of three quarters. Is it mostly related to AML resources, or are you taking down staff in general? On the SEK 1 billion you're investing this year and last year, should we still expect that to come off next year? It should be cost inflation on top of everything else except from the SEK 1 billion starting there.
Let me start. First is that, just as Jon said, we maintain strict cost control, and we continue with our external hiring freeze while making business-critical exemptions. As you can see, we ended the quarter with 270 fewer than we were a year ago. That means we are now less than 17,000 people in the bank, and we are now thinking about when to end this external hiring freeze. As you know, we steer the bank on cost and not on FTEs. Jon?
Thank you, Jens. When it comes to the SEK 1 billion, the answer is the same as before. It is temporary, and it will fall off after this year. You are also right that we have quite substantial headwind in terms of salary inflation, etc. It is too early to estimate what that will be for next year, but I would expect that it is still there. What I think, going back to what Jan said, what is positive is that the fact that we have come down on FTEs gives us increased flexibility going forward.
Okay, thanks. Secondly, on trading income, it seems like it's coming up a bit on the underlying activity among customers compared to quarter on quarter. Q1 is usually seasonally strong. I mean, I expected a larger effect from that, basically, but is that because you have a lot of companies that don't need to hedge currency headwinds and so forth, or is it just that you don't do much of that?
I think you need to keep in mind that we are to a large extent a retail bank with companies spread around throughout Sweden and the Baltics. We have less of that than compared to some others. What I think also is positive, I mean, both Jens and I mentioned the focus that we've had on corporate business in Sweden, and we've seen effects on that. I think it's positive that both NCI and NGL from the business perspective, or from LC&I perspective, I should say, has increased. That I take as a very positive part. You need to keep in mind what kind of bank Swedbank is when you look at the total size.
Yes, okay. Sure, thanks.
The next question comes from Namita Samtani with Barclays. Please go ahead.
Morning, and thanks for taking my questions. My first question is on the mutual fund sales, which were negative in Sweden. I find that quite off-trend to Nordea and SEB. I just wanted to understand what's going on there and whether you believe that will continue.
What we look upon is that we've seen an outflow, but you also remember there are quite a lot of changes in the PPM, which is mainly the premium pension. And Fondtorgsnämnden , I have no clue what that's in English, but you can see some changes there. Of course, we also have people that do not have as much money, and that means that we can see that you can see a bit of outflow there.
Thanks. Secondly, I just wanted to confirm, have you dropped the cost target of SEK 26.5 billion for 2025? If you have, could you explain the rationale? Because you only gave it to us one quarter ago. Thank you.
No, we have not dropped the cost target, but I guess you're alluding to the VAT recovery or repayment we got on SEK 205 million. These SEK 205 million are, of course, an extraordinary cost reduction, which we will not spend in our ordinary business, given that it's extraordinary.
That's helpful. Thank you.
The next question comes from Shrey Srivastava with Citi. Please go ahead.
Hi, and thank you for taking my question. My first one is conceptually on your business strategy in Swedish mortgages. I know you've talked a lot about balancing volume versus price, but is there a sort of stock market share position which you'd consider sort of doing something on price relative to competitors? That's my first question. Thank you.
Thank you. As you know, we are the market leader in Sweden, but we've had a difficult time since summer last year. As being the first, you need to start when you look at the overall number, that you have to see that there are two parts if you look in the mortgage. As being the case now for a few years, Swedish savings banks continue to put their mortgages in their own loan books due to they have a large deposit base, thus leading to a consistent outflow. That is the first part. When you look at the mortgages distributed for our own channels, we started 2024 with a very good first half. Last half of 2024 was not good. When we started in January, we had an outflow.
In February, we were up and we were a bit flat, actually a bit more. In March, we increased albeit with only SEK 700 million. As Jon said, the competition is tough, and we strive to strike the right balance between margins and volumes. I think the key point here is that our investment in the omnichannel communication platform means that we now, as I said in my speech, serve customer calls both from service centers and local branch offices. Thereby, we can use the full national potential of all our professionally locally employed mortgage and client advisors. This is a transformation that will take some time, but it will lead to results without increasing FTE levels. Our target is that 80% of our customer phone calls should be answered within three minutes.
At the end of the quarter, we were above 50% compared to a meager 20% in the beginning, while reminding you that we ended the quarter with 270 fewer employees.
Thank you very much. Just quickly following up on that, on your comments on sort of expanding in Swedish corporates earlier, do you think in the last few years there's been a sort of material difference in the attractiveness of the Swedish corporate segment, either the Swedish household segment, and sort of how are you positioning your strategy in response to that?
No, I wouldn't say so. We stick to the sort of clear strategy that we have laid out, and that is that we want to be the bank that empowers the many people and businesses to create a better future. That is our strategy. Questions like you ask now, that is something we will get back to you when we meet again on June 4, when we'll look forward and see how we can continue to deliver a 15% return on equity.
That's very helpful. Thank you very much.
The next question comes from Tarik El Mejjad with Bank of America. Please go ahead.
Hi, good morning. Just a very quick follow-up on the asset quality topic, please. Can you remind us what's the probability you allocate for the base scenario, negative and positive? Also, what's in your internal processes the trigger for you to review these probabilities and implement the new, I would say, macro metrics? Thank you.
You can see that in the quarterly report, you see the numbers we used, and I think the probability is like 16.666% on both two outliers and then 66% in the middle. You can also see that if you compare to the growth forecast we have in the fact book, the fact book is lower. We've seen a decrease, and then our economist, when you upgraded, those were the numbers I showed on the slide. It's a bit lower than that as well.
Okay, thank you.
The next question comes from Martin Ekstedt with Handelsbanken. Please go ahead.
Thank you. Jon, you mentioned briefly on page 16 the Latvian bank tax, but could you give us an update on its implications for you in 2025 and onwards, and whether you anticipate to be able to make use of the rebate clauses in that tax? If you were to grow the loan book at a rate higher than the GDP growth, you would face a lower tax potentially. On the other hand, if you do that and you grow NII, you would be subject to higher taxes potentially in the future if the taxes rolled over and so on.
I'll take that as well and see if Jon, you want to follow up. I need to sort of take this in an overall perspective and talk about bank taxes because that is an issue that's always discussed. First, let me, as always, remind you that we are an important part of societies. What we do is that we channel our customers' hard-earned deposits to lending, thus empowering people and businesses to create a sustainable future. To do that, we need to be profitable, and a sustainable bank is a profitable bank. We are proud taxpayers that contribute to the financing of welfare and security in our home markets. What we do not like are sector-specific taxes, retroactive measures, and an unpredictable regulatory and tax environment.
What we do like is equal treatment, rule-based system, and an investment and climate that fosters growth, financial stability, and green transformation. Let me say a few words on each of the markets. In Estonia, corporate tax increased with 2 percentage points this year, and we were once again the largest taxpayer in the country. In Lithuania, corporate tax also increased this year, but with 1 percentage point. Reminding you that since 2020, there is a 5% extra tax on banks. You have the extra NII tax. When I spoke with the Lithuanian Prime Minister last week, he was very clear that this investor tax on NII on top of all this will be phased out during the year. In Latvia, as you alluded to, we will have three years with an investor tax on 60% on NII exceeding a certain threshold. Let me be blunt.
This will hurt the Latvian economy in the short, medium, and long term. Our ambition to become the leading corporate bank in Latvia remains, but the tax has had and will continue to have an impact on our business strategy. In Sweden, we have a bank tax that the government is reviewing with the aim to introduce a base deduction while delivering the same amount of tax revenues, thus probably leading to an increased tax for the larger Swedish banks. On taxes, and when you talked about it, as Jonas mentioned, during the quarter, we had a repayment of SEK 200 million that we paid too much in VAT in 2017. We are looking into whether we can reclaim for more years. Did I? You want to add anything, Jon?
You're perfectly right. Let me just add that the quarter-over-quarter effect of the Latvian tax is plus SEK 140 million. While as the Lithuanian, as Jan said, that is gradually falling off.
Okay, thank you for that very clear run-through. To my second question, which is about your new collaboration around advisory with the Norwegian savings banks, i.e., SB1 Markets. Could you talk a bit about your reasoning behind entering this partnership and how we should expect to see the change from your previous setup with Kepler coming through? Are you strategically bringing this business closer to the core of what you're doing as a source of earnings diversification and fee income growth, or is there really no change to your overall strategic stance to advisory? Thank you.
This is really cool what we do, and it's quite a big effort, and we're really looking forward to starting this. What we're doing is that we see that many companies, they do Nordic things, and then we have this great cooperation with the Norwegian savings banks. They had the SB1 Markets. We started to talk with them, and then we realized we can really put the foot on the ground here and do something cool together. What we do then is that we move out a few people, and then they will do more equity research, and we see quite a lot of business opportunities there. In the same way, when our advisor then meets the clients, they usually have partner offers that they can ship in.
We have with Autoplan, we have with Entercard, we have, I can keep on talking like this. Now we're going to have SB1 , SB1M, which I think is really cool.
It sounds like there's a bit more of a strategic focus on it from your side than what used to be the case with Kepler then. Am I right?
It is a strong focus on it. Exactly how we will work with this, you can talk with Bo Bengtsson that runs C&I, or you can talk with the head of SB1M. This is a business opportunity. This is a forward-looking way, at least. Forward-looking, that is the word I am working with. I think this is a great thing to do.
Okay, thank you. That's all from me.
The next question from the phone comes from the line of Patrik Nilsson with Goldman Sachs. Please go ahead.
Yeah, hi, good morning, and thanks a lot for taking the time. I appreciate we discussed it briefly, but I just had a follow-up on the cost guidance because, first, did I just understand it correctly that whatever happens to, or the VAT today and whatever happens to any further potential VAT add-backs, we have to assess incrementally to the cost guidance you gave in Q4? Also, I mean, just the cost guidance today or the cost print today seemed to be quite solid compared to where expectations were. I was just wondering if there's anything on an underlying basis where you think that you are maybe progressing better than you thought in the end of last year. Yeah, both the underlying side, but also how to think about these incremental potential benefits.
Yeah, thank you. I mean, we gave the cost guidance based on 2024 year-end FX rates, and I do not sort of want to keep on updating the cost guidance as FX rates move up and down. I will try to be clear that the VAT recovery or repayment that we got of SEK 205 million, that is something extraordinary, and we do not spend that within our cost guidance. Yes, implicitly, we will deduct it from our cost guidance. We will not spend it in our normal operations. Otherwise, given that and given potential FX movements up and down, the cost guidance from end of last year, that remains. This is how we always do.
When there are extraordinary things, we do not sort of use those to either go down on cost short term because something extraordinary happened or to go up in cost as it would be now when we got that repayment. I hope that was clear.
Thank you very much. In terms of the underlying side, is there anything that's progressing better than you thought previously in terms of how the cost is progressing? Do you have more money to invest in other initiatives or is it just running with the leaner cost base?
We have a long-term view on working with efficiencies and with cost and also with investments. We try to stick to that because I think that is very important that we do that. We will come back more on the Investor Day on June 4th. All is going, or more or less is going in line with our long-term planning, and we will update you in June.
Okay, thank you very much.
The next question comes from the line of Piers Brown with HSBC. Please go ahead.
Good morning. Just a couple of small follow-ups from me. On the VAT recoveries, can you quantify how large they may be if you're successful and what the timing could be? Secondly, on U.S. AML, can you just update us on what the state of dialogue currently is with U.S. authorities? Is there any dialogue ongoing, or are you just waiting to hear from them, essentially? Thanks.
Yeah, thank you. When it comes to the VAT, this, as I said, is related to 2017. The question is about that we have parts of our business, leasing mainly, that is where we have deductible VAT. For the rest of the bank, we pay VAT. We can't deduct any VAT. I don't know at this point what potential implications or any that it could have for the years after 2017. We are looking into that, and when we have more clarity, we will come back. Just reminding you that what the numbers are, it depends on every year. It is both unclear if it has implications and if it has the size of them. We will come back if that happens. The other question, I think I'll leave to you, Jens.
What was the other question? Sorry, I was thinking about it. I think I answered that.
I just wonder if there's any active dialogue ongoing with U.S. authorities on the AML issue.
As I said, I mean, I always say that we are in discussions with three U.S. authorities, the Department of Justice, the Securities and Exchange Commission, and the Department of Financial Services in New York. I have no new information. I do not know whether we will get any fines. If we do get any fines, I cannot estimate the size of those. As always, we've been as transparent as possible during this process. When something material happens, we will continue to adhere to that principle.
Okay, thank you.
The next question comes from Magnus Andersson with ABG. Please go ahead.
Yes, hi. I was just wondering, I have a follow-up on slide 12 there on the NII bridge. If you could split the lending income decline between Sweden and the Baltics, roughly. Secondly, if you could split the FX and day count FX to SEK 204 million.
Thank you, Magnus. Yes, I mean, our total NII for the bank was down 6%. You had 12% down on the Baltics and 8% in C&I. There is always a movement between Swedish Banking and Premium and Private Banking. I'd say combined, they are down 5%-ish, approximately. The other.
Sorry, sorry. I was alluding to the SEK 2.7 billion, the yellow bar, the first bar, lending income that was down SEK 1.3 billion more in this quarter than the previous one.
I don't have that off the top of my head, unfortunately, Magnus.
No, no, we need to come back on
that. Yeah. Okay, good. Okay, we take that later. The FX and day count split?
I'll have to come back on that one too. I don't have the numbers in front of me or in my head.
Okay, we take that offline. Thanks.
That was the last question, sir.
Sorry, I need to push the right button here. The key point I want to say, thank you for, as always, asking difficult and tough questions. Now we look forward to seeing a few of you in other meetings. Otherwise, we'll meet again at June 4th at Investor Day. Until then, be careful out there.