Ladies and gentlemen, welcome to the Swedbank First Quarter Report 2020. For the first part of Today, I am pleased to present Gregory Karamoussis, Head of IR. Please begin.
Thank you. Good morning, everyone, and thank you for joining us on this presentation of Swedbank's Q1 results for 2020. With me in the room, I have our CEO, Jan Sennigsson our CFO, Anders Karlsson and our Chief Risk Officer or Chief Credit Officer, Lars Erik Danielson. After their introductory remarks, we'll open up for questions. Jens, please.
For of the corona crisis. And let's be totally honest, a global recession is coming and IMF is calling it the great lockdown. But unlike the subprime crisis of 2,007 and 2,008, this time the banks are a part of the solution, not the problem. Swedbank have adapted quickly to the new requirement in our way of working in the way of the corona pandemic. All employees who have the need to do so can work remotely.
And to achieve this, we have increased the capacity in digital channels without sacrificing to the corona crisis will add approximately DKK 250,000,000 to our total cost this year. Now many of our customers need advice and many need lines of credit. Our main task now is to do everything we can to help them manage the situation. We still have branch offices open in all our regions in Estonia, Latvia and Lithuania. And in Sweden, 159 out of 160 1 offices are open.
And many branches offer special opening hours for seniors, so they can visit us without risking exposure to the infection. The telephone bank has strengthened and in March, our customer centered handled 500,000 customer contacts phone. That's 30% more than normal. And we've been able to respond quickly to changing customer needs by being agile and by developing new digital service in a record breaking speed. And that's something I'm extremely of.
I'll just give you one example. We produced a digital application for the amortization in just a few hours. We have received some 25,000 applications from household and corporates in a few weeks, of which about 15,000 have been granted and the rest are in the process. We participate both in the governance guarantee program for companies and the Riksbank's credit facilities. And the banks have an important role to play in order for these measures to have effect where they are the most needed without delay.
And in the middle of all this, in the middle of the corona crisis outbreak, Swedbank settled our history with anti money laundering. On March 19, the financial supervisor authorities in Sweden and Estonia presented the results of their investigations. And the Estonian FSA, they gave us a precept with 25 points to rectify within 8 months. And the Swedish FSA gave us a warning and a fine of SEK 4,000,000,000 is the highest fine ever imposed by a Swedish authority. At the same time, Clifford Chance came out with their report of what went wrong in the bank from 2,007 until March 2019.
And the message from the investigation is coherent and crystal clear. The Swedbank's governance and control were not good enough and the bank has not lived up to the expectations that customers, U. S. Investors and society at large have the right to set on us. And we have not done enough to stop suspected money authorities.
The U. S. Authorities continue to investigate Swedbank and this is work in process and is a process that will take time to conclude. The cost of doing this is great. The AML related investigation cost will amount to SEK 1,600,000,000 this year according to our estimates and add that to last year's cost of NOK1.1 billion means we're talking SEK2.7 billion to be open and transparent about our history.
And add to this, the SEK4 1,000,000,000 that came from the fine, It's a lot of money. And now I'm not even calculating all the time that has been spent by management and all other on this. And it shows you that not having good enough order and internal control, it will cost a lot of money. And it's evident that the bank's ambition to make money on non residents without having a fully functioning AML Gaining confidence you can lose really quick, but regaining confidence takes time. Regaining confidence you do by being clear about your history and we publish the whole CLIFO Chance Report and then you need to focus on delivering right now.
As you know, we have a comprehensive action plan to improve the bank's routines, system support and processes for crime prevention. And when I presented at the Q3 report last year, we had 132 point program. By Q4, it had grown to 152 points and now we're up to 217 points, out of which 87 has been concluded. This is something I will continue to talk about because it's an important part of making sure that we are fully compliant and we expect this program to the end almost end at the end of this year. And it feels good to have reached the beginning of the end of this very painful money laundering crisis.
As with any large investment, it's important to use external experts to make an assessment. I've talked about the Clifford Chance and the Financial Supervisory authorities. And an independent validation is also made of how the banks work against money laundering and other financial crime progresses in the 3 year period 2020 forward. An assessment is made of the bank's compliance function with the aim of reaching the highest industry standard. And it's obvious that we've had shortcomings in terms of governance and control and therefore Swedbank's corporate governance is also evaluated.
So what about the Q1 results? Well, to summarize it, it's a solid underlying business during an unprecedented quarter with a large fine from the Swedish Supervisory Financial Authorities. The underlying profit was DKK 2,300,000,000 excluding the fine from the Swedish FSA. But after that, the net result for the quarter was a loss of SEK 1 point 7 billion. Our return on equity for the quarter was 6.5%, substantially lower than the bank's normal performance.
Our goal and target of 15% return on equity still stands. We have a capital buffer of around 300 basis points and the fact that the Swedish FSA lowered their countercyclical capital buffer added some 200 basis points. Our strong financial position give us a lot of space for credit expansion in support of our customers. To state that the outlook for the rest of the year is characterized by uncertainty is no exaggeration. As you have seen, we published information about increased cost on April 8, and the total cost for the full year 2020 are now estimated at approximately 21,500,000,000 the fine of $4,000,000,000 And compared to the previous estimates, that's an increase of 1,500,000,000 dollars Over the rest of the year, we will operate with higher cost than what will be required next year and onwards.
And this is necessary to secure the success of our AML work and the work related to the And when we reach year's end, we will be able to present a more detailed plan of of Our focus shifts from 2,007 to 20 20 5. And the good thing is that a lot of customer, we can use this opportunity to regain trust because it is a challenging environment for our customers. Mr. Carlson, the floor is yours.
Thank you, Jens. I would also like to start with some generic comments before we deep dive into the details for the quarter. As Jens already mentioned, we have faced unprecedented challenges in the quarter. When we look at the P and L development in the quarter, most income lines were affected negatively by the COVID-nineteen situation. However, our most important income source, net interest income was strong.
We again had extraordinary expenses due to the AML related investigations and reviews that weighed on the Q1 result. This was expected as we informed the market in early April about higher The administrative fine imposed by the Swedish FSA was booked in its entirety this past quarter. But our capital and liquidity position remained strong with solid financial sector and banks can thus play a vital role in supporting economic activity of households and companies. We can use our financial strength and focus on helping our customers through this difficult time, and Swedbank is doing exactly that. This is evidenced by the lending growth we saw in the quarter.
Corporate lending in Sweden and large corporate and institutions increased net by SEK 11,000,000,000. Most of the increase came in March as we had some large repayments early in the year. Swedish private mortgages increased by quarter. Our Baltic operations did also see significant lending growth, albeit boosted by the weaker Swedish krona relative to the euro. Deposit inflows amounted to €55,000,000,000 The increase is strongly correlated to both private and corporate customers building liquidity buffers by reducing a across our home markets.
In addition, we had around SEK 10,000,000,000 of signed committed credit facilities. As there also were some large scheduled repayments in the 1st 2 months of the quarter, the net lending volume Corporates are building liquidity buffers. We had around DKK 200,000,000,000 committed revolving credit facilities at the end of Q1, roughly DKK 10,000,000,000 more than in Q4. Utilization starting off with net interest income, which is higher quarter over quarter. Lending volumes were lower in average terms, therefore, not contributing to the increase.
The lending volumes increased towards the end of the quarter, as mentioned earlier, and will support NII in Q2. Margins in total did contribute slightly positive. Deposit margins were higher, while mortgage margins were lower on the back of higher market rates, and corporate lending margins were stable. Group treasuries NII was impacted positively by the repricing mismatch we talked about last quarter. The asset side repricing was phased in during Q1.
In addition, somewhat larger covered volumes and maturing senior debt funding did also impact positively. Lastly, as expected, the resolution fund fee was around $100,000,000 lower in the quarter. Over to net commission income, which was weaker this quarter. In addition to the usual seasonal effects in cards, as usage is typically lower than in the 4th quarter, transaction volumes were negatively impacted by the changed customer behavior due to COVID-nineteen. The asset management business was in and in corporate bond inventories.
In addition, share price development in the Visa and Asia Castieto Holdings resulted in around $330,000,000 of negative effect. On the back of the higher volatility, client trading activity in equities, fixed income and FX was in credit portfolio last quarter that generated 160 5,000,000, which was not repeated in Q1. Let us now look at asset quality Credit Officer, Lars Erik von Nielsen, to join me on this part of the presentation. We will run you through our loan portfolio and talk about the sectors that are mostly impacted by the current situation. In addition, we will be as detailed as possible about the assumptions that were used leading up to the credit impairments for the quarter.
We will also do a brief deep dive into the oil related segments and describe the Stage 1 to 3 movements within the quarter. Please bear in mind that the crisis is still unfolding. The situation calls for continued monitoring and new assessments will be made on a regular basis. With that, I hand over to you, Lars Erik.
Thank you, Anders. The overall economic environment changed completely in March compared to the beginning of the year. What is pretty much still the same is the composition of Swedbank's loan portfolio. To provide you with a real economic and business related impact our portfolio, we have divided the portfolio into 4 main groups: sectors with sectors with insignificant impact from the COVID-nineteen crisis sectors with slight impact sectors with moderate impact and sectors with considerable impact. Close to 90% of the total exposures are related to sectors that are insignificantly or slightly impacted of the corona effect.
A large part of Swedbank's core loan portfolio consists of mortgage lending and forestry and agriculture. Both have been through at least 2 financial crises in the '90s and '20s and have proven to be very resilient with very low loan losses. Our commercial real estate and tenant owner association portfolios have since 20 15 been through strict lending criterias where we firstly have avoided to finance only yield driven market values. Secondly, the net operating income has been in focus and stressed to make sure that the cash flow based buffers are at hand in the specific asset as well as the portfolio assets. The average LTV is therefore today around 50% with a 6% to 8% stress on financial costs within the cash flow estimations.
The most impacted sector as of today are manufacturing, transportation, retail, hotels and restaurants and shipping and offshore. The level of impact is different in the respective subsectors where we see food and groceries less impacted and restaurants and hotels more impacted. The large corporates and large midcorp segments have plans, are active and have a lot of tools to deal with the upcoming situation, where we see that they, to a large extent, are buffering up liquidity to cope with a different cash flow situation or to cover refining needs of common bond maturities. For SME and SSE, we are willing to help them out in this difficult situation with both grace periods or liquidity support. Important is that together with the client, find solution where all stakeholders come together and contribute.
All clients are not helped with new money injections as some already before the crisis had a stressed economic situation. There are a lot of governmental initiatives to help out with support and increase the liquidity postponed tax, export guarantees, state guaranteed bank lending and so. But so far, there is not so much demand from this segment on new lending as new money may not the solution in the long run. When it comes to provisioning in the quarter, the main effect under IFRS 9 has been: 1, changed macroeconomic outlook 2, review of existing provisioning on individual exposures in the oil related sectors and the need to and straight transfer from 1 to 2 under the IFRS 9. The changed macroeconomic outlook in March with expected negative BNP development and expected increase of unemployment figure has been implemented in our IFRS models and has affected the portfolio provisioning with approximately SEK 650,000,000.
You can, for example, on this slide, see the assumptions made for the Swedish economy. A base case scenario, a positive and a negative scenario. The trends are very similar in our Baltic home markets too, and you can find more details in the appendix. We did also do an expert adjustment on sector level as we saw clear signs of increased risk in different sectors. We have estimated rating downgrades for our expert based models with Stage 1 to Stage 2 transfer as a result.
This expert based judgment under IFRS 9 with a portfolio based sector provisioning give us a further increase of provisioning with approximately SEK 700,000,000. The sectors that are mostly affected were the manufacturing, retail, hotels and restaurants and shipping and offshore. During Q2, the work with rerating will be focused on an individual assessment of the specific clients, which will give us a better and more insightful understanding. And lastly, we have increased provisioning in some oil related cases, which already are seen as impaired exposures. The reason was the increased uncertainty on future cash flow and collateral values that decreased oil price.
The increase in provisioning this quarter is around SEK800 1,000,000 for clients in this segment. Our total exposure toward this segment is relatively small, and we have, as you know, taken action and provision whenever we have seen a deterioration during the past 5 years. In terms stage transfers, the described provisioning represent the largest movement from Stage 1 to Stage 2. We have so far not seen any effect in transfers from either Stage 1 to Stage 3 or from Stage 2 to Stage 3, indicating that the underlying asset quality has not changed and that the individual impact from COVID-nineteen is not seen particularly in Q1. In addition, we have provisioned close to SEK 10,000,000,000 throughout the years, which give us an initial caution.
And by that, Anders, back to you.
So thank you, Lars Erik. Now we turn to capital. The CET1 capital ratio decreased to 16.1% and the buffer to the Swedish FSA's minimum requirements stands at around 300 basis points. The negative result in the quarter contributed positively. The risk exposure amount increased by almost $42,000,000,000 in the quarter.
The main drivers were the lending growth, adjustments relating to default frequencies in the corporate portfolio and FX movements. Before we spend some time on forward looking aspects, I would like to remind you of the 10 years, built a robust liquidity and capital position, which is now enabling us to continue supporting the economy. Swedbank's liquidity metrics in our term wholesale funding stood at 35 months at the end of the Q1. Our liquidity reserve was SEK 4 84,000,000,000 out of which almost SEK 300,000,000,000 were deposits with and $24,000,000,000 for the remaining part of the year, our liquidity position would allow us to stay out of the funding markets for more than a year. We are, however, continuing to be active in the funding markets market.
Also, it's worth mentioning that we have an over collateralization in our covered bond pool of close to SEK 300 billion that could either be used for issuance or be pledged with the Central Bank. From a capital perspective, as mentioned earlier, our buffer to the minimum requirement stood around 300 basis points. This corresponds to an absolute amount of around 21 amount of capital, assuming an average risk rate of 40%. We discussed our asset quality a few moments ago. Swedbank's loan portfolio consists primarily of well collateralized exposures with collateral mainly in real estate, but also in other types of assets.
As you know, the first line of defense in any crisis is the ability to generate capital and liquidity through one's underlying operations. Swedbank's pre provision earnings are at historically high levels. The stable income from our private and SME customer segments is the foundation. It corresponds to around 85% of pre provision income and also the share of our income that stems from more volatile capital markets related activities is relatively small. These are strong support our customers.
Let us now look ahead and provide you with some forward looking comments. It goes without saying that the uncertainty is extremely high. What is certain, however, is that we have only seen the beginning of the financial act, both in the economy and in the banking system. Starting off by looking at some of the income sources. A large part of the higher loan volumes in Q1 was originated at the end of the quarter.
And in addition, we have seen further increase of liquidity requests from corporates in April by as much as SEK 25,000,000,000. So these lending flows will support NII in Q2 and onwards. Pricing on new lending is market based, and therefore, adjusted return should be supported for return on equity. Also, the amortization reliefs that are being approved will, on the margin, boost NII as net loan volumes will remain higher than otherwise would have been the case. Our priority remains to maintain origination discipline and risk adjusted pricing.
On the back of market rate movements in March April, the Swedish mortgage margins have decreased further, while deposit margins have increased. We expect these margins movements to more or less cancel each other out with regards to NII impact for 2020, assuming stable market rates. 2 products that have been heavily impacted by the crisis are cards and asset management. Card transactions in total in March April are down by around 5% to 10% to 10% compared to previous periods. If the situation prevails, we expect provision income to be negatively impacted, especially the on the transaction flows.
The significant stock market declines in March April have impacted both the assets under management in the mutual funds business, but also the flows. As we exited Q1, one should bear in mind that asset under management were significantly lower than the average during Q1. To give you an idea of the the stock markets decline by 10%, the assets under management will decline by 7.5%. In terms of other types of income, we expect the capital markets related activity to remain subdued, such as debt capital markets, equity capital markets, corporate finance, while client trading activity should remain elevated. Negative valuation effects experienced in Q1 could be reversed at some point when the markets have normalized.
Ask Lars Erik to give you further insights. Please, Lars Erik. Lars Erik to give you further insights. Please, Lars Erik.
Thank you.
In Q2, there are a lot of ongoing activities related to asset quality. We will make an individual assessment of our counterparts down to the specific situation of each client, and this will lay the ground for a potential individual risk rating change. We expect client proposals for new liquidity and amortization deferrals to increase. We also expect to get a better The macroeconomic outlook should also become clearer. I will not speculate today if and how large increased provisioning will be in Q2.
But I would like to repeat what I said earlier. We have already provisioned for close to SEK 10,000,000,000, which could offset possible future credit losses.
Thank you, transaction volumes and increasing prices. We noticed a slowdown towards the end of March continuing into April. If this prevails, we would expect it to become somewhat visible in lending volumes in the next few months. When it comes to capital, as previously mentioned, our pre provision earnings generation capacity is strong. We expect the individual assessment mentioned by Loshirik earlier to lead to negative PD migrations in Q2.
It is, however, not possible to quantify at this point. The Board announced yesterday evening that the AGM will be held on May 28. The Board notes that the bank's financial at the Annual General Meeting, but when the consequences of the COVID-nineteen pandemic are clearer. Lastly, let's look at expenses for this year. We pre announced the revision of our total expenses guidance for the full year of 2020.
We estimate them to amount to SEK21,500,000,000 excluding the administrative fine imposed by the Swedish FSA. The biggest Chance Chance investigation cost and future legal advice. In total, these expenses are expected to amount to SEK1.55 billion this year. If we use the underlying expenses of SEK 18,350,000,000 as the starting point and specifically look at the addition of SEK 3,150,000,000 taking us to SEK 21,500,000,000. I would say that around 60% of this addition is a one off nature that will eventually fall off, while 40% will build run rate.
We don't know how quickly the one off expenses will fall off as there is still high uncertainty linked to this type of expenses, but they will. This is again our best guess at this moment. As Jens mentioned, towards the end of the year, we will come back to you and talk about how we will continue developing our customer offerings and increase efficiency. I believe we are now ready to take any questions you might have. Operator, please?
Thank you. And our first question comes from the line of Magnus Andersson of ABG. Please go ahead. Your line is open.
Yes, good
morning. I thought I'd start off with cost. First of all, thanks for pre announcing your guidance already a couple of weeks ago, the sooner, the better. But just about the level for 2020, this considering that the AML initiatives you are undertaking during the year are increasing every quarter, is this is the guidance of 21 point 5,000,000, could that be subject to change depending on the further development of these AML initiatives? Or do you feel now that everything is covered by the 21.5?
Thank you, Magnus. I mean, if you look at the slide, you clearly see that there are 2 types of costs. 1 is the one who is related to AML investigations. That is always difficult, as you know, by now to predict. We have taken a large chunk of the Clifford Chance investigation cost in Q1 and part of it will come in April.
So in that respect, we have much more clear visibility on what would come. The other part, which is your main question, is the one which is investments related to AML initiatives. The reason for increasing them a bit this year are 2. 1 is, as Jens alluded to, the Estonian precept with a number of new initiatives where we have a clear deadline to deliver, which is in the end of this That is adding to the investments that were originally planned. The second reason for the increase
is some of
the findings in Clifford Chance investigation that we need to rectify as quickly as possible. And that is partly the underlying reason why Jens is moving from 132 points to over 2 100 points. I do not expect this to be an underestimation of what is needed to finalize the activities for AML related development.
Okay. Thank you. And just then about the future, I mean, you ended by saying that if you take the 18.35% and add 40% of 3.55%, we should have a run rate, then I think we should add some kind of cost inflation to that when looking forward. Do you think we will be down there already from the beginning of 2021, so to speak? Or will it be more gradual and take longer
than that? I need to be a bit cautious, Magnus. In order to have immediate effect in 2021, you need to take a lot of actions already now. We are doing that, but it would I would expect it to gradually coming into 2021.
Okay. Super. And then moving to capital, since your risk weighted assets were up quite a lot, SEK 40,000,000,000 quarter on quarter, you have that Slide 23 where we see that credit risk was an important driver and then also the Article 3 CRR. I might have missed it, but if you could just tell us what that is and whether that's a onetime Q1 impact or whether it will continue. Thirdly, I guess we will also see, when looking ahead, some effects of risk migration or PD migrations.
So just if you could give us some feeling from Q1 now and then link to corporate lending growth as well. We saw what it was in Q1. We heard your comments about questions for further credit facilities, etcetera, in Q2. Do you think that SEK 13,700,000,000 will remain at that level? Or was there kind of a panic during a couple of weeks in March, which means that things should calm down?
How should we think about the SEK13.7 billion going forward? And secondly, how much potentially, if you could say anything about risk migration or PD migration impacts here, the pro cyclicality of risk based assets?
Thank you, Magnus, for a very easy question. If we start off with a credit risk increase of 13.7% as you see on the slide, it's a combination of new lending, but it's also also impact on the derivatives portfolio where mark to markets have increased during the quarter. So part of it is driven by underlying movements in interest rates and FX. So that is difficult to have a view on. What I would do if I were you, coming back to me telling you about an increased request on lending during the latter part of the quarter moving into April is that I would assume a risk weight of 40% on that exposure change.
We have seen a flattening of the requests during April. So it was very sharp at the end of March continuing into the 2, 3 1st weeks of April, but now it's gradually at the plateau. That doesn't mean that it will come back. That is very much a function of how the capital markets will function and when there are corporate bond maturing whether they can have access to the capital markets or if they need the revolving facilities to be used. It is the large corporate part of the portfolio that we have seen this as Lars Erik said.
In the smaller and medium sized corporates, they are still very cautious. As far as PD migration comes, Magnus, it's extremely difficult for me to have any view on it. My gut feeling is that they come. It will be an increase of risk exposure amount. At the same time, part of that migration effect will be entirely be captured the increase of risk exposure amount.
Okay. Thank you. And then finally, just one question on asset quality and the oil related part of the exposure, which you've been struggling with since 2016, really. If the oil price I mean, the oil price is down somewhat since the 8th April when you announced these loan loss provisions. If the oil price stays around these levels, would that automatic in some way trigger more provisions for that portfolio?
Or have you is this within your expectations on making those provisions?
It's more within the already taken into account expectations. However, it's not direct correlated to the oil price. The subsectors that we are within are expecting to get order books from the oil source owners, so to say. So it's depending on the contractual situation that we will see going forward. That's the best answer I can give you at this point.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Chris Harte at Redburn. Please go ahead. Your line is open.
Great. Thanks, everybody. First question is actually just a follow-up on the cost stuff you were talking about earlier. You mentioned that you're happy with what you've got there in terms of an increase in expenses. Does that include what might come out of the U.
S. As well? I mean, how confident are you that they will or won't come up with a bit of curveball? And maybe do you think that we should have expected a slightly different time line on the U. S.
Given what's going on in the world with things slowing down a bit? And then just second on the corporate lending, I was actually just wondering if you could give a bit of color around the state guarantee loans that you may or may not be issuing, what your sort of view of that scheme is, what the take up is like and also what the economics of those loans are for you perhaps in terms of margin, capital streams, etcetera?
Thank you. On On your first question, we have not taken any potential fine into account when it comes to the U. S. Authorities' investigations. We are trying having said that, what we are trying to do in our cost guidance is to try to forecast what increased investigations comes, I hand over to you, Jens.
Well, I could just say a few words also on the cost of this investigation. Of course, it's a tremendous cost. Let's be totally honest priority on having a good quality and on time. And I think one thing that sort of struck me at least with when Clifford Chance presented their report was that nobody really questioned the report as such. I mean, they questioned our behavior and I think that was the right thing to do.
But the report now in many ways concluded our look back on history. Now what has happened now is that now we have the information to the U. S. Authorities and that means that they look at the Swedish FSA, the Estonian FSA and the Clifford Chance report. And if they come up with well, I'm sure they will, they will come up with complementary questions, we have a margin, so we can provide that information.
But now it will be a little bit more focused on costs for running the investigation, why? Because the CLIFO Chance is finished with their report. And we published everything in the sort of being totally transparent about this. Jose, did you have anything you want to say about?
The state currency
loans. As I said, related to SME and SSE, there is a low demand on increased liquidity in terms of taking on loans as of today. And by that, the state guaranteed loan has been very, very limited in terms of distribution. We expect that to increase. And the lending is related to market rate.
So the terms are market based? Yes.
Okay, great. That's great. Thank you very much.
Thank you. Our next question comes from the line of Andreas Hoeksefsen of Deutsche Bank. Please go ahead. Your line is open.
Good morning. We actually covered what I wanted to ask, so I'm fine. Thank you.
Thank you. The next question comes from the line of Petr Kiesikov of FCB. Please go ahead. Your line is open.
Hi, thanks for that. I had a few questions. First of all, Jens, you're mentioning that focus is now going to 2025. Should we read anything into the fact that you're mentioning 5 years out in of perhaps that's the point when you believe Swedbank will reach the full cost efficiency again that we've seen historically? Or is it just a reference on a year or few years out?
Well, I wish I was that smart. No, but it's a way of saying that we now I mean, let's we're totally honest, we've been focused at inward. We've been focusing on history. Now I want to say to sort of everybody working in the bank is that, okay, we've sort of not had good enough governance and internal controls. And yes, we've let suspected money launders use Swedbank.
That's not okay. Let's now be open about history. Now let's make sure that we have the fully compliant system and then look forward. I think 2025 is an important year in the sense that if you look on sort of my experience from both working at the International Monetary Fund and the Ministry of Finance, what you see is that if you have a recession that will impact unemployment quite a lot. And if you can mitigate sort of the consequences, and we as bank can be a part of like this is that the U.
S. Unemployment goes up really rapidly and goes down quick. The European economy is much more rigid. And that means once unemployment is up, there is a hysteris effect. And that means that unemployment falls much more slowly, but it rises also slowly.
So when I talk about 2025, it's more about that. I have expectations for efficiency much quicker than that.
All right. And then just a few small detailed questions and I guess a bit to Anders to start off with. But looking at the mortgage side and I guess with kind of the funding costs coming up, what's the view on kind of mortgage margins over the coming quarter or 2? And is it possible to say anything on kind of the direction of new lending margins versus the back book, etcetera?
Thank you, Peter. My best answer in under these circumstances is that the margins will be a function
sweet. But sweet. Right. Then finally, just a question on the sectors that was mentioned that were more or less exposed to COVID-nineteen. Just a detailed one.
But looking at kind of private other, which I assume includes consumer loans, you define or you put that within slightly impacted sectors. Is there anything that in particular we should take into account to why it's within slightly impacted rather than perhaps considerably impact or perhaps moderately? I would assume unsecured consumer loans could be somewhat more at risk in this environment.
I will start off Peter and then Lars Erik will fill in. I agree with you. Consumer loans have higher risk than mortgages. I've been talking about our ambition when it comes to consumer lending for a number of years. And unfortunately, we have not delivered on our ambition.
Today, I am to a certain extent grateful for that because when we look into our consumer lending portfolio, it is of extremely high quality and the loan losses have so far been on a very, very low level. Having said that, of course, if you look at how private individuals tend to behave in a crisis where they are sort of unemployed or their financial situation are impacted negatively, In relative In relative terms, I would argue that we have a fairly low risk in our consumer finance portfolio.
All right. That was all for me. Thanks.
Thank you. Our next question comes from the line of Sophie Peterson of JPMorgan.
Yuri, Sophie from JPMorgan. I was wondering, when are you on Slide 2, where you talk about the great lockdown and we see the GDP forecast for the Baltics, you have minus 5%. But when I look at the IFRS 9 scenarios on Slide 29, you have around 1% to 2% GDP growth for the Baltics this year. Could you just on the macro adjustments that you have done, how much are all of these macro adjustments only for Sweden? Or what share is for the Baltics?
Thank you. The slide where you see the scenarios is Sweden and oil price because and then there are similar patterns in all our home markets, but I think it would have been virtually impossible for you and us to make any pedagogical explanation using all the different variables that we are looking into. So when you look at that slide, it's Sweden and it's based on our macro research team's estimates and forecasts at the latter part of March.
So just to clarify, you basically haven't taken any macro overlay provision for the Baltics?
We have. We have taken a, I would say, fairly significant amount for the Baltics as well. The slide that we used in the presentation was just for you to get a sense of how we have taken worsening macroeconomic conditions into account in our IFRS 9 calculations. But the Baltics have been impacted. You can see that in the appendix of the presentation.
Again, this is Sweden as an example.
Okay. And the EBA has the new forbearance rules. Have you taken advantage of these that you haven't done customer reclassification from stage 1 into stage 2, even if they've got an amortization or a payment holiday in with the ABA guidance? And if you wouldn't have done this, what kind of impact would that have had on your asset quality and provision?
We have taken that into consideration. It's not automatically deteriorated credit quality due to the fact that you are given an amortization relief. So we have not been putting those applications that we have granted into a forbearance situation. I don't have the numbers on the top of my head, so what it is exactly, but it's a fairly limited number in terms of volume.
Okay. And then a question on money laundering. You mentioned that you have several U. S. Investigations ongoing.
Can you give a little bit more details on who is looking at you?
Hello.
Can you give details on how many entities are looking at you?
Plural.
Okay. So is it fair to assume that it's double digit in terms of numbers, kind of mid single digit? How should I think about it?
No, I'm not going to I'm just going to say it's more than 1. Thank you.
Okay. And in terms of the sanctions shift bridge, you came out and said that you only had €5,000,000 of exposures that had kind of over expansion rate pre-twenty 14. But when we look through the Clifford Chance report, there is some mentioning of exposures in theory. If we would look pre-twenty 14, do you expect the number to be significantly higher? And do you have any could you kind of give details around what level we potentially could have seen?
Well, Clifford Chance has not looked back further, and this is a 5 year period you have to look upon that. We've talked with OFAC and we self reported the 4 point I think $4,800,000 and it was 5.80 transactions.
Okay. But you don't have any details on anything before the 20 14?
Correct.
Okay. That was all my questions. Thanks very much.
Thank you. Our next question comes from the line of Johan Nykolm of UBS. Please go ahead. Your line is open.
Thank you. Just a few follow ups. In terms of the guaranteed loan schemes, when you say it's based on market terms, does that imply that you price it as though there was no guarantee? Or does it imply that you price it as though a large proportion of it is sovereign risk? So that's the first question.
Secondly, in terms of the off risk RWA adjustments you made, do you have any estimate as to how the FSA's fine might impact the off risk RWA going forward? And then finally, just in terms of the funding, given the covered bond buybacks that you did during Q1, your net issuance was very close to 0. So how should we think about the total issuance need? And in particular, if you have unused capacity in the cover bond side, why are you so aggressively buying back when there is such an increase in credit demand?
Well, Jens here. As Anders said, we have a sort of market pricing on this. And of course, we take into account that there is a guarantee from the government, but we also pay a fee for that according to the rules set up by the Swedish National Debt Office. Anders?
Thank you. On your first question, Johan, on operational risk, no, I don't have that on the top of my head. It depends very much on one single, I don't remember the name of it, but there is a in theory, we need to add this to our operational going forward when the new rules are put into play. But that depends on how the Swedish FSA will decide on the slope of a function that is of added. If they set that function at 1, the impact will be limited.
If the slope is steeper, it will have a higher impact on our risk exposure amount going forward. We have done a couple of calculations. I don't have it on the top of my head, but we can maybe talk about that in more detail bilaterally. On your second question, I think you need to repeat that because I lost you. Yes.
No, I'm just thinking on the fundings. If we look at the cover volume buyback that you did, there's 0 in Q1?
Yes. First of all, that is not in any way aggressive. It's part of how we usually are handling our maturities coming in. We are buying them back long before they mature rather than having as you know, the Swedish covered bond market is working the way that you have fairly large maturities at one point in time. You don't you want to avoid that.
So we are spreading the refinancing risk over the year rather than having it at one point in time. Secondly, we are not issuing because we don't need to issue. We issue when we need to issue and we are trusting the covered bond markets. If worse come to worse, we could use that space to put as a collateral with the Central Bank. But we don't need that at this point.
What we do need, unfortunately, is due to cost of funding is to issue senior unsecured at some point during this year. You saw that the National Debt Office prolonged the implementation period for MREL debt, but they did not the new senior non preferred, but they did not change their requirements. So we need to issue some senior during the year, and we will issue covered bonds when we need to issue covered bonds.
Thank you.
Thank
you. And our next question comes from the line of Martin Latgep of Goldman Sachs. Please go ahead. Your line is open.
Yes. Good morning. I have three questions, please. And the first one, I was just wondering if you could give us a view on how high risk cost should be for a given GDP scenario. I think one of the European peers yesterday came out with a loan loss assumption based on a certain GDP scenario.
And I was just wondering if, say, your base case of minus 4.4 for Sweden would occur, what is the kind of risk cost for the year you would expect? I'm just trying to tie up some of the data points out there. Obviously, the risk is experienced during 2009, but equally EDA stress test data, which obviously both would suggest a comparatively higher level of loan loss as compared to the 50 bps for the Q1. The second question, I was just wondering if you could comment on the loan guarantee schemes in Sweden and how effective you think they will become. In a way, how should we think about the takeout in terms of new SME lending?
Should we expect that most loans will feature under that guarantee? Or will this be essentially a comparatively small portion of your loan book going forward? And the final question, the third question, I was just wondering if you could update us on the major capital headwinds you foresee over the next 1 or 2 years. And this is just in light of the dividend suspension, which you keep deducting from capital. So your capital headroom all else equal would be north of 400 basis points.
And I was just wondering, a lot would need to happen for Citibank not to generate capital in terms of risk costs. So just wondering what other major capital headwinds you could anticipate. Thank you.
Thank you. I think your first question is extremely relevant, but virtually impossible to answer. But to give you a flavor of what we have done, we have based our IFRS 9 calculations on 3 different scenarios as you saw. The base scenario at that point in time was a GDP drop of 4% in Sweden in 2020. The alternative worsening scenario was a GDP drop of nearly 8% during 2020.
So if the macroeconomic development stays in accordance with that scenario, in theory, we have provisioned adequately going forward for this year. I think the main question when you think about cost of risk going forward is the time line. If the macroeconomic situation continues and it is worsening over a longer of risk increasing in the banking system. In the scenario that we used, the base scenario, the economy came back in 2021. So it was a fairly, I would say, V shaped economic development.
So there are 2 things to think about. 1 is the magnitude and secondly, the time until the economy comes back. When it comes to your question on loan guarantee schemes, I would say that in the Baltics and in Sweden, if there is a demand for new loans from small and medium sized corporates, they will most likely be under the guarantee scheme. We have seen very little demand up until now. It's difficult for us to forecast.
But as Lars Erik alluded to, loans and indebtedness is not necessarily the best solution for many of those corporates. There are other ways of handling their situation which is more effective. On your last question, which was about potential capital headwinds going forward, I would argue that they are tightly related to what I said in the beginning about IFRS 9 and the provisioning. Its macroeconomic outlook and potential PD migrations coming from that. That's the sort of short term headwind that you can expect in a world that looks like it does today.
If you look further out in time, the one that we have been talking about is the IRB overhaul that EBA announced. That means that we have to basically rebuild all our internal models for risk and capital adequacy purposes. That is coming gradually with the finalization time in Q3 20 21. And since Nordic banks have relatively low risk weights in their corporate portfolios, we and our peers will be negatively impacted. What will come this year according to the Swedish FSA's decision floors on commercial real estate and we have communicated So that is my best answers to your questions.
Perfect. Very clear. Thank you. Thank you very much.
Our next question comes from the line of Matsuyveddal of Handelsbanken. Please go ahead. Your line is open.
Yes. Good morning. Long queue today. A few follow ups. Anders, if you can comment on the corporate facilities.
I get a lot of the drawdowns in Q2 were on old credit facilities from the corporate sector, I. E, e, the margins are done on those should have been negotiated quite a long time when there was a different situation. Could you comment on when you now go into and negotiate new facilities, how the margin difference is between sort of old facilities and the new ones coming? Just so how I can think in terms of corporate margins. And then also maybe on impairments, I know very difficult question to answer.
But if we look at your macro scenarios with macro coming back 2021, 2022 under IFRS 9, we have never tested this. How soon do you think you could see reversals if we should compare to, I mean, the Baltic situation, for instance, which was a little bit more longer lasting perhaps? Thanks.
If I try to answer your first question, you're right. A large chunk of the drawdowns have been on already negotiated terms and conditions. There were SEK 10,000,000,000 of new revolving credit facilities coming in the quarter. And yes, the price for new lending is substantially higher than it is for the old facilities. So that is I will not give you a clear sort of indication on that, but it's higher.
It's more we are trying to price it market based. On your second question.
That's a difficult one.
I kind of like it. I have asked that myself, but I do not have a firm answer on that. I'm not sure Lars Erik has either, but
maybe No, the different situation in terms of impairment compared to the last financial crisis was that the main part was related to individual exposures.
And the
reversals and the outcome of this was then related to how went the restructuring or was it a bankruptcy case. Now we have portfolio set offs. And in theory with IFRS 9, we should have a more point in time view on things. So in theory, if we see reverses, they should come a little bit sooner, I guess. But as you said, this is untested for us.
So it's very hard to give you a correct answer. I think we are running out of time unfortunately and there are
a couple of more questions. Can we we will try to answer very swiftly. And if you don't get the possibility, we will reach out to you bilaterally. But please continue.
Okay. I believe we have time for one further question. That's from the line of Riccardo Rovere of Mediobanca. Please go ahead. Your line is open.
Thanks, and good morning to everybody. A couple of questions, if I may. Considering that the rest of Europe is more or less reopening, Austria, Spain. Italy is supposed to reopen to on the 4th May, at least partially. Germany has never really closed and is in a little bit more the economic activity.
If Sweden has never really shut down, not as in a draconian way as Italy, France, Spain or Austria. Considering if the situation goes on like that, do you think that the amount of provisions, the overlay provisions that you have taken so far would be kind of enough for what you see today if the situation, let's say, does not deteriorate further? This is my first question. The second question is on your lending approach. I remember, maybe I think it was last quarter where you stated you deliberately decided not to participate to some campaigns and that resulted in market share loss.
And I was wondering whether the attitude just changed, that you are more inclined to, let's say, percent to defend as much as you can your market share from now on? And a very final question I have, again, in Capital Edwin, sorry to get back one second on this. All the regulation that has been, let's say, promoted over the past 5 years seems to have been relaxed dramatically because of what's going on. Especially on the commercial real estate risk weight, do you see any possibility that this might be delayed to this and other eventually initiatives might be delayed to move forward as long as the situation does not get clearer because that imposing higher capital would be exactly against anything that has been proposed in Europe for the moment. So is it really reasonable to see that by the end of this year?
Okay. Thank you. If we start with your first question, if I understand you correctly, what you're saying is, is your provisioning in the quarter enough if Sweden were to be completely locked down? The provision No, no, no, no, no, no.
It is exactly the opposite, sorry. Sweden does not lock down Sweden has not never been under lockdown. The rest of Europe is reopening. If the situation remains this, that is the question.
Okay. But then it's about whether the V shape is sort of adequately mirroring the economic development going forward. And at the point when we calculated our future need for provisions, We based it on the macroeconomic scenarios that I walked you through. If they are changing to the better and that happens quicker, I would argue that the answer question, we are not participating in campaigns. There are no campaigns as we speak.
We are, on the other hand, not changing rates are moving up and down. We are continuing to operate the same way as we have been doing during the last years. And on your third question, it's a very relevant question. You need to ask the Swedish FSA on their view. It's up to them.
Okay.
Okay. But would you be surprised if they moved it forward in general, any initiative? Commercial risk weight is just 1, any initiative. Would you be
any in a very proactive way during so far during this crisis. Whether they will continue do things if needed, I would assume so. But again, it's up to them to answer that question. All right.
Okay. Okay. Thanks.
And I'm afraid we have
Yes. Operator, it's Gregory here. Yes, I understand we need to close the call. There are a couple of more questions in the queue, a
couple of questions, I think.
No, I
said that there are a
few more questions in queue. Those individuals could contact me directly and I will answer them after call is closed.
Thank you.
This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.