Ladies and gentlemen, welcome to the Swedbank First Quarter Report 2020. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Today, I'm pleased to present Gregori Karamouzis, head of IR. Please begin.
Thank you. Good morning, everyone, thank you for joining us on this presentation of Swedbank's Q1 result for 2020. With me in the room, I have our CEO, Jens Henriksson, our CFO, Anders Karlsson, and our Chief Credit Officer, Lars-Erik Danielsson. After their introductory remarks, we'll open up for questions. Jens, please.
Thank you, Gregori, good morning to everyone. We are now seeing the consequences for the economy of the Corona crisis. Let's be totally honest, a global recession is coming, IMF is calling it the Great Lockdown. Unlike the subprime crisis of 2007 and 2008, 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. To achieve this, we have increased the capacity in digital channels without sacrificing security. The technology works extremely well. The IT-related investments we make to adjust our organization to the Corona crisis will add approximately SEK 250 million to our total cost this year.
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. In Sweden, 159 out of 161 offices are open. 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 center handled half a million customer contacts via phone. That's 30% more than normal. 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. That's something I'm extremely proud of. I'll just give you one example. We produced a digital application for the amortization easing 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 government's guarantee program for companies and the Riksbank's credit facilities. The banks have an important role to play in order for these measures to have effect where they are the most needed without delay. 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. The Estonian FSA, they gave us a precept with 25 points to rectify within eight months. The Swedish FSA gave us a warning and a fine of SEK 4 billion. It's the highest fine ever imposed by a Swedish authority.
Clifford Chance came out with their report of what went wrong in the bank from 2007 until March 2019. The message from the investigation is coherent and crystal clear. 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 laundering in our bank. The board of directors had decided to accept the decision of the financial supervisory authorities. The U.S. authorities continue to investigate Swedbank. This is work in process. It's a process that will take time to conclude. The cost of doing this is great. The AML-related investigation cost will amount to SEK 1.6 billion this year, according to our estimates.
Add that to last year's cost of SEK 1.1 billion means we're talking SEK 2.7 billion to be open and transparent about our history. Add to this, the SEK 4 billion that came from the fine, it's a lot of money, now I'm not even calculating all the time that has been spent by management and all other on this. It shows you that not having good enough order and internal control. It will cost a lot of money. It's evident that the bank's ambition to make money on non-residents without having a fully functioning AML process was one of the worst deal in Swedbank's history. The good thing with this is that now we can leave history behind. Confidence you can lose really quick, regaining confidence takes time.
Regaining confidence you do by being clear about your history. We published the whole Clifford Chance report. 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. When I presented at the Q3 report last year, we had a 132-point program. By Q4, it had grown to 152 points. 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. We expect this program to almost end at the end of this year. 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. An independent validation is also made of how the banks work against money laundering and other financial crime progresses in the three-year period 2020 and forward. An assessment is made of the bank's compliance function with the aim of reaching the highest industry standard. It's obvious that we've had shortcomings in terms of governance and control, therefore, Swedbank's corporate governance is also evaluated. What about the Q1 result? To summarize it's a solid underlying business during an unprecedented quarter with a large fine from the Swedish Financial Supervisory Authorities. The underlying profit was SEK 2.3 billion, excluding the fine from the Swedish FSA.
After that, the net result for the quarter was a loss of SEK 1.7 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 8th, and the total cost for the full year 2020 are now estimated at approximately SEK 21.5 billion and excluding the fine of SEK 4 billion.
Compared to the previous estimates, that's an increase of SEK 1.5 billion. Over the rest of the year, we will operate with higher cost than what will be required next year and onwards. This is necessary to secure the success of our AML work and the work related to the ongoing U.S. investigations. Our goal to be one of the most cost-efficient banks in our category remains. When we reach year's end, we will be able to present a more detailed plan of the development of banks, customers offering an increased efficiency. With the investigation behind us, we can now look forward. Our focus shifts from 2007 - 2025. The good thing is that We can use this opportunity to regain trust because it is a challenging environment for our customers. Mr. Karlsson, the floor is yours.
Thank you, Jens. I would also like to start with some generic comments before we deep dive into the details into the quarter. As Jens already mentioned, we have faced unprecedented challenges in the quarter. When we look at the P&L development in the quarter, most income lines were affected negatively by the COVID-19 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 total expenses for the full year. Credit impairments were, as we also pre-announced in April, higher as we provisioned both at portfolio and individual levels, taking worsening macroeconomic outlooks into account. The administrative fine imposed by the Swedish FSA was booked in its entirety this past quarter.
Our capital and liquidity position remained strong with solid buffers. In contrast to many previous crises, the current crisis does not stem from the 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 billion. Most of the increase came in March as we had some large repayments early in the year. Swedish private mortgages increased by SEK 5 billion, corresponding to a somewhat improved market share in new lending, which is a positive development compared to last 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 SEK 55 billion. The increase is strongly correlated to both private and corporate customers building liquidity buffers by reducing risk in their savings and drawing down on liquidity facilities. Let me say a few more words about corporate lending in the quarter. We clearly see that long-term investments are being put on hold, resulting in near-term lower loan demand. On the other hand, we lent roughly SEK 40 billion to corporate customers across our home markets. In addition, we had around SEK 10 billion of signed committed credit facilities. As there also were some large scheduled repayments in the first two months of the quarter, the net lending volume growth landed at SEK 16 billion.
A large part of the increase came from drawdowns of revolving credit facilities, especially in LC&I. I would describe these actions as precautionary. Corporates are building liquidity buffers. We had around SEK 200 billion of committed revolving credit facilities at the end of Q1, roughly SEK 10 billion more than in Q4. Utilization increased also by SEK 10 billion to roughly SEK 70 billion. Let's look at the result in more detail, 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, corporate lending margins were stable.
Group Treasury's 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 bond buyback volumes and maturing senior debt funding did also impact positively. Lastly, as expected, the resolution fund fee was around SEK 100 million 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 fourth quarter, transaction volumes were negatively impacted by the changed customer behavior due to COVID-19. The asset management business was also negatively impacted following the sharp stock market declines in March, despite a strong start in January and February. Turning to net gains and losses and other income, we saw significant negative valuation effects in net gains and losses.
Wider CDS and credit spreads in the quarter led to large negative valuation effects in derivatives and in corporate bond inventories. In addition, share price development in the Visa and Asiakastieto holdings resulted in around SEK 330 million of negative effect. On the back of the higher volatility, client trading activity in equities, fixed income, and FX was solid. Other income was also lower. Insurance saw higher claims in sickness and unemployment policies. Income from the partly owned savings banks was lower due to the low result in their operations. As you remember, Entercard had a sale of a credit portfolio last quarter that generated SEK 165 million, which was not repeated in Q1. Let us now look at asset quality and the credit provisions that were made in the quarter. I will ask our Chief Credit Officer, Lars-Erik Danielsson, 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. 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 one to three 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 on our portfolio, we have divided the portfolio into four main groups. Sectors with insignificant impact from the COVID-19 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 in forestry and agriculture. Both have been through at least two financial crisis in the '90s and the 2000s and have proven to be very resilient with very low loan losses.
Our commercial real estate and tenant owner association portfolios have, since 2015, been through strict lending criteria, 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 of assets. The average LTV is therefore today around 50%, with a 6%-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 mid-corp 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 coming 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 as postponed tax, export guarantees, state-guaranteed bank lending, and so on.
So far, there is not so much demand from this segment on new lending, as new money may not be the solution in the long run. When it comes to provisioning in the quarter, the main effect under IFRS 9 has been, one, changed macroeconomic outlook. Two, review of existing provisioning on individual exposures in the oil-related sectors and the need to increase them based on the oil price development. Three, sector-based increased risk. Stage transfer from one to two under the IFRS 9. The changed macroeconomic outlook in March with expected negative GDP development and expected increase of unemployment figure has been implemented in our IFRS 9 models and has affected the portfolio provisioning with approximately SEK 650 million . 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. We saw clear signs of increased risk in different sectors. We have estimated rating downgrades for our expert-based models with stage one to stage two 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 million. The sectors that are mostly affected were the manufacturing, retail, hotels and restaurants, and shipping and offshore. During Q2, the work with re-rating will be focused on an individual assessment of the specific clients, which will give us a better and more insightful understanding. 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 SEK 800 million for clients in this segment. Our total exposure toward this segment is relatively small, and we have, as you know, taken action and provisioned whenever we have seen a deterioration during the past five years. In terms of stage transfers, the described provisioning represent the largest movements from stage one to stage two. We have so far not seen any effect in transfers from either stage one to stage three or from stage two to stage three, indicating that the underlying asset quality has not changed and that the individual impact from COVID-19 is not seen, particularly in Q1. In addition, we have provisioned close to SEK 10 billion throughout the years, which give us an initial caution.
With that, Anders, back to you.
Thank you, Lars-Erik. We turn to capital. The CET1 capital ratio decreased to 16.1%, and the buffer to the Swedish FSA's minimum requirement stands at around 300 basis points. The negative result in the quarter impacted CET1 capital base negatively. The pension liability valuation following significantly lower inflation expectations contributed positively. The risk exposure amount increased by almost SEK 42 billion 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 strong financial position that Swedbank enters this crisis with. We have, during the past 10 years, built a robust liquidity and capital position, which is now enabling us to continue supporting the economy. Swedbank's liquidity metrics are very strong.
They are based on a strategic priority to extend the maturity profile of our capital markets funding and, of course, on our solid deposit base. The average maturity in our term wholesale funding stood at 35 months at the end of the first quarter. Our liquidity reserve was SEK 484 billion, out of which almost SEK 300 billion were deposits with central banks. Let me give you a flavor of what this means in real terms. Considering that we have maturities of around SEK 124 billion 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 despite elevated spreads, primarily issuing covered bonds. It is important to maintain presence in the market.
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 requirements stood around 300 basis points. This corresponds to an absolute amount of around SEK 21 billion. As an example, we could lend over SEK 400 billion to corporates with this amount of capital, assuming an average risk weight 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 fundamentals, both from an income and balance sheet perspective, and it provides us with the ability to continue to 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 impact, 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.
In addition, we have seen further increase of liquidity requests from corporates in April by as much as SEK 25 billion. These lending flows will support NII in Q2 and onwards. Pricing on new lending is market-based and therefore risk-adjusted returns should be supported for return on equity. 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 and 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. Two products that have been heavily impacted by the crisis are cards and asset management.
Card transactions in total in March and April are down by around 5%-10% compared to previous periods. If the situation prevails, we expect provision income to be negatively impacted, especially the part that is linked to foreign transaction volumes. Other payment-related income is not dependent on the transaction flows. The significant stock market declines in March and April have impacted both the assets under management in the mutual funds business, also the flows. As we exited Q1, one should bear in mind that assets under management were significantly lower than the average during Q1. To give you an idea of the potential impact, depending, of course, how the market develops from here, Robur, our asset management division, has about 75% of its assets in equities. If the stock markets decline by 10%, the assets under management will decline by seven and a half.
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. As discussed earlier on the call with regards to asset quality, we are closely monitoring the development. Here I ask 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 understanding of the effect government support initiative will have on our client situation. The macroeconomic outlook should also become clearer. I will not speculate today if and how large increased provisioning will be in Q2. I would like to repeat what I said earlier, we have already provisioned for close to SEK 10 billion, which could offset possible future credit losses.
Thank you, Lars-Erik. To continue, the Swedish mortgage and housing market performed well in January and February, with growing 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 Lars-Erik 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 28th. The board notes that the bank's financial position is strong. However, it proposes that decision on dividends shall not be made at the annual general meeting, but when the consequences of the COVID-19 pandemic are clearer.
Lastly, let's look at expenses for this year. We pre-announced a revision of our total expenses guidance for the full year of 2020. We estimate them to amount to SEK 21.5 billion, excluding the administrative fine imposed by the Swedish FSA. The biggest increase with SEK 750 million stems from the Clifford Chance investigation cost and future legal advice. In total, these expenses are expected to amount to SEK 1.55 billion this year.
If we use the underlying expenses of SEK 18.35 billion as the starting point and specifically look at the addition of SEK 3.15 billion, taking us to SEK 21.5, I would say that around 60% of this addition is a one-off nature that will eventually fall off, while 40% will be 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.
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. Just about the level for 2020, considering that the AML initiatives you are undertaking during the year are increasing every quarter. Is the guidance of 21.5, could that be subject to change depending on the further development of these AML initiatives? Do you feel now that everything is covered by the 21.5?
Thank you, Magnus. If you look at the slide, you clearly see that there are two types of costs. One 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. Part of it will come in April. 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 two. One 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 year. 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. That is partly the underlying reason why Jens is moving from 132 points to over 200 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. Just then about the future. You ended by saying that if you take the SEK 18.35 and add 40% of SEK 3.55, we should have a run rate. 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 I would expect it to be gradually coming into 2021.
Okay, super. Moving to capital, since your risk-weighted assets were up quite a lot, SEK 40 billion 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 one-time 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. Just if you could give us some feeling from Q1 now and link to corporate lending growth as well. We saw what it was in Q1. We heard your comments about questions for further credit facilities, et cetera, in Q2.
Do you think that 13.7 will remain at that level or was that kind of a panic during a couple of weeks in March, which means that things should calm down? How should we think about the 13.7 going forward? Secondly, how much potentially, if you could say anything about risk migration or PD migration impacts here, the procyclicality of risk-weighted assets.
Thank you, Magnus, for a very easy question. If we start off with the credit risk increase of 13.7, as you see on the slide, it's a combination of new lending, but it's also impact on the derivatives portfolio where mark to markets have increased during the quarter. Part of it is driven by underlying movements in interest rates and FX. 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 two, three first weeks of April, but now it's gradually at a 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 corporates bond maturing, whether they can have access to the capital markets or if they need 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 counteracted by us than having the possibility to decrease the Article 3 add-ons that we have taken on.
Okay.
It will not entirely be captured in increase of risk exposure amount.
Okay. Thank you. Finally, just one question on asset quality and the oil-related part of the exposure, which you've been struggling with since 2016. Really, the oil price is down somewhat since the 8th of April, when you announced these loan loss provisions. If the oil price stays around these levels, would that automatically in some way trigger more provisions for that portfolio? Or is this within your expectations when making those provisions?
It's more within the already taken into account expectations. However, it's not directly correlated to the oil price. The sub-sectors that we are within are expecting to get order books from the oil source owner, so to say. 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.
Yeah. Okay. Thank you very much.
Thank you. Our next question comes from the line of Chris Hart 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 kind of 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? How confident are you that they will or won't come up with some bit of a curveball?
Maybe do you think that we should expect a slightly different timeline on the U.S. given what's going on in the world with things slowing down a bit? 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 view of that scheme is, what the take-up's like, and also what the economics of those loans are for you, perhaps in terms of margin, capital treatment, et cetera. Thanks.
Thank you. On your first question, we have not taken any potential fine into account when it comes to the U.S. authorities' investigations. Having said that, what we are trying to do in our cost guidance is to try to forecast what increased cost in terms of legal advice is needed to manage the U.S. authorities' questions and requests for this year. As far as the timeline for U.S. 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 about that. The reason for that is that we have made a priority on having a good quality and on time. I think one thing that struck me at least when Clifford Chance presented their report was that nobody really questioned the report as such. They questioned our behavior, and I think that was the right thing to do. The report now, in many ways, concluded our look back on history. What has happened now is that now we have the information to the U.S. authorities, and that means that they can look at the Swedish FSA, the Estonian FSA, and the Clifford Chance report.
If they come up with, well, I'm sure they will come up with complementary questions. We have a margin, we can provide that information. Now it will be a little bit more focused on costs for running the investigation. Why? Because the Clifford Chance is finished with their report, and we published everything. José, did you have anything you want to say about
The state guarantee loans.
As I've said, related to SME and SSE, there is a low demand on increased liquidity in terms of taking on loans as of today. By that, the state guaranteed loan has been very limited in terms of distribution. We expect that to increase, and the lending is related to market rate.
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 Håkansson of Danske Bank. Please go ahead. Your line is open.
Yeah, good morning. We actually covered what I wanted to ask, so I'm fine. Thank you.
The next question comes from the line of Peter Kessiakoff of SEB. 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 five years out in terms of perhaps that's the point when you believe Swedbank will reach the full cost efficiency again that we've seen historically? Is it just a reference on a year, a few years out?
Well, I wish I was that smart. It's a way of saying that we're totally honest. We've been focused inward. We've been focusing on history. I want to say to everybody working in the bank is that, okay, we've not had good enough governance, internal controls. We've let suspected money launderers use Swedbank. That's not okay. Let's now be open about history. Let's make sure that we have a fully compliant system and then look forward. I think 2025 is an important year in the sense that if you look on my experience from both working at the International Monetary Fund and the Ministry of Finance, what you see is if you have a recession, that will impact unemployment quite a lot.
If you can mitigate the consequences, and we as bank can be a part of mitigating the consequences, you can avoid unemployment going too high up. What happens in situations 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 hysteresis effect, and that means that unemployment falls much more slowly, but it rises also slowly. When I talk about 2025, it's more about that. I have expectations for efficiency much quicker than that.
All right. Just a few small detailed questions and I guess a bit to Anders to start off with. Looking at the mortgage side and I guess with the funding cost coming up, what's the view on mortgage margins over the coming quarter or two? Is it possible to say anything on the direction of new lending margins versus the back book, et cetera?
Thank you, Peter. My best answer under these circumstances is that the margins will be a function of how market rates are moving.
Okay. Short but sweet. Right. Finally, just a question on the sectors that was mentioned that were more or less exposed to COVID-19. Just a detailed one, looking at private other, which I assume includes consumer loans, 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 impacted 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 low level. Having said that, of course, if you look at how private individuals tend to behave in a crisis where they are unemployed or their financial situation are impacted negatively, they tend to prioritize their housing. Too early to say higher risk, yes. 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 Sofie Peterzens of J.P. Morgan. Please go ahead. Your line is open.
Hi, here is Sofie from JP Morgan . I was wondering, when I look on slide two where you talk about the Great Lockdown and we see the GDP forecast for the Baltics that you have -5%. When I look at the IFRS 9 scenarios on slide 29, you have around 1%-2% GDP growth for the Baltics this year. Could you just, on the macro adjustments that you have done, are all of these macro adjustments only for Sweden or what share is for the Baltics? Thank you.
Thank you. The slide where you see the scenarios is Sweden and oil price, and then there are similar patterns in all our home markets. 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. 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.
Just to clarify, you basically haven't taken any macro overlay provisions for the Baltics?
We have taken, I would say, a fairly significant amount for the Baltics as well. The slide that we used in the presentation was just for you to get the sense of how we have taken worsening macroeconomic conditions into account in our IFRS 9 calculations. The Baltics have been impacted. You can see that in the appendix of the presentation. Again, this is Sweden as an example.
The EBA has the new forbearance rules. Have you taken advantage of these, that you haven't done customer reclassification from stage one into stage two, even if they've got an amortization or a payment holiday in line with the EBA guidance? If you wouldn't have done this, what kind of impact would that have had on your asset quality and provision?
Thank you. We have taken that into consideration. It's not automatically deteriorated credit quality due to the fact that you are given an amortization relief. 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. 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?
No.
Can you give details on how many entities are looking at you?
Plural.
Okay. Is it fair to assume that it's double digits in terms of numbers, kind of mid-single digits? How should I think about it?
No, I'm just going to say it's more than one. Thank you.
Okay. In terms of the sanctions breach, you came out and said that you only had SEK 5 million of exposures that had an OFAC sanction breach pre-2014. When we looked through the Clifford Chance report, there is some mentioning of five closures in theory. If we were to look pre-2014, do you expect the number to be significantly higher? Could you give details around what level we potentially could have seen?
Well, Clifford Chance has not looked back further than this five-year period you have to look upon. That we've talked with OFAC, and we self-reported the, I think, $4.8 million, and it was 586 transactions.
Okay. You don't have any details on anything before the 2014?
Correct.
Okay. That was all my questions. Thanks very much.
Thank you. Our next question comes from the line of Johan Ekblom 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? That's the first question. Secondly, in terms of the op-risk RWA adjustments you made, do you have any estimate as to how the FSA's fine might impact the op-risk RWA going forward? Finally, just in terms of the funding, given the covered bond buybacks that you did during Q1, your net issuance was very close to zero. How should we think about the total issuance need?
In particular, if you have unused capacity in the covered 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 of this, and of course, we take into account that there is sort of 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. In theory, we need to add this to our operational losses, and therefore it could have a negative impact on our risk exposure amount going forward when the new rules are put into play. That depends on how the Swedish FSA will decide on the slope of a function that is added. If they set that function at one, 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. 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.
Yeah, no, I'm just thinking on the funding. If we look at the covered bond buyback.
Oh, yeah. Thank you.
that you did.
Yeah.
There's zero net issuance in Q1.
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 want to avoid that. 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. 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 Swedish National Debt Office prolonged the implementation period for MREL debt, the new senior non-preferred, but they did not change their requirements. 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. Our next question comes from the line of Martin Leitgeb of Goldman Sachs. Please go ahead. Your line is open.
Yes. Good morning. I have three questions, please. The first one, I was just wondering if you could give us a view on how high risk costs 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, I was just wondering if say, your base case of -4.4% for Sweden would occur, what is the kind of risk cost for the year you would expect? Just trying to tie up some of the data points out there. Obviously, the risk experience during 2009, but equally EBA stress test data, which obviously both would suggest a comparatively higher level of loan losses compared to the 50 basis points for the first quarter.
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 take-up in terms of new SME lending? Should we expect that most loans will feature under that guarantee? Will this be essentially a comparatively small portion of your loan book going forward? 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 one or two years. This is just in light of the dividend suspension, which you keep deducting from capital. Your capital headroom, all else equal, would be north of 400 basis points.
I was just wondering, a lot would need to happen for Swedbank not to generate capital in terms of risk costs. I was 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. To give you a flavor of what we have done, we have based our IFRS 9 calculations on three 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. 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 timeline. If the macroeconomic situation continues and it is worsening over a longer period of time, you will definitely see cost 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. There are two things to think about. One 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. It's 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 2021. 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, is, as you know, risk weight floors on commercial real estate, and we have communicated around that before, and that impact is approximately 50 basis points on our buffer. 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 Per Sundin 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., the margins on those should have been negotiated quite a long time when it was a different situation. Could you comment on when you now go in to negotiate new facilities, how the margin difference is between old facilities and the new ones coming, just so how I can think in terms of corporate margins. Also maybe on impairments, I know a 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 the Baltic situation, for instance, which was a little bit more longer lasting, perhaps? Thanks.
If I try to answer your first question, you are right. A large chunk of the drawdowns have been on already negotiated terms and conditions. There were SEK 10 billion of new revolving credit facilities coming in the quarter. Yes, the price for new lending is substantially higher than it is for the old facilities. I will not give you a clear indication on that, but it is higher. 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 you can.
No, the different situation in terms of impairment compared to the last financial crisis was that the main part was related to individual exposures.
Yes.
The reversals and the outcome of this was related to how went the restructuring or was it a bankruptcy case. We have portfolio setoffs. In theory, with IFRS 9, we should have a more point in time view on things. In theory, if we see reversals, they should come a little bit sooner, I guess. 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. We will try to answer very swiftly, and if you don't get the possibility, we will reach out to you bilaterally. 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, Jens. Good morning to everybody. Couple of questions, if I may. Considering that the rest of Europe is more or less reopening, Austria, Spain, Italy is supposed to reopen too on the 4th of May, at least partially. Germany has never really closed and is starting a little bit more 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, could 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. I was wondering whether the attitude has changed. You are more inclined to, let's say, to defend as much as you can your market share from now on. A very final question I have, again, in capital add-on , sorry to get back one second on this. All the regulation that has been, let's say, promoted over the past five 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 too, and moved forward as long as the situation does not get clearer?
That, imposing higher capital would be exactly against anything that has been proposed in Europe for the moment. 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 your provisioning in the quarter enough if Sweden were to be completely locked down?
No. It is exactly the opposite, sorry.
Uh-huh.
If 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. It's about whether the V shape is adequately mirroring the economic development going forward. 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 is yes, we have provisioned adequately and might even get reversals. On your second questions, we are not participating in campaigns. There are no campaigns as we speak. We are, on the other hand, not changing list prices as market rates are moving up and down. We are continuing to operate the same way as we have been doing during the last years. 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. Would you be surprised if they moved it forward, in general? Any initiative. Commercial risk weight is just one. Any initiative. Would you be surprised if that would be moved forward?
I think that the Swedish FSA have acted in a very proactive way so far during this crisis. Whether they will continue to do things if needed, I would assume so. Again, it's up to them to answer that question.
All right. Okay, thanks.
I'm afraid we have-
Yeah, operator. Hi, it's Gregori here. Yeah, I understand we need to close the call. There are a couple of more questions in the queue. A couple of questions, I think. After the call.
Sorry, you broke up.
No, I said that there are a few more questions in queue. Those individuals could contact me directly, and I will answer them after this call is closed.
Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.