Ladies and gentlemen, welcome to the Swedbank first quarter report 2019. For the first part of the call, all participants will be in listen only mode. Afterwards there will be a question and answer session. I will now hand the call over to Gregori Karamouzis . Please go ahead.
Thank you. Good morning, everybody. Thank you for joining us on this call, presenting Swedbank's first quarter results. With me, I have our acting CEO, Anders Karlsson, and our Chief Risk Officer, Helo Meigas. We will first make a short presentation of the quarter's developments before we open up for questions. I will now hand over to Anders. Anders, please.
Thank you, Gregori. Good morning, everyone, thank you for joining us for this presentation, our Q1 result. The year has financially started off with a good momentum. Focus has, however, as you all know, been on information about indicated shortcomings in Swedbank's anti-money laundering work. Let me therefore first make a few comments in relation to this before I hand over to Gregori, who will walk you through the financial result in the quarter. The United Nations estimates that the amount of money laundered globally in one year corresponds to an amount of about three to five times that of Sweden's GDP. Money laundering has become a race between criminals and legislators, authorities, financial institutions, and financial intelligence units. Criminals develop increasingly sophisticated methods to avoid discovery. Legislators respond with stricter rules and stronger regulations. We, the banks, play a central role in combating money laundering.
It is the bank's responsibility to know their customers, to detect and report suspicious transactions to the authorities, to ascertain that all employees adhere to laws and regulation. Previous internal investigations have indicated shortcomings in Swedbank's anti-money laundering work, such as in our KYC and customer screening processes. A broader and more comprehensive internal investigation is now underway in order to review our AML processes as well as to validate and, if needed, address previous findings. In addition, there are investigations being carried out by various authorities in Sweden, the United States, and the Baltics. The respective Swedish and Estonian investigations are expected to be finalized before year-end. Allow me to take a step back. The interest in the Baltic region from Swedish corporates dates back all the way to the fall of the Soviet Union in 1991.
Seven years later, Swedbank invested in Hansabank in Estonia, an investment that paved the way for us into Latvia and Lithuania. I can say with pride that we, through our presence in the Baltics, have contributed to the positive development in the region. Swedbank and other Nordic banks account for a very important part of the financial infrastructure in these countries. Regrettably, individuals who may have obtained assets illegally may have managed to use our bank in the Baltics for money laundering. At Swedbank, we have continuously worked to improve our anti-money laundering methods. For example, in 2016, this work was intensified through an AML program with particular focus on the Baltic markets. More stringent procedures led to many customers being off-boarded. However, no bank executive, me included, can guarantee that our AML work is flawless.
To strengthen the work against all aspects of financial crime, we are now establishing a new unit called Anti-Financial Crime. The unit will focus on anti-money laundering, counter-terrorism financing, and financial crime that affects our customers in everyday life, such as identity thefts and card frauds. The unit will also focus on cybersecurity, information security, and physical security. The unit will coordinate the broader internal investigation, but also manage the cooperation with the authorities within the AML area. In order for Swedbank to deserve the trust from our customers, authorities, investors, employees, and other stakeholders, we will make sure that further progress in our anti-money laundering work is achieved. I also strive to be as transparent as possible given the various legislations in the jurisdictions where we operate. Bear in mind that these legislations in some regards collide.
The bank and I are nevertheless committed to find ways to be as transparent as possible. However, it is not enough for us to act alone to make the problem of money laundering disappear. The key to successfully combating money laundering is enhanced collaboration between financial supervisory authorities, banks, other financial institutions, and financial intelligence units, both nationally and internationally. With these comments regarding our AML work, I would like to move on to the financial result in the quarter. We are delivering a strong set of results with higher net interest income and better trading results on the back of improved market conditions. Expenses are impacted by extraordinary one-offs related to the AML investigations, and asset quality remains solid. Gregori will now go through the numbers in more detail before I will make a few comments on expenses expectations for the full year.
Last but not least, Helo will talk about asset quality. Gregori, please.
Thank you, Anders. As Anders already mentioned, summing the year's first quarter up, we delivered another strong result with an ROE of 15.5%. The year started off on a positive note with the main income lines performing strongly, while expenses are somewhat higher than expected and asset quality remains resilient. I will now walk you through the P&L lines for the quarter in more detail. Let's start off with the net interest income, which is higher quarter-over-quarter on the back of lower resolution fund fee and the repo rate hike in Sweden in December last year. The Swedish private mortgages continued to grow, somewhat slower than our back book market shares, though. In addition, we are pleased to see loan growth in all three Baltic countries. Corporate lending in Sweden and LC&I did also grow, mainly in real estate sectors.
Margins in the quarter were mixed, with lending margins somewhat lower and deposit margins higher. Over the quarter, we saw the vast majority of our Swedish mortgage book in three-month fixings, which corresponds to about 60% of our mortgage book, reprice successfully by the 20 basis points rise in the lease prices. Since three months STIBOR rates increased on average by around 30 basis points compared to last quarter, margins in new lending did, however, compress with around 10 basis points in the quarter. Lending margins in Baltics were stable while corporate margins in Sweden and LC&I were slightly lower due to the floored loans. Deposit margins have expanded in Sweden as we haven't changed our pricing in any of the deposits. In line with what we communicated before, the resolution fund fee was around SEK 100 million lower in the quarter.
Also bearing in mind that the day count effect is quite significant this quarter with two days less corresponding to around SEK 18 million in a negative quarter-over-quarter effect. Group treasuries NII was as expected lower in the quarter, that is reflecting the immediate effect of higher short-term interest rates on treasury interest expenses. On a group level, however, as we've talked about many times, this effect is mitigated by higher deposit margins in the business areas. Now turning over to net commission income, which was seasonally lower in the quarter. We see the usual seasonal effects in cards, asset management, brokerage, and custody, and we also have a fewer days impact in this quarter in net commission income as well. Payments are stronger in comparison to last quarter due to the higher expenses we booked last quarter.
Look at the underlying business, however, in particular asset management, which had a very solid performance supported by the positive stock market development. In addition, we continue to see strong net inflows in our funds business, both in the private and institutional side across geographies and asset classes. Fixed income funds and mixed funds saw the biggest inflows, but also equity funds attracted new flows. Turning to net gains and losses and other income. We saw improved market conditions, and they led to a number of positive effects in the quarter. We had a strong quarter in fixed income trading while tighter credit spreads led to positive valuation effects. In group treasury, we have the holdings of Visa and Assa Abloy shares, if you remember we talked about that last quarter, which are held at market value.
This led to a positive delta of around SEK 350 million in this quarter. When looking at other income and excluding last quarter's portfolio sale by Entercard, which gave about SEK 75 million in a positive impact, the underlying business had an overall stable development. Now, saying a few words about capital. Our capital position remains strong. The buffer to the Swedish FSA's minimum requirements stands at around 140 basis points. Net profit excluding dividend impacted the CET1 capital base positively, while the pension liability valuation was negatively impacted following significantly lower long-dated interest rates. The risk exposure amount increased by almost SEK 20 billion in the quarter. To be more precise, SEK 18.5 billion. The main reasons for the net increase were the continued loan volume growth, the introduction of IFRS 16, higher market exposures, and also the annual update for operational risks.
Now summing the quarter up. We delivered a strong set of results with the positive effects from the repo rate hike becoming visible, and also the improved market conditions impacted trading and net commission income positively. Expenses were slightly higher due to one-offs amounting to around SEK 120 million related to the AML situation. Asset quality remained resilient. Before I hand the word back to Anders, who will talk about expenses in more detail, and later on to Helo, who will cover the asset quality part, I will first say a few words about the bank's liquidity position. We continue to have a very strong liquidity position in the bank. Our solid liquidity buffer, where we are pre-funded for more than 12 months, allows us to cope with severe stress in the markets and also to be selective of when we access the capital markets.
During the quarter, we have issued long-term funding of around SEK 47 billion, while our maturities for the full year stood at SEK 68 billion in the beginning of the year. With these issuance volumes, we have already this year fulfilled around one-third of our funding plan. The funding spreads in our domestic and international covered bond market have not been impacted by the AML situation, while the senior unsecured bond spreads have by around 25 basis points. Our significant level of covered pool over-collateralization gives us, however, the flexibility to fulfill our funding plans if we choose so, without tapping the senior market for as long as the spreads are elevated.
In addition, since our core funding sources are deposits and term funding, we have no reliance on short-term funding and can choose to either only take up really short duration money without paying up or stay out of the market. Our deposits with central banks exceed the outstanding volumes in our short-term programs. Lastly, pointing to the regulatory liquidity metrics, which are continuing to be strong with large buffers to the minimum requirements. As you can see on this slide, the LCR ratio is 167% and the NSFR ratio is at 110%. Now I will hand the word back to Anders, who will go through expectations on total expenses for the year.
Thank you, Gregori. As already mentioned, we have incurred one-off expenses in the first quarter following developments in the AML area. Due to these developments and the extraordinary situation the bank is in, my key priority for the year will be to rebuild the trust of customers and other important stakeholders. We continue to have a strong financial position that provides us with the platform to meet this challenge. Our efforts to address the current situation will lead to approximately SEK 650 million in expenses relating to ongoing investigations, CEO severance pay, acceleration of projects to bolster our AML processes and meet new future regulatory requirements, and customer initiatives to strengthen the brand. In addition, we have been reprioritizing some projects relating to the digital transformation of the bank and doing more to maintain the speed and scope of the development plan. This has cost more than anticipated.
We believe these initiatives will create value and improve customer satisfaction, we will continue to invest in and execute on these activities. We also anticipate some business one-offs over the year relating to the closure of Luxembourg branch and additional VAT expenses regarding leasing. Altogether, these initiatives are estimated to increase cost by approximately SEK 1 billion during the year, in addition to our previously communicated goal of underlying expenses being below SEK 17 billion in 2019. We have previously mentioned headwinds from FX and pension, which are currently estimated to be SEK 800 million. Reminding you that the FX effects are net positive. The extraordinary circumstances require specific actions that we have chosen to take. Our key priorities of having a market-leading cost efficiency and a return on equity target of at least 15% remain.
With that, I hand over to Helo, who will walk you through the development in asset quality.
Thank you, Anders. I shall give now a short overview of asset quality. Credit growth was moderate in Q1, with the loan portfolio increasing by SEK 13.7 billion, of which SEK 5 billion was FX effect. Aside from mortgages, growth primarily came from property management, the majority of it in Swedish Banking, both in commercial and in residential properties. Credit impairment in Q1 was SEK 218 million, divided between LC&I and Swedish Banking. In Baltic Banking, we continue to record small recovery. The increase of provisioning is primarily a sum of rating migrations and slightly more negative forward-looking assumptions, plus some provisioning for a few smaller defaulted clients, i.e. Stage 3 provisionings. All in all, credit quality stays strong.
If I conclude with the topic of housing developers, which we have been focusing in the last quarters, our exposure continues to go down and is at the end of Q1 at SEK 14.8 billion. This is because finalized construction of bigger volume than lending to new projects. With that, I hand back to Gregori.
Thank you, Helo. Thank you, Anders. Operator, we're happy to take any questions.
If you do have a question for the speakers, please do press 01 on your telephone keypad now. The first question is from Magnus Andersson. Line is open.
Yes. Good morning. Just on the costs. We know that you raised your guidance to around SEK 18.8 billion for 2019. I would like to get a better grip on how much of this should we look at as recurring into 2020 and potentially 2021 without being extremely specific. For example, if you take the SEK 650 for AML-related initiatives, how much is legal consultancy, et cetera, and how much is due to own initiatives such as brand management, et cetera? Of the investments of SEK 250, I guess it's mostly digitalization. If you move things forward, does it mean that it, all else equal, could be lower in 2020, 2021? I guess that the SEK 100 in other business one-offs should be a one-off for 2019.
I think any light you could shed on how much cost expectation should go up beyond 2019 would be very valuable at this stage. Thank you.
Thank you, Magnus. I will do my best. If I simplify it for you, I would argue that half of the SEK billion is run rate and half of the SEK billion is extraordinary costs. The latter part is, however, open-ended, Magnus, because I don't know how long the process will continue. Onto your remark of the investments that we are doing, I think it is extremely important to do two things at the same time. One is to move forward some projects that are increasing our customer convenience at this point, and also to push the throttle on AML-related projects. The reason for not taking the foot off the gas is the fact that we have a plan, as we have been talking to you about, which is transforming the bank. In order to be able to remain cost-efficient, that will continue.
It is a rough number for you, but at least it gives you a sense of where we stand and how it is distributed.
Okay. Simply put, once the investigations, et cetera, are finalized, whenever that happens, roughly 50% of the SEK billion should fade away.
That's the best estimate at this point, Magnus.
Yep. Okay. Secondly, just on NII, in connection with the Q4 report, we were talking about the NII impact from the Swedish rate hike STIBOR moves and your rate action, and you expected an impact of around SEK 200 million per quarter from Q2 in 2019. Does this number still hold?
What has changed since we last quarter communicated the parameters that matter for the NII sensitivity is that the three-month STIBOR rates have increased even more during this quarter.
Yep.
This leads to a couple of impacts. Firstly, as actually I mentioned already before, mortgage margins are slightly lower, which means that the pass-through on mortgages is smaller. Secondly, the floored corporate loans and the deposits where we have been charging customers will lead to an additional headwind in the second quarter. This headwind, if three-month STIBOR rates stand still or increase further from here, will, on the other hand, disappear going forward. All in all, what has changed is that all these impacts lead to a somewhat smaller net positive impact in 2019 altogether.
Okay. Do you have a view on the fact that when we look at front book rates on new three-month loans, they are up by five basis points from December until March? Is that an indication of competitive pressure, or how should we look at that?
Well, I think you're referring to the average mortgage rates, right?
Yes. To the average actual rates. Yes.
Yeah. As you know, the average mortgage rates that are published monthly only represent new contracts. That is, the large part of the mortgage book that is rolled over monthly is not included there. That's why I made the comment before that we actually did reprice with 20 basis points to the vast majority of the book. Your question is however still valid. I think it indicates what happened during these couple of months, and the market is in a calibration phase. I think we need a few more months to say if the actual new price is at those levels, or if the price is at a different level. It's too early to say if the book is going to reprice at those levels going forward.
Okay. Just finally on NII. I guess your comments around liquidity position and funding plans, et cetera, implies that we should not expect any negative impacts on funding costs, at least for 2019, and then we'll obviously have to see what happens, right?
Yeah. I would say I describe the optionality that we have-
Yeah
the flexibility that we have. Your comment is correct. To date, we haven't seen any higher funding costs on the back of widening funding spreads because we have the flexibility to meet our funding needs in a different way.
Okay. Thank you very much.
Next question is from Peter Kessiakoff from SEB. Please go ahead. Your line is open.
Hi, good morning. Just a few questions. First of all, on the AML concerns really that have impacted you in all your markets. Have you seen any impact on client flows from that so far?
Thank you, Peter. I think our staff has done a fantastic job during the past two months talking to our customers. We have so far only seen a few customers that wanted to move the business away from us. Having said that, though, I think we need to be humble in anticipation of the continued conversations with our customers. We will do what we can, our utmost, to keep the trust. The initiatives that I mentioned earlier are aiming to do exactly that. Limited impact so far. Lots of questions handled fantastically well by the staff, we need to be humble. Okay.
On capital, as you mentioned, you have a buffer of some 130, 140 basis points. During the end of the year, we will have the countercyclical capital buffer rising in several markets, which could imply that your capital buffer is at or below 100 basis points above your requirement by the end of the year. Does that mean anything for you? Does that change your behavior in any way, or are there reasons to believe that the Common Equity Tier 1 ratio will rise from today's levels? Are there any kind of material effects?
We feel comfortable with our current buffer to the minimum requirements. As you know, we haven't yet made a statement about a range or a capital buffer internally that we have set. There are still some uncertainties, as you know, on the regulatory front that need to be clarified before we set that buffer target. You should remember, if you look forwards, because that's really your question, our behavior doesn't change. We will continue doing the business that we want to do as long as those deals are meeting our return hurdles. You should also remember that there have been a number of factors that have been going against us, if I call it that, for a number of years now. I'm thinking about the pension liability valuation and the elongated interest rates in REA have been increasing quite a lot the last couple of years.
That basically means that we have already taken a lot of hits, basically, on the REA front. For the time being, nothing is changing in terms of how we conduct our business.
Okay. Being below, say, 100 basis points in buffer isn't necessarily something that you would find concerning?
No. There is a buffer that you can temporarily be below 100 basis points or even lower than that, there is nothing that would worry us at this stage, no.
Okay. Just one final question on the AML issues. You mentioned that you have a dialogue with both the Swedish and U.S. authorities. Could you perhaps elaborate a bit on what the dialogue is with U.S. authorities? What kind of questions are being asked, or what's the focus here? How broad is potential investigation from their side? Any comments would be helpful. Thanks.
Thank you, Peter. Specifically on the U.S., I have unfortunately to be fairly limited, but there are numerous questions of different sorts and kinds. That is number one. Number two is that is why, as I said, we have a broad and deep internal investigation going on for the sake of us understanding, but also to be able to manage all the different authorities' expectations and answers. As you have seen, we have been using Clifford Chance as our legal firm to represent us in the U.S.
Okay. I am done there. Thank you.
Next question is from Johan Ekblom from UBS, please go ahead. Your line is open.
Thank you. I think the majority of the questions have been covered. I just want to come back a bit to the mortgage shares. You said the majority of your variable rate book was repriced during the quarter. Can you just give us a sense as to when in the quarter that happened? Just to get a sense as to how much of that effect is fully in Q1 and how much is left to come in Q2. Then secondly, also on the mortgage market, you sort of allude to front book market shares being below your back book. Can you talk a little bit about the outlook there? Are you seeing lower growth because of the competitive pressures and you are not wanting to write business at current levels? Or is this a conscious step in terms of risks that you see?
Just to get a sense to what your appetite for growth is, relative to what kind of market growth we're seeing.
Thanks, Johan. On your first question, we have rollovers, the way I call them, every month. At the end of the month, a portion of the book is rolled over. For the second quarter, you would expect that more or less the whole book of three-month fixings will be repriced. Your second question about front book, back book margins and what to expect in terms of growth. First, a comment on the potential gap between those two, the front and the back book. There was a gap in the beginning of the quarter as a result of what I discussed before, the significant three-month STIBOR increase, late Q4 and beginning of Q1. This has now been closed as the mortgages with three-month fixings very quickly reprice, as I mentioned, every month, and become part of the back book.
Today, when we look at the book, the front and the back, there is no gap between the front and the back. In terms of growth, I would describe the market situation as being in a calibration phase, in terms of competition, how competition behaves. Us capturing a little bit less market shares this quarter, I would assign to this situation or this phase, that the competition is fierce and the behavior in the market has still not settled, if I put it that way. We will see over the next few quarters how things develop. Overall in the market, there is a slightly lower growth pace. That has to do with what we've been discussing in the past. You've had the amortization requirements that were introduced, and you have a generic slowdown in the economy.
Still, the economy is growing robustly, so I would say, but in a slower pace, and that impacts also the mortgage markets.
Can I just clarify? On the mortgage rollovers, is it fair to say that it rolled over roughly evenly through Q1, so half the impact is in Q1 and half is still to come? On the second, on the growth side, I guess another way of putting it is, you talk about slower growth. To what extent is that market and to what extent is that Swed-specific? Would you expect to have a materially lower market share of new production than your back book this year?
On your first question, I would say that two-thirds, maybe, has already been visible in the first quarter, and then you will have the one-third coming in in the first quarter. The full effect will be visible in the second quarter. To your second question, again, repeating myself a little bit maybe, but I think it's difficult judging from one month or two months data to say if it's any Swedbank effect in these numbers. We don't see that so far. We remain humble about both the competitive environment, the AML situation that Anders mentioned before, and our main priority is to do the deals from a risk perspective that we can accept, and with the ambition to defend margins.
Again, competition is fierce, and we'll see how this continues then for the remaining part of the year.
Thank you.
Next question is from Jan Wolter from Credit Suisse. Please go ahead, your line is open.
Hi, Jan Wolter here, Credit Suisse. Thanks for taking the question. First, just maybe clarification there. I think, Gregori, you mentioned mortgage repricing. Did I understand correctly that of all the mortgage repricing, two-thirds happened already in the first quarter, and then one-third is yet to be seen in the second quarter? That's the first question.
Correct. Roughly, that is the case.
All right. When we look at the margin impact in your presentation there, it looks like the total margin effect is roughly SEK 58 million Q on Q. That would be a proxy, I guess, for the two-third mortgage repricing in the first quarter. Would that be fair?
It's included in that number, correct. That number is a total.
Sure.
Yeah.
Okay. Thanks. A couple of other questions there. First on the treasury NII and GL, do you still see unchanged level year-over-year as the best guess? Question around the internal investigation. I think, Anders, you mentioned that it's still ongoing. Do you expect some data on that to be disclosed to the market, and specifically then if we could see the amount of questionable flows from the bank? If you intend to disclose when in time do you think that could happen? Thanks.
If I start off, Jan, with your first question about net gains and losses in group treasury. Last quarter, we went through the factors that impact the group treasury result. There was nothing new to you. For NII, we talked about the dollar funding market conditions. For net gains and losses, we talked about the cover bond buyback activity, which we expected to be at about the same level in 2019 as it was in 2018. Of course, the market movements in basis swaps and credit spreads and the share price and FX development for the Visa and Assa Abloy shares will dictate where that line goes in the year. Assuming everything else being equal, I would expect more or less a similar level on that line.
You should look at this combined together, NII and net gains and losses when we talk about the treasury result. All in all, what we've said, and everything else being equal and the factors that we mentioned before, you should expect the group treasury result to be lower year-over-year. The second question, I hand over to Anders.
Yes. Thank you, Jan. First of all, the internal investigation that I referred to has two prime target goals. One is for us, ourselves, to understand what has happened in the past and if there is anything that we can learn from that. The second part is, as you rightly point out, to manage the different authorities' questions in the best possible way. For me, it is extremely important to run a complete and thorough investigation with facts. The timeline for that, however, Jan, I'm not in a position to reveal at this point in time since it is a very comprehensive investigation. We do not expect to be in a position to discuss any specific findings until our review and those of the relevant authorities are complete.
Having said that, again, coming back to my initial statement, we will try to be as transparent as possible, but promising anything at this point in time wouldn't be fair to us or to you.
Okay. I think just to follow up on that quickly, the internal investigation is running. Even if you conclude that, the bank is unlikely to disclose any results to the market since you will be waiting for the outcome of investigations by authorities. Is that a fair description of the sequence of events here?
Yes, Jan, I think I would like to remind you, not being an expert in this type of investigations, but the internal investigation have twofold ambitions. One is for us to understand, the other one is to manage the authorities' questions and expectations. They might change over time, and that is why it is important for you to understand that the investigation will continue until we have answered all the questions that the authorities might have.
Okay. No, that's clear. Many thanks.
Next question is from Adrian Cighi from RBC. Please go ahead. Your line is open.
Hi there. Thank you very much for taking my questions. Just a couple of follow-up questions on AML and NII, please. Your capital position remains strong at 140 basis points over minimum capital. Has the regulator flagged any potential add-on requirements coming from this ongoing AML investigation? Under what circumstances would you consider abandoning the 75% payout ratio, even temporarily? On your comment on dealing with the U.S. authorities, can you specify which U.S. authorities are involved in the investigation? Is the DOJ involved or maybe other authorities are involved? Then very quickly following up on the NII, can you provide any more color on the $46 million treasury headwind? Is this further headwinds from the U.S. carry trade or any additional color you can provide would be very helpful. Thank you very much.
If I would start with the question of the capital add-on. Swedbank is currently holding SEK 69 billion worth of risk exposure amounts for operational risk, and that is an equivalent of about SEK 5 billion of capital. Currently we consider it to be sufficient to cover the possible operational risks that we are aware of. However, this is an ongoing process. We do make reassessments continuously whether the capital keep is sufficient for any risks the bank is facing, including compliance and regulatory risks. We will, of course, inform the market if we come to a different conclusion.
Yes, I have to ask you, I heard you have two questions. I only got one of them, and that was the last one, which I think was about which authorities in the U.S. I cannot give you any more specific details on that. I think the second question was about if we were to come into a situation where we need to abandon the current dividend policy. I think it is too early to say anything about that. Did I catch your questions correctly?
That's correct. Thank you very much.
Lastly, Adrian, on the group treasury. This quarter, you as a delta quarter-over-quarter, the dollar funding conditions that change, there is no delta between those because in the last quarter, there was no element of that in the numbers. There is a one-off correction or adjustment of $36 million that is booked this quarter. It's basically a correction from during a long period of time that is taken as a one-off of $36 million this quarter. That won't be repeated.
Thank you very much.
Next question is from Bruce Hamilton from Morgan Stanley. Please go ahead. Your line is open.
Thanks. Morning, guys. I think most of my questions have been asked, but maybe just circling back on the additional cost point. You said sort of about half you think may be one-off or is linked to the investigations, half is run rate. If we assume that's assuming that the Estonian and Swedish investigations complete by this year, but the U.S. ones proceed thereafter, I'm assuming that's the case, or does that assume fairly quick conclusion on the U.S. side as well?
Thank you. The ambition from the Swedish and the Estonian regulators have been communicated to be finalizing, I think, in October, and then they will come to a conclusion whether there should be any sanction or not at the end of the year. On the U.S. side, it is extremely difficult for me to have any view on how long that will continue.
Okay, thanks.
Next question is from Riccardo Rovere from Mediobanca. Please go ahead. Your line is open.
Good morning to everybody, thanks for taking my questions. A couple, if I may. On the attempt you're making to try to retain as much as possible clients, is it fair to assume that the clients that want to leave eventually will probably leave over the next, let's say, six, maybe nine months or so? If we don't see, let's say, a large client outflows over the next two, maybe three quarters, we could eventually be fairly reassured that the franchise is not going to suffer any further damage. This is the first question. The second question I have is on risk-weighted assets from REAs. Aside from IFRS 16 and the FX, the growth that we have seen in this quarter, is there anything that you could point out as one-off, or it was just trailing the volumes growth?
Thank you. To answer your first question, I reiterate, we need to be humble. My colleagues in the bank have been working and will work diligently with communicating around with the customers. As I said, we are putting full throttling in order to deliver services and products that are increasing customer convenience. I don't know the answer, Riccardo, I think you understand that. We are doing the utmost to keep our customers, but we are humble.
On the REA question, there are really no one-offs that will go away. Next quarter, you have the usual moving parts, which is the lending, the leasing book, which is IFRS 16. If the asset composition changes, then you would have REA effects, but that's normal course of business. The one parameter or factor that is one of nature, but it's permanent for another year, is the operational risk REA increase. It moves up to a new level since it's calculated on a three-year rolling income basis. We have 2015 falling off the calculation and 2018 coming into the calculation. That is also, as I said, permanent for the year.
Yeah. Very clear, Gregori. Thanks a lot.
Next question is from Paulina Sokolova from Barclays. Please go ahead, your line is open.
Hi. Most of my questions have been answered, actually. Maybe just coming back to costs. Are you able to give us an indication of how much of the half a billion of temporary costs that you flag are related to the Estonian and Swedish investigations specifically? Then maybe just also on the U.S. investigations, is it fair to assume that the investigations are broader than issues related to the Panama law firm, Mossack Fonseca? Thank you.
Thank you. The estimate that I gave you, the best estimate I have is that around 50% of the SEK 1 billion are extraordinary costs, and the other 50% is a run rate. How that will pan into 2020 is too early to say, since I do not know how long the investigations will continue. That is my best estimate to you. As far as the U.S. authorities and the questions they are interested in, it is a broad number of questions, the same essentially as other authorities are asking about certain transactions, customers, processes. It is more general than specific in this case.
Okay. Thank you very much.
Next question is from Jacob Kruse from Autonomous. Please go ahead, your line is open.
Hi. Thank you for taking the question. I guess I just have two. Firstly, just going back to the question around capital buffers. In Denmark, we saw Pillar 2 buffers being increased by regulators ahead of any fines were set. I guess in Sweden, Nordea had a number of Pillar 2 buffers in this other category. I guess I just wanted to ask, have there been any discussions or indications by the FSA that they may look to add such a buffer where you get your new capital requirements set or new SREP set this year? My other question was just around the NII. You just made a comment that the Q2 NII may be burdened by the increase to stable rates going through this quarter. Should we look at rate movements and margins as broadly neutral for Q2? Did I misunderstand that?
Thank you.
Regarding the Pillar 2 add-on, I would want to reiterate what I said before. I'm not in a position to comment anything more specifically at this point in time.
Then Jacob, on your second question, no, there will be a net positive delta quarter-over-quarter. Q2 will be higher than Q1 if you isolate the effects from the rate hike.
Okay. Thank you.
Next question is from Connor Middleton from JP Morgan. Go ahead, your line is open.
Hi, good morning. My questions have been answered, I'll pass on to the next person. Thanks.
Next question is from Geoff Dawes from Societe Generale. Please go ahead, your line is open.
Hi, good morning. Thanks a lot for the call. Couple of questions from my side, both quick, hopefully. The first one is, in terms of the main banking products on the deposit and the mortgage side, have you seen any shift in term requested by the customers, and what impact does that have on the margin? Specifically switching from the three-month to two-year fixing on the mortgage side, also if there's anything on the deposit side that's worth highlighting. Second question on mortgage volumes. There's obviously been across the major banks a reduction in new book market share below the bank book market share level, a bit of fragmentation of the mortgage market. What do you think could change that? Do you see that continuing, or is there anything that will reestablish the dominance of the larger players? Those are the two questions. Thank you.
Thank you. On your first question, we saw in the beginning of the year a slight migration from three months to three years. I think it was specifically in one month, but then it has faded off. On the deposit side, it has been very limited. As far as your question around the mortgage market actors and the fact that there are more players coming to the market, I would expect that to continue. That is my best guess at this point.
To add to that is actually the competition description that we gave is coming from established players. The new entrants, if I call them that, or the smaller players, they are competing for sure, but they're not the ones that are moving the needle at this stage.
Okay. That's great. Thank you.
That was our final question for today. I will hand call back to the speakers.
Thank you, operator. Thanks, everyone, for participating actively. We will meet with most of you on the road over the next couple of days. Thanks again, and have a good day.
This now concludes the conference call. Thank you all for attending. You may now disconnect your line.