Skandinaviska Enskilda Banken AB (publ) (SEBA) Earnings Call Transcript & Summary

Hi, everyone. This is Johan Torgeby from SEB, and I'd like to welcome you all to this Q1 report presentation on a fantastically sunny day in Stockholm, which has not been a common feature this spring. I hope you guys are all well, and let's jump into it. We'll start with the financial performance of the bank, and I'll hand over to our CFO, Masih Yazdi.

Thank you, Johan, and good morning, everyone, on the call. So I'll start on Slide 2 with the development of the financial markets. I'm sure you're very aware of what's happened during the last quarter. But we've seen very strong equity markets. We've seen credit spreads continue to go down slightly, and then we've seen long-term rates go up, which has steepened the yield curves. And all of these developments have had implications on our Q1 financial results. If we move on to the next slide, Slide 3, noting the highlights in Q1. To start with, we note that we have a return on equity of 13.8% in the quarter on a capital buffer above the regulatory requirements of 780 basis points. This is actually the highest profit ever in SEB's history, but as we're holding more capital now than we've done in the past, the return on equity is not the highest ever. We also say in this quarter that given the improving macroeconomic outlook, we now expect that expected credit losses will normalize already in 2021. And by normalization here, we mean around 8 to 10 basis points or about SEK 2 billion given the size of the current balance sheet. We also note that the largest division, LC&FI, large corporates and financial institutions, they continue to strengthen their position in the market. And in this quarter report a return on business equity of 14.9%. And then Johan will come back with the establishment of the new division for private banking, the private wealth management and family office divisions. If we move on to Slide 5 and look at the financial summary for Q1, and I'm going to compare it to Q1 2020 all through this presentation. We can see that the operating income is up 32%. Cost or expenses are pretty much unchanged. And given much lower expected credit losses, we see an operating profit increase of 153%. You should note here that on a year-on-year basis, we have a negative FX effect of almost SEK 300 million on income and a positive FX effect of almost around SEK 100 million on cost, just keep that in mind. And then to the right, you see the expected credit losses in basis points, 3 basis points to cost income ratio of 0.43; the capital, I will come back to later; and the return on equity of 13.8%. Moving to Slide 6. The net interest income development, is plus 3% compared to Q1 last year. That is mainly driven by slightly higher lending than Q1 last year and primarily driven by lower funding costs. And this is not predominantly with spreads coming down, it is the case that we've seen strong deposit inflow in the bank, which has allowed us to do less wholesale funding, which has lowered the funding cost of the bank. Quarter-on-quarter, net interest income is down. That is mainly driven by higher regulatory fees and a shorter quarter in Q1 versus Q4. We noted in Q4 that the net interest income coming from our markets business was elevated about SEK 100 million above a normal level. We note that it continues to be elevated in Q1 of about the same level as it was in Q4. Also on NII, I would just note that there is a negative FX effect on a year-on-year basis of around SEK 80 million. We can see that mortgage lending has accelerated. It's about 70% higher Q1 this year versus Q1 last year, although that was a low base, but we see an acceleration there. At the same time as corporate lending growth is -- continues to be muted. Move on to Slide 7, net fee and commission income. Also here, we see a 3% year-on-year growth. But there are quite large movements underneath this aggregate number. We see an improvement in asset management, to a large degree, driven by the strong equity prices. And we see an improvement in investment banking-related fees compared to Q1 last year. At the same time, the lower corporate lending demand has led to lower lending fees. We see slightly lower fees coming from our markets business and also the fact that Q1 last year was the last sort of normal quarter or close to normal quarter in terms of card turnover, we see a negative effect from card and payment fees versus Q1 last year. You should also note that when it comes to the FX effect, it's about SEK 140 million negative year-on-year. And so the net fee and commission income line would have been up 6% compared to the 3% had FX stayed where it was. We know that we continue to have a strong pipeline for investment banking and only a small fraction of that has been materialized during Q1. Move on to Slide 8, net financial income development. Here is obviously the big swing factor, SEK 3 billion above or contribution from the Q1 level last year. We have seen a good development in our markets business, mainly within fixed income. And we've seen a recovery of the negative XVA effects we had Q1 last year. So the minus SEK 1.3 billion, we can see that if we sum up the last 4 quarters, that is actually fully in line with the minus SEK 1.3 billion. So that has been fully recovered in the last 4 quarters. Historically, we have said that this line should be about SEK 1.2 billion to SEK 1.4 billion if you exclude XVA effects and exclude the treasury business. We now believe that we can increase that guidance slightly. Given the strong acquisition, we feel that we have in our markets business, mainly within fixed income, and also given the steeper yield curves, we believe that we, in the future, on average, should be able to generate SEK 1.3 billion to SEK 1.5 billion, so about SEK 100 million higher than the previous guidance, excluding treasury and XVA effects. I move on to the next slide. The one we always use the operating leverage, obviously, it looks very good right now, keeping costs pretty much unchanged compared to the average cost level for the last year on a quarterly basis. But with a strong income growth, we see a strong operating leverage, but obviously, 3 more quarters to go. So we'll see what happens. Moving on to next slide, just a few key ratios. I think the ones worth noting, in addition to what we've talked about already, is the customer deposits, a very significant growth that seems to be continuing, which has some potential negative implications in the long term, but right now, it allows us to do less wholesale funding, which is positive for net interest income. We also disclosed the net stable funding ratio for the first time this quarter. It's going to be mandatory from next quarter. But we do it already now. You can see it's at around 111%. So clearly, above the regulatory comments that will be put into force. And then on capital, I'll just move on right away to the next slide, so Slide 11, looking at the capital development. So we've seen a reduction of the buffer from 840 basis points in Q4 to 780 basis points in Q1. First of all, the strong profit generation in Q1, taking away the expected payout of 50% of the profit, has added 42 basis points, which is a pretty good number. At the same time, we've seen an increase in market risk, and we've seen negative FX effects and also a small increase of the asset side. When it comes to market risk, we note that the risk exposure amount related to that is at a very high level, SEK 55 billion, compared to around SEK 40 billion on a sort of normal quarter. And we think that this, over time, will come down again to approximately the same levels we've seen in the past. So we think that part is fairly temporary. Obviously, FX is difficult to predict. But right now, it's -- the krona is a bit stronger than it was at quarter end. Then finally for me, move on to Slide 12. If you look at the development of the credit portfolio. And just to -- a reminder here, the credit portfolio is the combination of the on-balance sheet lending as well as the off-balance sheet commitments. I think the numbers worth noting here is the corporate FX-adjusted credit growth, that is down 2% Q-on-Q. This is mainly driven by the off-balance sheet commitments. If you look at just the lending side on corporates, there's a small increase Q-on-Q. On Swedish mortgages, again, this is both lending as well as the mortgage commitments we have, which is accelerating to a 9% year-on-year growth level. If you just look at the lending side, the growth rate is about 6% and during Q1, we just -- we took slightly higher than our back book when it comes to mortgages, so around a 15% market share in Q1. Also, we can see that when it comes to CRE, there is a negative growth rate, both on a quarterly basis as well as a year-on-year basis, which is pretty much in line with the strategy we have in the bank. With that, I'll move on to Johan and some thematic slides, sustainability, savings and international expansion. So...

Thank you, Masih. That's exactly the 3 themes I'd like to address today, starting with our sustainability work. On Page 14 is just an update on some progress we've made when it comes to policies, procedures and the different type of initiatives that we have engaged in, in the first quarter. First, we have probably 2 of the most topical policies for the bank, the fossil policies for the bank for lending and the fossil policy for investment management, both being updated and sharpened and quite a lot increased in detail. The purpose is, of course, to reduce any negative CO2 footprint SEB generates directly or indirectly through its engagement through clients, and these are our first step in trying to accelerate that journey. [indiscernible], it's about what do the funds that we manage investment and invest in, and we've also tightened that framework. And I'm also very, very optimistic to see that we now talk about things like Paragraph 9 and Paragraph 8. And for the first time, it feels like we are starting to have a common standard for what and how to classify some of the investment activities as we do. As we all know, it's a tricky area where every institution chooses their own adjectives in order to understand what this is all about. And lastly, there is a pretty much a new movement from when we signed principles for responsible banking in 2019. And that's the new UN-sponsored call for action called Net-Zero Banking Alliance. And we have signed this as 1 out of low 40 type of bank joining forces in order to, in the next 18 months, try to put a common standard how to report, what to do and how banking should be viewed in the context of what is Paris aligned and making sure that we are a positive force for positive transition. On the next page, we go into a more business update on sustainable finance, which you've heard me said many, many times, is the most interesting thing from a future growth perspective for financial institutions like SEB to make sure that you are relevant, picked by the clients, that you have valuable advice in order to be part of the whole world's transition. This is not Nordic. It's not for SEB. So here, I've just shown sustainable finance characteristics from 2013. And first, we can just conclude, this is growing dramatically, and we're getting close to a full year number for 2020 of USD 800 billion in total volume in these 6 or 7 or so different categories. This year's first quarter indicates that this pace is maintained, we will double this year's volumes compared to last year. So right now, Q1 is a fantastically encouraging sign to the tone that we have set in the past that this might be the super cycle for sustainable finance starting, and this is a very long-term prospect. What I would like to highlight is everyone knows about green bonds, they've been around since 2008. But there's so much other things happening. And right now, I just want to present the market around sustainability-linked notes, bonds and loans. These are the SLLs. And as you can see, the light green area in the global market is one of the fastest-growing in the last 3 years. To the right, we have taken the sustainability-linked loans. These are bank loans to companies and just done our market share split. So we have the largest part of this market is 20%. And the issuance in our part of the world has been USD 16 billion. And some examples of clients doing it. Two things to point out. The loan market in Europe is vastly larger than the bond market. Hence, the green bond market is targeting a smaller constituency of all the corporates that borrow money. We often talk about the 70-30 versus the U.S. has 30-70 when it comes to bonds versus loans. So in order for the loan market to adapt into sustainable loans, it's a much greater opportunity. And as we have many smaller companies in Europe, they are more or less 100% dependent on the bank markets. They have bank loans and no bonds. What is more a novelty is that the sustainability-linked bonds also is starting here. There's a global market last year that grew 15x, but it's a very small portion yet. So at the FNLs amounted to $12 billion, and we have done maybe the most notable one with H&M, which I think was really a landmark transaction to define how these things can be. What is incremental interesting with SLL is that they are not only green. They are partly green, but a company can design any sustainability criteria relevant to their ambition, their footprint and what they want to achieve and link it directly to the use of proceeds to the financial cost of that financing and even event of default if one wants to. So this is creating enormous flexibility to put in inclusion, diversity, gender using recycled material, et cetera, in order to show and make a hard commitment. The other thing that managers of businesses, say, around the SLLs, that they have enormous impact internally. So once you have signed or done one of these transactions, the whole organization automatically get aligned because the financial result is now directly contractually dependent on you living up to whatever you have said are the key criteria for your business. Next page. We will step back a bit. And this next 3 slides are really the context of why, as you probably have seen, we have announced that we will try to expand our corporate business in Holland, Austria and Switzerland. So I'll try to share now why we are confident in trying this on. And it's based on the last 10 years of strategies. It's actually, to me, very much a continuation of what we have done in the past. So a quick reminder. SEB is trying to be a very internationally capable institution for the Northern European clients. So we are in 22 places, and we are committed to the international network and the business that we have outside Sweden. We define our market in home markets versus the international network. The home market is where the clients reside. And up until now, that's been in the Nordics, Baltics, Germany and the U.K. And we have an international network anywhere between New York and Shanghai, where we don't source clients, we service the clients we have in an attempt to give them a global 24/7 capability. We are predominantly focused on large corporate, I think it's around 70%. There is no retail banking in this, except for in the Baltics and Sweden, so it's all large corporate. But for the financial centers in New York, Singapore, Hong Kong and London, we also have a meaningful financial institutions business of roughly 30% of this business. In 2010, we decided to do what we then called the Nordic German growth expansion. This meant to bring in roughly 500 new clients on a base of just shy of 2,000 in the countries outside Sweden where we had nowhere near the Swedish market share. That now 10 years later, I think we can conclude, was a good thing. As we know that the wholesale banking industry have struggled a lot with generating any type of growth and it's a very highly competitive market with enormous increase of capital allocated to its business. So we all know it's been a challenge for everybody. To the right, we show that we did not have these clients in 2009. And from the growth of income for large corporate and financial institutions from SEK 13 billion in '09 to SEK 22.3 billion last year, we split out the share coming from those clients that we added in these growth initiatives. And in 2020, that was 19% of total income. You could argue, you've had a quite modest growth on the part that we did not decide to grow, as everyone has, but we've succeeded there in a decent way. But the key was, of course, to bank more clients and make sure that we service them in the deepest, broadest possible way. That has generated this 19%, which equates to SEK 4.1 billion. On the next page, I just want to share with you the international split, the return on equity, cost to income and the resources that goes into this type of international business. And out of those growth numbers that has been generated, it's very clear that all countries have contributed in a meaningful way. U.K. as at 4%. And please remember, that's not part of that 10 year, it's a 5 year. So we're half way through on the U.K. compared to the others. However, Norway, Germany, Denmark, Finland, all have had a meaningful impact in generating this. Looking at the cost efficiency and the capital efficiency of having SEB outside in the world, we've now shared today the return on equity, measured here as ROBE for the different countries, the cost income and the resources in terms of FTEs that goes into this. And for us, this is very much the conclusion that there is scalability on our platform, many of the central costs to run a business like this, the investments one have to do in markets, in derivatives, in different advisory areas, are actually taken in Stockholm, and it is scalable. So going into a new area, you need people and not that many of them to meet clients in order to provide the products and services that SEB has at its disposal already produced. The other is that when we now enter into new markets, this is very much true as well. There will be very marginal cost differences. We are talking a few tens of people to begin with, and I'll come back to that. What's more important is maybe the DNA change, if you want to express it like that, that this has resulted in. In 2010, 66% of the large core business was Swedish. And slowly, but surely, after an initiative like this, we have now more than 50% outside Sweden. And this is, thanks to Norway, Germany, Denmark, Finland, U.K. and in the international network, growing faster than Sweden as we acquire new customers. This means that we are going -- have gone from a very Swedish bank to a much more broad bank in a Nordic, German, U.K. perspective. And what we're now talking about is to taking this next step, where it all call it, in the narrative that we put on here, we're becoming more of a northern European institution as we will have mostly northern European countries as part of our business. On the following page, I'll just share the income growth of those 19% per country. And here, one can see that over the last 10 years, we've had a CAGR, so compounded average growth rates per year, of 3%. That's a stable, very good business, but it's really part of the strategy. We have a position to defend, and it's very hard. We have most of the clients we wish to have. But the growth opportunity has clearly come in the last 10 years in the other markets. Now we are getting to a very similar position in the other markets to Sweden. So from today, there is still a lot to do, but nowhere near what we've done over the last 10 years. But both, I would say, in Norway and Finland, we are very close of having the same type of market presence as we do for -- in Sweden when it comes to large corporates. Denmark, we have a little bit more to go. And in Germany, we have a completely different strategy because we're not trying to become a dominant bank in Germany, but a niche bank for the clients that we've selected, the same in the U.K. So to conclude this part, I just want to summarize what this humble expansion that we are planning to now put on -- in motion is about. So Netherlands is a new market for us. So we will establish ourselves for the first time. We will have to wait for corona to not restrict our traveling for this to come up, but we've just appointed a country head for the Netherlands, who will just now start the work on mapping up exactly how we should approach this. We will initially coverage from Sweden, so there will be no office or any incremental cost associated with opening it up. But the plan is to have some type of physical presence in Holland, I guess, most likely Amsterdam, and we're talking perhaps at the first stage up to 10 people or so. Austria, Switzerland, we're strengthening our services to cater for their needs in those countries, but we already have it through our German operation, and we actually have a few of the German-speaking countries -- clients in Germany despite them not being headquartered in Germany. So this is really about expanding our coverage possibilities of these markets from Germany. So we're not opening up effort and we will center this effort around our office in Munich, who has a very good infrastructure to do this. And who -- what -- how large is this? What clients are we pursuing? So I've listed here some of the key just trains for what we call customer acceptance criteria. And those are that we want a minimum of SEK 1 billion sales. So we're looking at large corporate. Most of them, if not all, will start with being listed investment-grade type of companies, so good for average asset quality and in industries that we are skilled in covering. So we don't go for everything. We take the ones that we think are most relevant for us and where we have the right expertise and track record from the previous 10 years. This could result in roughly 50 to 100 large corporate clients being in scope of becoming clients of SEB if we are successful. And this is very much in line with the U.K. So the sum of this actually looks a little bit like the U.K. and that gives you a little bit of frame what we are talking about. But they are marginal from a financial impact point of view in the short run, but as you've seen, very meaningful in the decade type of perspective to changing slowly, but shortly, your position of your institution. Lastly, on Page 20, we are talking a lot about investments and savings and having in the business plan, as I presented, previously, a very strong reemphasis and focus on this area. You know that in several areas, it's hard for us to conclude that we have done everything we can, and hence, it's time to do some changes and move forward in a different way than we have in the past. And I just have 3 things this quarter. First, today, we have announced that we will break out private banking. Private banking in SEB has more than SEK 1,000 billion of asset under management. It's one of our historically strongest business areas, and we would like to bring it to the next level. Hence, we're breaking it out and we're making it a division of the bank reporting to myself directly, and we take a very strong business person in William Paus, currently co-head of LC&FI to run this effort. And it's a focus on private banking outside Sweden, also in Sweden, focus on family office, the new generation, the next-generation and particularly female, which is a very interesting thing to see that we are not attracting some of the people we are finding very wanted to come to us, and we need to change our ways. This is about client satisfaction and profitability and having this as a main part of SEB in the future. Secondly, on the digital capabilities for the savings and investment areas, we've talked a lot about the formidable success some companies have shown in using tools of technology in order to reinvent the way you meet clients and doing it in a cost-efficient way. And here are 2 responses to that, which have taken some time, but we're very at least encouraged that we are getting somewhere. So we have now launched 2. The first one is about robo advice or automatic investment advice, algorithmic-based automatic advice. And we've just launched the SEB bot adviser, as we call it, for our 700,000 customers in the pension area. This is a client segment that for many, many decades, put in a small premium and is a low-touch type of client base. And it's always been a challenge how to take care of them in the best possible way as they are a client saving for their time after they end professional life. With this bot, we hope to meet them all in a customized, individual way during the life they live, and over time, help them to allocate their pension assets in a smarter way. We also, next Tuesday, plan to go live with our online trading capabilities for equities. We have tried it for 2 weeks now. We only have about 100 people in the bank who has used it. And this is really for a capability that we have lacked for some time to allow SEB's 2 million clients in Sweden and in the future, 2 million clients in the Baltics to get access to -- direct access to single stocks and single financial securities in their mobile channel in a real-time type of way. So this is a minimum viable product. It's not going to be launching a formidable new bank, but absolutely the most critical function will now be available. With those words, I'd like to thank you for your attention. And I don't know, maybe hand over to the operator, and we'll open up for Q&A.

[Operator Instructions] And we now have a first question that comes from the line of Andreas Hakansson from Danske Bank.

First question, we had a long debate with 1 other Swedish bank yesterday about mortgage market shares, and you seem to be doing significantly better or taking quite a bit of market share at the moment. Could you tell us how are you doing that in your view? Where are you taking? Are you taking it in the main growth areas? Are you competing on price? Or what are you doing right in your view? That's the first question.

Okay. Thank you. First, I think I'll just give you context. I mean it's a remarkable last 3 months, house prices are up more than 20% and single flat homes are lagging a bit, but still up 7%, 8% or so. So I think 1 needs to conclude, it's a remarkable positive driving force in the mortgage market right now. If this is maintained, you don't need to make too much of an assessment. These -- the demand for mortgages will go up unless you think all LTVs will go down. And there's no reason to think that. The question for me, sustainability of this price move and the current levels. So that's all positive. The other positive for us is that, for once, it's been mostly in -- centered around the larger cities. This is where the price tags have gone up the most and also on single-family houses, which we have a larger portion of. This has been the opposite scenario for many, many years. But that's, of course, where we have a much higher market share with probably 20% plus in the areas where this is happening right now compared to the average of 14 and have a quite low market share on the country side. The other, as you remember, we did have a pretty self-critical position on the mortgage market, some 3, 4 years back and rechanged a lot of the simple stuff that you need to do in order to be relevant. And I'm not talking about price, it's about picking up the phone when they call, it's about making sure that it's serviced in the -- it's serviced in the fastest possible way. And also the follow-up is very, very critical. We still have no larger ambition to increase the market share, but it seems to have been working for the last time. On the pricing, we're not doing this by lowering the price, but there is definitely a price pressure around this market as more entrants are coming in, focus is clear from everybody, and particularly now if it's a bit positive in the underlying. It's, of course, an important area for many of us to perform. Masih, would you like to add anything?

No, I think that's it. I mean price is an important factor, but it's definitely not the sort of most -- is most important factor, but there are many other factors you have to put in place. And we just launched a few weeks ago, the mortgage commitments in the mobile app, so you can get it from there. So the lead times are becoming extremely important. As you can see that the time to buy a flat or a house is getting shorter and shorter. So the buyers are extremely stressed to get the mortgage commitments and the mortgages timely. So I think the -- you're handling of that process and the pace you can do it that is becoming more and more important. And I mean we track nowadays, the time on the telephone bank, et cetera, in order to, as I pointed out, in 2018, these are things we need to address, and it's still not easy. I mean we're still working and have more to do. But it's definitely part of doing it right.

And then just maybe a bit more detailed question. On your fees and commissions, we see securities and advisory, doing okay, I guess, not amazing, but you have been quite weak on ECM over the last year, and you're much stronger on the M&A side, on the advisory side. Do you have a feeling that 2021, we could see actually a year of M&A rather than small-ticket ECM? Or what's your feeling on activity on those 2 areas?

Yes, I'm not -- I don't know if I'm hopeful or if I'm making a prediction. But yes, there is definitely no reason to think that the things that have been active, as you correctly point out, has not been a perfect fit for us. So the smaller type of ECM businesses, there are some very strong, let's call it, niche investment banks who have done very well. And we are, of course, having as part of our business plan, to enter into that in a much better way. So we've just staffed up what we call the growth corporate banking unit, which is going to go for the hundreds of thousands of SMEs that we actually have in the bank, whom we've not serviced with, let's call it, investment banking-like services. M&A it's a bit too early to call, but there's definitely something happening now when optimism has a little bit more come back, and we kind of see that the vaccines might work. This pandemic, we might be at the beginning of the end of this type of journey. And we can clearly see that on the pipeline and on the work level in the investment bank and the corporate bank, it's exceptionally high. It's often very high. But now I think there is there is some at least connotation that this will be spreading not only to the small, but also the larger deals can be. And that's, of course, when it's time for us to show and test what our market position is, if that happens.

Next question comes from the line of Magnus Andersson from ABG.

Okay. First, more of a high-level question just on operational leverage. You've had a quite impressive cost-to-income ratio trend with continuous decline since 2010, despite similar money laundering acquisitions that has resulted in cost increases in other banks. If you look ahead, you're now at 43% cost-to-income ratio in Q1. It was a very strong quarter, obviously, but you were at 46% adjusted for one-offs in 2020. So if you think about this and the coming let's say, 2, 3 years throughout your next business plan, do you think -- I mean, how low can you go? Do you think that this can continue given ramping up your IT platforms, you initiated a partnership with Google Cloud, et cetera, where is the bottom? Or are we at the bottom now there?

Yes, Magnus, don't put these numbers into your excel sheet after I say these things. But this is how I'm thinking about it. And I'll ask Masih to clarify with the new financial targets. Operational leverage does not need to come by falling cost income. There is another way, which is a more stable way. Falling cost income, you have to stop at some point. Otherwise, it goes to 0, that is by having income growing more than cost. That's the important bit. It doesn't mean that call it dollars and sense. So you increase the profits. And if you look at the financial targets, this quarter was, of course, a huge positive driver from lower credit losses and a recovery of NFI and a stable growth in the NII and fees and commission, but it's not -- we're not indicating to you that we can do this trick for another 10 years.

Yes. I'll just try to phrase in a way you can put in an Excel sheet maybe. So yes, I mean, the low-cost income ratio this quarter is obviously driven to some extent by market valuations, and those will typically not be repeated. And if you look at the financial aspirational targets we set last quarter, we say there in the long-term that we expect to have the cost-to-income ratio if we achieve our target of 15% return on equity, that will be on a cost income ratio of 0.45. So we don't believe that we need to be at much lower levels than that to reach the return on equity target that we have. And I think what we are emphasizing is that we want to see income grow. And if there are investments needed that will drive up the cost line to get that revenue generation, we are prepared to do so as long as we continue to be an efficient bank and we have the cost income ratio that is competitive in the market. So I think just repeating what Johan said, it's not about taking the cost level down because we've seen that being tried in other banks and elsewhere, that typically leads to a negative revenue effect, maybe not immediately, but some time it does. We think it's more important to invest so that you can get the revenue generation and improve profits through that.

Okay. And when are you going to present your new 3-year plan?

We will very likely do that by year-end as we typically do, so in conjunction with the Q4 report.

Okay. Good. And then just a more detailed one on NII. We saw that your markets, it was elevated in this quarter, thanks to partly that mortgage-related NII remained, and you expect this to normalize at some point. Is that -- I mean, do you think it will happen in Q2? Is it just impossible to say, it could very well remain?

Maybe it's possible to say. It's impossible for me to say. We typically see that it sort of as long as -- when it's low or high, the next quarter typically goes down to a more normalized level. This is pretty uncommon that we've seen sort of 2 quarters in a row on exactly the same level. So yes, I think you should just assume that to be conservative, next quarter it goes down to a normalized level. If it doesn't happen, then we'll see it then.

Okay. And on the NII, have you any updated sensitivity analysis how higher short run rates would impact you assuming that lending margins are unchanged?

Yes. We just updated that. So if short-term rates, we're talking about just Swedish krona, if the repo rate goes up by 0.25 that will have a positive effect of just over SEK 1 billion. This is the gross effect, so assuming no change to lending margins. And if it goes down by 0.25, that's around SEK 1 billion. So slightly more positive if it goes up compared to if it goes down. The balance sheet has grown and deposits have grown, but it's also the case that we've done some changes to our deposit pricing model. So that sensitivity has gone down, but as the volumes have gone up, the implications of our rate change are pretty similar to what we had about a year ago.

And your next question comes from the line of Richard Strand from Nordea.

Yes. First question on the lower funding costs from not reissuing maturing bonds, if you could give any guidance, given the continued strong inflow of deposits, obviously you foresee that in the coming quarters?

Yes. I can try to do that. I think it will be something that will continue for some time that we will see wholesale funding maturing that we will not fully replace. So hopefully, that will be a small tailwind also in the coming quarters. But it's also difficult to say if spreads go up on the wholesale funding we need to do and if something happens in the market, that might not materialize in a sort of lower funding costs. But assuming the same spreads we have today and assuming that we keep the deposits we have on the balance sheet today, we should see less wholesale funding issuance in the coming quarters than what we have maturing.

Okay. And then on the corporate loan demand, if you could share any insights on sort of -- any indications of improvements there? And if there are any specific segments or sectors that are sticking out in any direction positively or negatively?

Yes. Sure. There's no sectors I can think of. But I'd say this that the first half of this year is very much in line with, I think, what we tried to explain in Q3 and Q4. And that's a base effect that March, April and May last year, we saw this explosion from COVID response from clients in asking for new credit. It didn't materialize in real loans, but all those are now falling off; March, April, May and will not be refinanced. So the underlying kind of credit exposure should have a little bit of a pause, just like we see this quarter in the first half this year for no other reason than that one. And then that doesn't mean anything for the long-term prospects for our client activity. So one needs to go into the pipeline, and the optimism for businesses to start to expand and having capital-intensive plans that needs to be financed. And there, I can just make an observation for the long term that I have rarely seen a more -- I'm really more optimistic on where balance sheet deployment can take place in the future when it comes to lending to the sustainable transition, the numbers we see from our clients coming out now rapidly are staggering in terms of investment needs, and this is very much fixed capacity in the CO2 challenged areas, which is a lot of everything from factory to energy to raw material extraction, et cetera. So that's a super trend that where we see could come from. And then coupled with my previous comment on just M&A, ECM for the areas that we have not seen being very active, it's also a very positive backdrop if that kind of -- that optimism continues, and we'll start seeing more transactions.

And then finally, just a quick one on your credit exposure towards fossil fuels. And if you could share any guidance on how much you will see the cap being lowered annually?

Yes. We don't have any numbers yet, but we will come out with those numbers. We're modeling like crazy right now. There's a lot of different engagements. This is where the ambition is. We will come out and have a -- well, in our world, quite significant reduction in the relative exposure to this industry. And that is not industry as the classification of the company, but what part of that company is particularly damaging. And try to become an adviser in the sustainability financial sense to those companies to accelerate that transition. And lately, as I've shown, when it comes to loan advice, leading these transactions, sustainability, advice, M&A advice, energy advice, we are, I must say, doing very well right now. So those things will come out. When it comes to coal and certain other areas, mining from -- thermal coal mining, that's very clear in the policy, that's just out, and we've put down a few dates there. We will not take any new exposure. That's actually from 15. So there's nothing -- no new clients, no new projects. The ones we do have, we do have clients with some exposure to that industry, we're phasing that out by 2030, one could say, with a few couple of exceptions. It's actually in my presentation. And then on the one we're modeling is very much the traditional E&P business, the oil extraction business, which is not going to go away in 5 years, but we would like to show a clear path aligned with all our commitments, in order for it to be transparent that everyone can follow it. And I won't commit, but I'm really hopeful that we will come out soon.

And your next question comes from the line of Nicolas McBeath from DNB.

So starting off with a question on cost. I was wondering if you have any reflections of so far, whether new ways are working during the pandemic, has any structural impact on your cost base like use of office premises or traveling or anything else you can think of at this point?

Nicolas, I'll start with that one. Yes, I mean, we know that there's going to be a new way of working, and we will implement a new policy shortly on how people can work remotely. And so people will be in the office less than they've been in the past. And I think, in general, banks do see this as a possibility to reduce office space and see an improved sort of cost level given that. But at the same time, you've seen indications in the market that when companies do that, they actually want to have more office space when they are at work because they worked differently in the past. So it's actually fairly early to be able to call that exactly how it's going to develop. But we are seeing it as an opportunity to start with. And then we have to follow the market and see exactly how this develops and how we need to reshape our office space as well. But yes, it is an opportunity, and we're just going to follow it and make sure that we utilize it if it emerges.

Okay. And then on loan losses. I think your guidance now implies around SEK 600 million per quarter for the remaining quarters this year in loan losses. So could you comment anything on why you expect loan losses to come up from the Q1 level? And then secondly, also on loan losses, I think your earlier guidance was that normalized loan losses would be between SEK 2 billion to SEK 2.5 billion per year. Now you're saying SEK 2 billion, and at the same time, your balance sheet has grown, I think, over the recent quarters. Is this reflection that you have somewhat revised your view on the long-term cost of risk in the balance sheet? Or is it just kind of rounding detail that I'm noticing here?

Yes. So if I start with that guidance. If you look at this quarter, Q1, we had a very low level, but we also had 3 fairly large recoveries this quarter, up to about SEK 300 million. So these are exposures that we had reserved for last year. And what we've seen now they've materialized. So we've seen some debt-to-equity conversions, for example. We've seen that the reserves that we had done on a name-on-name basis were higher than the actual losses in the end. If you look at the underlying level this quarter, it's closer to SEK 500 million or between SEK 400 million and SEK 500 million. So the guidance for the remaining quarter is not too far away from that level. But then surely, we are a bit conservative on what could happen, if you see a contraction of the fiscal support of different programs that have been in place. So yes, it's just based on that, but there is some conservatism when it comes to the second half of the year and the fact that the underlying level this quarter was higher than you can see in the numbers. On that guidance, I think we've said sort of normalized by 2022, 2023 is between 2 to 2.5, that is more a reflection but we do expect the balance sheet to grow over time. With the current size of the balance sheet, it's about SEK 2 billion. But if the balance sheet does grow, obviously, the expected losses could go up in line with that growth in the balance sheet.

Okay. That's clear. And then finally, a follow-up question on sustainability. You were talking about, yes, capping the exposure to fossil fuels, and yes, at the same time, there is strong demand for renewable financing, if you could elaborate if you expect the demand for renewable financing to offset the decline you expect to see in your fossil fuel exposure on the balance sheet, so the net effect of those are becoming, I guess, 5 to 10 years? And then also any margin implications from such transition in the balance sheet? Do you expect any net effect on the profitability on this part of the balance sheet? And yes, -- and profitability implications for the bank, please?

Yes. I'll take that. The hypothesis, as you're rightly pointing out, it's a 5- to 10-year horizon, it's very much that it will be widely better for us in the opportunity of the super cycle renewable, but also financing transition, which is doing as bad compared to what we -- through the cap is avoiding to grow in. And by the way, we have a cap already. We've had a cap for a long time, and that cap is lowered all the time. So you can track in the numbers that, to a certain extent, several areas of the higher risk areas such as, regardless of sustainability, we have used that. We also have it, as I've talked to you guys about before on real estate and structured finance and emerging markets exposure in order to protect the asset quality of the bank. We're just tightening in it much more now due to a new phenomenon. That's because of the transition of the world into a low-carbon society. The margins are almost impossible to say. Volumes are very clear. That's in our favor over a long period of time. That's our hypothesis. Margins are, in my book, inconclusive. I would say there's no major change, but there are 2 indications to point out. The green bond market has currently noted the highest discount for being green versus brown we've ever seen. But we're talking a few basis points. So it's tiny because credit risk and economic value are still very important factors when one decides to value financial security. But there is at least the first sign that a company can fund themselves cheaper, and we can lend cheaper if it is deemed to be future-proof. The other aspect is the opposite from the positive, it's to avoid the negative. And that's a very important factor, namely that the risk of anyone who invests in financial security or has risk on, that you are risking of stranded assets or having exposure to nonfuture-proof business lines, that's also avoiding that risk. So that is always a risk. And as you are more cautious in this area, you're reducing that. And that's a negative P&L effect you are avoiding if you do it this way. So I would say those 2. So on the margin positive, but hard to say. And right now, I do want to point out there's such a hype around many of these new companies, et cetera. So right now, it's the credit quality, which is the no, not the purpose or the intention. Those are fantastic. But as we see that financial prices are going up quite dramatically in certain areas of the economy, one need to also have some tight underwriting standards, so you don't go and overextend yourself in the short run. In the long run, there's no debate. This should increase as a portion of the balance sheet and as a portion of our business as a whole.

And your next question comes from the line of Namita Samtani from Barclays.

I've got 2 questions, please. Just coming back to the Swedish mortgage market have been vocal about wanting to be more aggressive in the larger cities, which is a big part of your business. So just curious to know if you feel threatened by this? And how you would defend your position in the large cities? And my second question is on the market risk RWAs that you expect to normalize. But you talked about an upgrade and trading guidance. So I'm not sure how these 2 statements go together. So if you could give some additional color? And should we expect this type of volatility in the core Tier 1 ratio quarter-on-quarter?

Yes. I'll start with the second question, and I didn't really catch the first one, so I'll allow you to take that one.

I think I caught it.

Okay. On market risk, yes, I think in general, you have to look at different things happening at the same time. So obviously, the nominal amounts of trading bonds you have on your platform to facilitate for client trading has an implication on the capital requirements. But also much more important implication is the market events. So what's happening to spreads, what's happening to volatility, which has a big effect on VAR and stressed VAR. And in this first quarter, it's a combination of those 2: us holding more bonds on our balance sheet to facilitate customer activity, but it's also a large implication coming from market movements. So I think what we're guiding for that we will see that part that is driven by market movements come down in the future. That's what we're seeing. So the REA should come down to closer to the sort of average historical level. It doesn't mean that it will come down to exactly the average level, but clearly down from the very elevated levels we've seen in Q1.

Yes. And if I understood the first question correctly, it was around the strategy for the mortgage. And I wouldn't say if I understood you that we are aggressively pursuing anything. But I would say the we want to grow with our clients. There is an underlying growth in the housing market and in the mortgage market, and we're very inclined to maintain a super relevant position, so we are there for roughly 15% as the first rule. This means that we do not have a market share at KPI as an important one. It's not that we're trying to take another 5% in the classic market, but maintaining a good integrity around the underwriting standards, making sure that we service clients. So we don't want to go down, we don't want to have an offering not worth its name amongst our clients. Now that being said, this is partly related to this more cautious market share approach, not that growth is not being seen. That's a function of how the housing market goes and how the clients of ours invest in larger properties and getting flats and bigger houses and getting families, et cetera. But there is something very interesting happening as mortgages have been very, historically, closely connected to the physical meeting. And as we are now getting very close, I think, to the inflection point, where the whole mortgage process in Sweden can be digitized, we're not there yet, but we're working together with the other banks to get the transfer of beads, the last portion of a housing transaction digitized. It means that all of a sudden, I think, the physical meeting will be reduced in importance. You always need to have it if a client wants to see you or talk to you, but it's not going to be so highly correlated to where you have a branch. And hence, the next phase of branch offices in retail banking will be affected because right now, mortgages is a key area why we still need to see people. It's a big life decision, and there's still a manual process. So that means that we could definitely come into the next-generation of digital retail banking, where this becomes completely -- is not important where you have your branch because most of this market will go online. And then, of course, we will try to be as competitive as we can and no longer have the relative advantage of being fairly low on number of branches and geographical spread, which is clearly a benefit if you need to have a lot of face-to-face meetings. So we have our 100 branches, and we look very positively on the digital side in the future of mortgages, but let's call it, a cautious market share and a very strong focus on delivering a good product to our clients.

Sorry, what I meant to ask was, I'm just referring to Swedbank talking about yesterday saying that they wanted to be more aggressive than larger cities. So I was just wondering like how you feel about that and how you would defend your actual position in the large cities?

Okay. I didn't -- yes, I didn't think about that. But well, bring it on.

And your next question comes from the line of Jens Hallén from Carnegie.

Yes, actually 2 follow-ups. Firstly, on the -- you talked about the credit growth and optimism amongst your customers. In terms of timing, I mean, how eager are they to start doing these investments? Do they need a big buffer after COVID-19 is over? Or what's the feeling there on your side?

Yes. I think it's too early to call. So I'm not daring to be super optimistic, but it's a timing matter, as you point out. I think there are 3 things that needs to happen and take it for my personal assessment of the current situation rather than any academic proof. First is that the supply chains have been disrupted after COVID. Everyone needs to make sure that in the future, you have a secure supply chain. So the dependence, particularly for companies in our part of the world is huge on international trade making sure you get critical components. And as you remember, the automotive industry last spring had a huge problem because maybe 1 or 2, very few critical components got stuck on the way here. So I think many people are changing their view and the risk assessment of the supply chain dependence. That in itself is an investment. But that's something that needs to -- before you go out and start doing. The other one is the demand side. So we have seen a pretty good demand for services, local services. If it's not travel or holiday making, you see that there has been a decent demand for services. You haven't been able to spend the money if you've had lockdowns, and you've actually had a very good demand for retail goods. So people have been buying TVs and renovating perhaps instead of traveling. When that gets normalized, there will be also a potential demand side that will come, and we have seen now that we have shortages in certain industries, that is that the supply side. The supply chain cannot right now meet what we see on the demand side. So that's kind of happening right now. And here, I would just listen to our own economist yesterday, there's a quite positive, call it, tonality around purchasing managers' views of the future, et cetera, which I think is a good summary of supply and demand. Then there needs to be an equity market type of owners type of desire for companies to transform and strategically change, not only organic. So this, to me, is very much about the optimism and the confidence in the boardrooms that you want to go and acquire growth or you want to build your business organically in size? And there, I think the -- we're getting to an inflection point to see if that is actually going to occur or not. And looking at the activity levels in our own bank, there seems to be a lot going on. And then you always have this new type of entrepreneurship of the world, which means that there is -- and I mean new startup, fintech, other tech companies, sustainability companies and the whole expansion of the private equity industry, which is, of course, a fantastically strong engine behind listings and equity market transactions in the future. So that's, of course, what we're also working with.

Okay. Then perhaps a quick question on capital. I just wanted to understand, if anything except the FSA decision on the dividend caps that you're waiting for before you can make any call on how and when to distribute capital? So let's assume we get this now before September, what else is needed for the Board to make a call?

No. Obviously, that's the main input we need. As we've talked about in the past, we also look at the strategy we're planning for, for the next coming years. I think given the capital position we have today, that's not going to be a game changer when it comes to the overcapitalization of the bank and how we can address that. So it is the input from the FSA that we're waiting for them. Past that, we can decide on exactly timing and in what proportion we do dividends and share buybacks.

Okay. And do you have a desire to do this quickly? Or is that still too early to say?

I can't really answer that. We have a target of being between 100 to 300, and we're going to work our way towards that target in a timely fashion.

And your next question comes from the line of Geoff Dawes from Societe Generale.

Geoff Dawes from SocGen. Just a quick question, I won't keep you any longer. In terms of your Merchant Banking division, deposits are now greater than loans, probably for the first time ever. I mean I haven't looked through the history, but it's quite an abnormal place to be. In terms of looking forward, do you see that as an abnormal situation? Or is it just kind of a response to a new funding model from corporates? And this will become more normal going forward that they will use their -- the market's balance sheet much more than your own balance sheet going forward. And if so, can you give us an idea of how this shows up in the revenues for the group? So the distribution between NII fees and everything else and whether on a net basis, it's more or less profitable for you? That's the main question.

Yes. Thank you, Geoff. I think, I mean, first of all, this is not predominantly driven by the lending side. It's driven by the deposit side. So we've not seen a very strong sort of structural trend on the large corporates going to capital markets. I mean that's been happening for some time, but it's not the reason why we have a loan repo ratio 5 below 1 for the first time. It is driven by -- deposit side is driven by QE. And as long as you have this amount of extra money in the system, you're going to see this end up on a bank's balance sheet in one way or the other. It could be deposits from financial institutions, corporates or households. But either way, it will end up on the bank's balance sheets. Right now, given that the large corporate customers and the financial institutions are professional, it doesn't have a big implications on our revenue side really because the market pricing on deposits is efficient. So we can charge negative deposit rates. So it's not a big problem. It will become a problem if it happens on the household side, where we still have a clear difference between the sizes of the lending and the deposits. So I think it is driven by deposit. It's not driven by lending. And right now, it doesn't have a clear negative effect, but we will have this situation as long as you have QE at the levels you have today. So central banks need to withdraw the money that they've supplied to the market for this to reverse at some point.

Yes, that's very clear. And on the flip side as well, on the credit side, do you see corporates using the market balance sheet much more than your own? Is that part of the push higher in fee income?

That's been a trend for some time in Europe as we're sort of lagging the U.S. in terms of how much corporates are using bank's balance sheets relative to the markets. But that's sort of in a cyclical point of view, it's more driven by credit spreads in the market. So we saw last year when you had the height of the pandemic and markets froze, we can see that they came to us and used our balance sheet much more. Right now, spreads are very low. So the companies that do have access to capital markets can utilize that to a larger degree than they did a year ago. But that goes up and down in cycles. And typically, our spread, our funding cost moves slower than the companies that we lend money to. So when you have spreads widening, they come to us instead because that's going to be cheaper for them. But it moves in cycles, but it's an underlying trend towards more capital markets financing, but at a fairly slow pace.

And your next question comes from the line of Chris Hartley from Redburn.

Just 1 question on the credit losses and the expected normalization of that down to 8 to 10 basis points. Is there an assumption in there that some of the conservatism that was sort of put on last year will unwind this year? Or are you saying the 8 to 10 basis points is because the kind of the world is back to normal and the front book loans that you're writing are on 8 to 10 basis points, and so we're still to see whether the provisions from last year were overly conservative, and we may or may not get write-back on top of that reduction to 8 to 10 basis points?

Yes. That assumption on normalized credit losses to this year is based on that we do not utilize any of the model overlays that we put on. And if you look at last year, we put on SEK 1.3 billion, we've added another SEK 100 million in Q1. So assuming that we don't utilize any of that, then we think that ECL will be around 8 to 10 basis points or SEK 2 billion this year.

Okay. So it's still potentially a little bit more a benefit from that, if you don't end up needing those overlays?

It depends. We have to wait and see what happens. If we are concerned about bankruptcies going up maybe in 2022, if you see a withdrawal of stimulus and stimulus packages in '22 rather than '21, we might want to keep that for '22 instead or further on. But it depends on what happens to the recovery of the economy and how stimulus packages are removed or scaled down. So we haven't decided exactly whether we use those model overlays or not this year or next year or a year thereafter, but the guidance in itself is based on us not utilizing it this year.

Riccardo from Mediobanca.

Two or 3, if I may. I get that 1 second on the expected credit losses. Now if the situation is going to normalize already in 2021, is it fair to say that we should not expect any material negative risk migration with regard to risk weights in the calculation of credit risk capital requirement if the situation is going to normalize already this year? This is the first question. The second question I have is on the change in the funding mix. Now MREL has been postponed. To what extent you can go on postponing the issuance of medium- to long-term funding? And if you had to issue today senior nonpreferred, would it cost much more than a normal, let's say, a normal senior? And then the third question I have, with the share price at around SEK 105 or SEK 110, could you be ready prepared to sacrifice share repurchases on altar of cash buybacks or M&A, bolt-on acquisitions? Does it change anything the fact that the share price is SEK 110 or so?

Okay. Thank you, Riccardo. I'll start. There is a clear distinction between expected credit losses and risk migration. So even though we've changed the guidance on ECLs this year, we do still believe that we're going to see negative risk migration. Again, we didn't see that to a large degree in Q1, but I'll try to explain why we expect to see that. So we -- typically, if you look at our large corporates, we do annual reviews of them and sort of find a new risk class for them once every year at least, if there's not a new deal coming up. Now we're going to get their annual reports for 2020, which will be an input in that. And obviously, some of them did see their profits come down in 2020 versus 2019. So that new input in the new grading of those companies will, to some degree, lead to a negative risk migration. It doesn't mean they go into default. It just means that maybe if there was risk Class 7, it could be a risk Class 8 now because of the financials deteriorating a bit in 2020. So that's one of the reasons we do still believe that you're going to see some negative risk migration in 2021. On the funding mix, it is correct that MREL is one of the restricting factors on how much we can take down senior unsecured funding as well as senior nonpreferred. So we have to check that and see that we have the outstanding share of senior funding, preferred funding and nonpreferred that we need right now, I've been checked lately, but I think it's about a 20 basis points difference for us to issue senior nonpreferred versus senior preferred. But that goes up and down quite a lot. But right now, it's fairly low. On the valuation of the bank and whether that changes our sort of disposition between dividends and share buybacks. I would say, no, not really. It's difficult for us to guess how the share price will move in the future, and we just have to assume that fair value at each point in time. So we will just -- when we've decided exactly how we're going to do this, we'll do it in that fashion, a bit sort of irrespective of the share price at that point in time.

And your next question comes from the line of Martin Leitgeb from Goldman Sachs.

My first question is just to follow-up on flow share comments in Swedish mortgages. I mean 2 of your competitors who reported so far indicated that they intend to increase their flow share going forward. And I was just wondering, is SEB happy to see the flow share dropping, potentially propping below the stock share level for a period of time? Or your comments earlier in the call essentially mean that you want to be around the 14% mark going forward? Secondly, if I just look at average negotiated pricing for SEB in mortgages, that seems to have edged lower over the period of the last 12 months, a period in which your flow share has increased. And I was just thinking -- wondering how should we think about negotiated pricing going forward? Do you see the trend to continue that negotiated pricing, whether that's 3 months or fixed-term continues to edge lower? Or do you see the trend there, as you see with some of the smaller players in the segment that negotiated pricing could actually start edging higher? And related to that, I was just wondering if you could give us an indication how much of your new mortgage business in Sweden is on a fixed-term versus viable basis? And finally, third question, if I may. I was just wondering what implications the large increase in deposits in the first quarter has on NII and NIM? And apologies if I missed it, I didn't fully understand it in the previous answer. And related to that, I know you don't give guidance on NII progression from here. But is it fair to assume that NII continues to gradually expand? Or could the be there a scenario where NII would stay flat or even edge lower from here?

Thank you. I'll do my best on those 4 or 5 and then ask Masih to complement. We would not be happy if our part of, as you expressed it, flow share goes down. So we will, of course, do our utmost to maintain relevance to the same extent. And that is nothing new. I think we have seen competition increasing over time in the mortgage market. And as you point out to, there might be more right now from competitors out there. But it's nothing new, and it's always a fight to try to maintain your clients to pick you. The other one was on negotiated prices. I think we are of the view that there is some type of underlying margin pressure in terms of negotiating prices are coming down and also the disruption from fixed price. So in Swedish, we say something called [Foreign Language] or [Foreign Language] that means negotiated and done, take-it-or-leave-it type of pricing. And I think all those effects are pointing in 1 direction, that there is, of course, a lower price point potentially. I do think, however, the 0 interest rate, the 0 deposit rate is a very strong cushion that banks need to have these 2 communicating with each other. So we have increased rates, and we have a different position on the deposit side, the dynamic will change for pricing or mortgages. But there's a lot of stability there, and they are very low, the levels, at an outright level as they are. For SEB compared with others, we, of course, look at the same statistics you do. This is not something that we know daily or weekly what's happening. But we know that the larger mortgages tend to be much lower in price point than the smaller. What has increased lately, we believe, is the larger. The larger cities have a lower average price than the countryside because it's larger and it's also maybe tougher clients to some extent that negotiate, et cetera. And this is, of course, the area that we are. So this is not to be mixed up with any strategy or attempt from SEB to try to gain market share whilst not having a good offer in order to protect it. So we are trying to have a quality driven service rather than using price. Masih, anything to add before the NIM question?

No. Should I take the NIM?

The fixed variable on the new business we do, it's increasing and fixed. Do you know the number?

Yes. I don't know the exact numbers now, but fixed has been increasing structurally for some time as fixed 1, 2, 3 years, at least, is approximately the same price as 3 months. But we have to come back to you on that on exactly what the mix has been in the latest quarter. On NII, I mean, we won't guide on how that's going to develop. I think we see some lending growth, both in corporates and especially mortgages right now. We see some tailwinds from funding costs. And then on the front book, there is some margin pressure on mortgages. And then you're going to see regulatory costs going up or down and other implications. But we'll see exactly how that's going to pan out. But obviously, last year, we had 10% NII growth, it won't be near that level this year. I just got the number on fixed and variable, it's about 50-50.

And your next question cost from the line of Antonio Reale from Morgan Stanley.

You just answered the question on NII. But I have another one on your international expansion plan, please. So if I look at Northern European corporate banks, they deliver returns that are, on average, below 10%, which will be sort of dilutive to your group ROE. I guess your decision to enter this market implies that the return on allocated capital you project is higher than that. So my question is what makes you confident that's the case? And what would you be doing differently than, say, a domestic Dutch corporate bank for you to be able to remunerate capital adequately?

Yes. And thank you. It's -- I guess, the $10 million question about why do certain banks succeed and others don't, and we have our subjective view on this. The first thing I want to point out to that when you talk large corporate, it's more or less a given market world price on credit. So you cannot negotiate, you don't get a different price. These are often constructed on the corporates that we talk about here in combinations of 10 banks helping 1 corporate, and there is a very multi-bilateral type of negotiation to find the price. The credit market in the public sense is also a very important factor. We know roughly what the price of credit is. Hence, the real differentiating factor is the cost side, the efficiency and the fast -- and decision process. And here, we are of the belief that we can do this in a very cost-efficient way. We are -- this is very scalable on the existing processes and infrastructure that we have. So that's a main difference. The other one is the funding cost outright. So if you look at a loan priced at 50 basis points and take, for example, Holland, you can just immediately look at where the bank is funding itself, and you can do the kind of the profit that, that bank, and that varies a lot depending on what type of credit rating and what price you face in your own institutional market. Deposits and all other things come into this as well as well as cost of equity, of course. And then you have what is unique by -- and every institution has -- every bank has their own needs. We are, of course, always having this. We start with being a niche provider for international companies in Nordics. So if any large international companies have any business in Norway, Denmark, Finland or Sweden, that's how we, of course, have a place at the table because all of them do. Even though it might be small in the company's perspective. For us, it might be very significant. Think of any global brand. They have a business in Sweden, they're selling their products here, and they need a local bank for that need. There's no bank in the world who can cater for everything. The other one is that we have a very underestimated vast international network. So when we go into other countries, they often have no clue that we have a very functioning corporate bank in China or in the U.S., and we can often be part after time in those type of RFPs for the business all these companies do. And if you were to look at the international network that we do have, you will see that a lot of the income is actually coming from these new markets that we have entered lately. So that means that you are in the eyes of the clients, a bit of a niche provider, but you are more often than not after 5 years, in our history, being invited into the core group. And the core group needs to be a diverse group catering for any company's need. Then without -- I don't want to sound like I'm bragging, but I have worked for a couple of institutions, and there is a very fast process in this bank for corporate lending, if required. And these things are critical once a client has a problem or an acquisition that you have fast access to management, senior representatives of the bank and can do credit decisions in a fast way. That's something you can say. But until you've tried it, you don't know. And these things take time, often decades. But we know that we are a fairly nimble, small Nordic bank, which is quite different from some. And that's also something we find clients often appreciating. And that's not to say that we're always easiest to deal with or anything like that. And then we have a rather full-service capability outside lending, which is, of course, the core to your first point. We do not do this expansion to come in at the return on equity that the average of European corporate bank is enjoying. We are doing it to have a higher return on investment -- on equity for LC&FI and that's currently our long-term aspiration of 13%. And these are all over time, planned to be accretive on that notion.

Yes. Can I just add, I mean, if you look at the Slide 17, we have, look at the German financials, you can see that the cost income ratio from our German business is 0.3, which is allowing us to return 13% in Q1 for that business. And obviously, the biggest difference between us is that cost-to-income ratio, and there's another angle to this as well. We have, what we believe, is a very scalable platform in Sweden. The more we expand, the more customers we add to that platform, the lower the costs will be for the remaining business in Sweden because we can allocate some of that cost to the new businesses we add. So it also not only adds to the income generation for that division. It also reduces the cost level that is allocated to the remaining part that we didn't expand. So I think that's an important angle as well. Scaling your business has become extremely important in any business these days, and we feel that within wholesale banking, we have a scalable business, and we're just utilizing that even further now.

And just a final remark. When we do any of these, we kind of start with client satisfaction. So what this is about to begin with is to meet these new companies and see if we have a mutual understanding of coexisting together and doing something fantastic together and customer satisfaction is the key. If we can't get there, we won't. If we can, there is always an economic opportunity to engage.

And your next question comes from the line of Sofie Peterzens from JPMorgan.

Here's Sofie from JPMorgan. So my first question would be, if you could give an update on the money laundering. I see you still have the same comment in the annual report in the first quarter report. But I would also like that when we look at Danske Bank, who reported this morning, they are flagging that they might need to do additional money laundering investigations internally. And that advanced from that, but they are -- that the U.S. authorities are looking at [indiscernible] across Europe. So if you could just give an update on the money laundering case? And then the second question would be on the banking tax. Have you heard anything on the banking tax? Do you think it's going ahead? How should we think about it? And then my final question would be on -- it is related to the previous question, but how should we think about excess capital? How much capital is all your growth plans in private banking, private wealth management, Austria, Switzerland, Netherlands, how much capital is that going to consume? And how should we think about the kind of capital progression going forward? How much is that going to be kind of going to with these growth projects? And on the private banking project, are you planning to also expand in your international markets? Or is this purely in your home markets?

Okay, Sofie, I'll start and ask Johan to add. On AML, we haven't changed our disclosure because nothing has really happened during Q1. We continuously have discussions with the authorities that are asking questions to us, and we continuously provide them with new information. So it is stuff happening, but nothing material that sort of led us to change our disclosure. We've said that if something happens, if we get any indications of anything in terms of sanction process or anything material changing, we will disclose that to the market if that happens. On the banking tax, I haven't heard anything new, to be honest. That typically comes up in the autumn proposal on the budget from the government. And as they flagged that this will be introduced in 2022 this autumn, they should have that in their budget. So we just have to wait and see, and they might come out something just before that, they typically flag something before the budget comes out a few weeks or months before that. So I think maybe this summer, you could see something. On excess capital, the way we look at it is that we try to normalize the regulatory requirements we can expect in the future. We know that right now, it's 12.5%. So we know that the Pillar 2 guidance will be added. We think that's going to be about 1 percentage point. And it's very likely that the Swedish compensatory buffer will be increased back again to 2.5%. So if you look at that, our go to regulatory covenant will be around 15%. You add the management buffer that takes you to 16% to 18% percent. And then anything above that would be excess capital. The initiatives we have launched in terms of growth outside of Sweden -- sorry, outside of the current home markets, private banking, everything else, it doesn't really move the needle, to be honest. It's very little in terms of capital. And if you look at how much capital we generate in Q1 100 -- sorry, 82 -- 84 basis points pre dividend. We do generate a lot of capital to be able to finance the future growth we expect. So in terms of the current situation with the excess capital, that is very unlikely to be needed for the expansion plans that we have.

Great. That's very clear. And yes, maybe just a follow-up. On the private banking, is it purely in the Nordics that you're going to focus or you're also planning in Germany and U.K. and the other countries?

Yes. We are going to start with a focus on the Nordics outside Sweden because the market position is very different in Sweden versus outside Sweden in the Nordics. But Germany and U.K. are also in scope as they are defined as home markets. Further international scope is not included. So we will not start opening up a private banking -- private wealth management business outside the geographical limit where we currently exist. So don't mix it up with the international network. However, with one little clear difference. If you are a Nordic or German or U.K. person who has a relationship, and you move abroad, there's no limitations for us to continue to help you if you move to a different country where maybe SEB is not present. But we call that the international network. Singapore and Luxembourg is currently already the 2 centers for taking care of the international people who are out in the world. So we have these 2 international centers. And that will be -- continue to build on.

There are no further questions at this time. Please continue.

Then I say a big thank you to all, and wish you a healthy time until we see you next time. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.