Skandinaviska Enskilda Banken AB (publ.) (OTCPK:SKVKY) Q1 2020 Earnings Conference Call April 29, 2020 3:30 AM ET
Johan Torgeby - President & Chief Executive Officer
Masih Yazdi - Chief Financial Officer
Conference Call Participants
Magnus Andersson - ABG
Chris Hartley - Redburn
Andreas Hakansson - Danske Bank
Sofie Peterzens - JPMorgan
Nicolas McBeath - DNB Markets
Martin Leitgeb - Goldman Sachs
Thank you very much. And I'd like to extend a warm welcome to everyone in these extraordinary times and say that this is the first phone and web-based PowerPoint presentation that we have done in many years, but thank you everyone for joining.
A practical comment. If you haven't seen the presentation that we will refer to on this call, you can go into sebgroup.com and under the tab Investor Relations we have posted the PowerPoint presentation, which we will refer to on this call.
Starting on page 2, the macroeconomic backdrop is not a surprise to anyone, but at least some reflections. We have seen a sharp fall in share prices. However, year-to-date they are still not anywhere close to the largest falls we've seen in history associated with traditional stock market crashes. However, volatility is exceptional and the speed and magnitude of the fall was very unusual.
Credit spreads have widened significantly and come in about a quarter or so since quarter end, but we can see a massive spread widening both for high yield and investment grade. And as always we also include SEB, which shows the same pattern but to a less magnitude. The credit spreads are a key component to understand the context of this quarter's result as it affects many areas of the bank. Lastly, interest rates are modestly down, highly volatile so they go down and up during the quarter and has less of an impact on the result this quarter.
Flicking to page 3. Very quickly, just to say that there is no lack of spectacular macroeconomic time series these days to show of the uniqueness of the current situation. Here we've included 4(2) [ph] that records the redundancy levels and the registered unemployment rate and number of unemployed in Sweden. Also seen a deterioration in the outlook for house sentiment, housing sentiment, and of course the business sides surveys, all falling in tandem sharp drops that we haven't seen in the past.
On page 4, SEB card turnover. This is proprietary data as one of the larger credit card issuers in our part of the world and we thought we'd just show you, how it looked up until last Friday. Here we see two clear patterns and that is a sharp drop from week nine to week 12 in credit card spending for corporate customers. These are the spending one do in their job. This is a 62% drop in three weeks, but it's now stabilized and there has been a very small uptick in the last couple of weeks.
If we look at credit card or payment card spending for private customers, it has gone down less. It's the same time frame where the sharp drop came namely week nine to week 12 and it's 27% down. And there we see a more marked uptick last week and it could be a little bit of a post-Easter uptick as well. But what's interesting is both have stabilized for the last four five weeks. So they have not continued to deteriorate. For completeness, we show the two split corporate versus private for all the Nordic countries where we have a significant business.
Flicking to page 5. Here we look at the national fiscal room for maneuvering to assist in this crisis, and, of course, a focus on the main countries where we operate at large. The exhibit to the left, the government relief measures has I think one interesting observation.
If you split up as a percentage of GDP the announced relief measures taken by the government one can divide it into green and blue in this graph. The green are actively deciding on fiscal stimulus, the immediate fiscal impulse, and one is an automatic stabilizer. It's already in the past decided on social, security, unemployment benefits et cetera that naturally kicks in and becomes a fiscal stimulus effect.
Looking at Sweden in particular there is relatively little of immediate fiscal impulse. So it's definitely so that all the so far announced programs are nowhere near consuming a large part of the government budget going forward. And I would interpret that as a positive, namely that there is much more room to maneuver should they decide to do so.
One also need to go back to the right and see what level do you start at. And this is, of course, simplistically put as share of debt to GDP for the government finances. And again you can see, all our home markets Estonia, Denmark, Sweden, Norway, Latvia being way below the mean in Europe, hence good government finances allowing them to have good dry powder should they desire to do so.
Going to page 6. A few comments on what we have observed amongst customers, communities and employees. If I start with customers, we've seen a significant increase in loan demand. We've been -- we have now accepted about 19,000 grace period for amortization, when it comes to mortgages.
We've also arranged several corona-related financing in the market as an intermediary and as an arranger. All branch offices are open in Sweden. They are closed for drop-ins, but they're also open in the Baltics by appointment only. And then we've seen a relatively sharp increase in incoming calls transactions executed and in the trading and funds operations, transactions passed through the bank.
When we look at the communities, we are, to say, the least actively engaged with all relevant authorities when it comes to the financial markets at this point. This includes the government and the government program, the regulator, the National Debt Office and the Central Bank.
We participated in the lending facilities from the Central Banks in Sweden, Norway, and Denmark. We also work with the Swedish Export Credit Agency, which is a guarantor for the larger companies should they require funding that can be split and risk shared between the bank and the agency.
Moving on to employees. We have put in contingency plans, as I think, most companies have done and crisis management, critical staff, management, trading, operation, payments, all the critical functions that we conduct in the bank. We have multiple places and a good staff preparation should something happen. So far we have not had any deaths in the bank, but we have had many people in quarantine and working from home for contingency reasons.
Health measures limiting physical interaction has also been implemented in a wide array of areas including how we go to the canteen. Needless to say, there's no business travel to speak of whatsoever at this point in time, et cetera.
Many people are working from home and we've seen a dramatic change in the way of interacting using digital collaboration tools, where we have a two to three times increase in phone conferences, digital and over the phone, but also video conferencing in order to have a face when we meet.
Sharing a little bit more about the corona-related sustainability bonds that has been done in the last weeks, flick now to page 7 and we'll just conclude that we have four lead arranger roles for the World Bank and IFC, the Nordic Investment Bank, and the one corporate bond for Getinge, the medtech company from south of Sweden, who did a SEK 1 billion corona certificate in order to create ventilators for hospitals. So, it's a very interesting fast development that the use of proceeds for corona relief is not only in the government sectors, they are also coming from agencies and private sector at this point.
Flicking to the next page. We have seen an increase in loan demand, and we have tried to create a picture here, where it shows some relevant starting points and where we stand as of 17th of April, so a little bit more than half into April. So we start -- we just conclude where we ended the year in drawn and undrawn facilities of SEK 944 billion in Q4, 2019.
28th of February is the date that we have picked as the start of corona-related advisory and corona-related financings really starting to come into the bank. So we have measured since the 28th of February, what is related specifically to have extra liquidity for a rainy day or any other type of financing that one might take up, because they see that the macroeconomic environment has a response to the national impact from corona is affecting their funding and financial strategy.
We then have also included Q1, 2020, which is the official numbers from the quarterly result and then included where we stood a week ago, including the pipeline which we deem to be likely to be converted into loans. So we have a pipeline on lending, which is high, medium or low.
So, we have not included what is low and medium, but the things we are high. So here we have a decent view of this actually being converted and is being processed in the bank. This pipeline is being processed in credit committees as we speak with the intention to extend it.
So just looking from February 28 until April 17, the loans in the bank extended and effectuated to clients grew by 5% from SEK 946 billion to SEK 996 billion. If we add the SEK 83 billion we are currently processing, and use that as a proxy if that would be converted into loan we would end up at SEK 1.079 trillion and that would equate to 14% increase. And this is, of course, very unusual to see these type of percentage increases in less than two months.
So we see a very strong demand. However, just like for credit cards, the demand increase is not increasing. So the second derivative is flattening out. We are seeing stabilization around this level of higher demand. So in the last week or two, it's not continued to increase from this level.
And now of course, so everyone understands, the pipeline is at a point-in-time assessment. Tomorrow, we will have a different pipeline and that will go on throughout the year, and as long as extra financing is required.
Flicking to Page 9, I'd just like to summarize the financial results before I hand over to Masih to go through it in more detail as follows. The underlying business remained robust. And if you look at NII and fees and commission, we actually saw an acceleration in growth rates.
However, strong negative impact came from market valuations as credit spread widened and stock markets fell. Asset quality remained very strong but there is a very uncertain and unusually low visibility on what this means for the real economy. So we have added credit provisionings from the past. We had a strong capitalization and a comfortable liquidity position going into this quarter. Masih?
Thank you, Johan. I want to start to say that I hope you're safe and healthy wherever you are before we dig into the numbers for Q1. So I'm starting on Page 10 in the presentation. As you can see [Technical Difficulty] sorry, it was me hitting the mute button.
As you can see the revenues came down by 15% in Q1 this year versus the same quarter last year. That is predominantly due to the CVA and DVA adjustments, we'll comment on later. Expenses are flat year-on-year, while expected credit losses are up significantly mainly due to model overlays that we've done this quarter.
The expected credit loss level is 25 basis points. The return on equity is 6%. Obviously, you can always make up a lot of adjustments you can do on your results. What we've done here is to just adjust the results for the CVA adjustments in this quarter which would lead to a cost/income ratio of 0.5 instead of 0.56 and a return on equity of 9.3% instead of 6%.
If I go into next slide number 11 NII, it's up 16% year-on-year in Q1 this year. This is mainly driven by three factors. The first one is volumes, strong volume growth, although the volumes Johan mentioned, mainly came in end of March and starting April. So those volumes have not had any material effect on NII in Q1.
The second positive factor is the resolution fund fee that has been reduced from nine to five basis points, which will improve our NII, everything else equal by close to SEK 700 million this year. And then finally the repo rate hike in December last year has a positive effect on deposit margins mainly in C&PC.
I'll comment on mortgage margins. I'm sure you're interested in. They continue to be under pressure as there is intense competition in the market. Going forward, I would say one thing about NII, it's obviously that there is – there will be some tailwind because of the strong loan demand we've seen in recent weeks.
Next Slide number 12. Net fee and commission income, up 8% year-on-year. Here we see positive contribution from lending fees again due to the strong lending growth we've seen in recent weeks. A positive contribution from asset management, as asset under management on average in Q1 this year was higher than the average level of Q1 last year. Although, obviously going into Q2, the levels are significantly lower. There was also positive contribution for markets-related fees mainly within equities.
There's a negative effect coming from payments and cards. We saw a small share of that in Q1 but that is more likely to become more negative in the remaining three quarters of this year. And also some negative effects within investment banking where we had a strong last year.
Moving to Page 13. Net financial income, which is the big swing factor this quarter, it's down from SEK 2.1 billion last year to minus SEK 0.8 billion this year. And to comment on this, I'll go right over to the next page number 14.
Here we show you the underlying NFI and then the different driving factors this quarter. Here we define the underlying NFI as the NFIs generated in Large Corporates & Financial Institutions C&PC as well as the Baltics adjusted for the CVA adjustments. So that – those three divisions in total add to close to SEK 1billion of NFI.
Then we have the CVA and DVA adjustments, which has a net impact of minus SEK 1.3 billion. We also have strategic shares in the bank. These are the holdings we have in predominantly three companies: one is Visa, the other one is Asiakastieto and the third one is Euroclear. They have – because of the share prices coming down during Q1 and revaluations, this has led to a negative effect of SEK 437 million in Q1.
In Life, NFI is minus SEK 118 million. This is due to asset values coming down, mainly within traditional investment portfolios. And then finally Treasury shows a positive NFI of SEK 75 million this quarter and we typically exclude that from the underlying NFI. So here you have the reasons for the reported level of being at minus SEK 804 million this quarter.
So they're focusing on NFI as I understand a lot of people use NFI as a proxy for our Markets business i.e., our fixed income commodities and currencies as well as equities has developed. Here on page 15 you can see the full revenues for our Markets business. So this is NII fees and commission as well as NFI for our Markets-related business in the last five quarters excluding, XVA factors.
Here you can see that Q1 was actually a fairly good quarter. It's comparable with Q4 and Q1 last year, which were also good quarters. So if you adjust for these valuation effects we did have a good development within our Markets business. We also show you to the right that if you compare the three different months in Q1 March showed a 50% increase in revenues within Markets compared to the previous two months. So when volatility picked up during Q1, we also saw what we typically see within Markets that revenues go up. So it was good to see that happening again in Q1.
Moving to page 16 and commenting on the provisions we've done during Q1. To the left you can see what the underlying level of expected credit losses have been in the bank in the last five quarters. Hadn't we done a model overlay this quarter we would have recorded loan losses of around SEK 400 million, very much in line with the average level of last year excluding the elevated level we saw in Q4.
Now as Johan mentioned, I think, he mentioned it at least, we've done a model overlay of SEK 1.1 billion. And you can see to the right what sectors those -- that overlay refers to. The main reason is the oil and gas portfolio about SEK 500 million in extra reserves related to the exposures we have there and then you see the split for several other sectors. And you can also see the split between the different divisions. So in C&PC and the Baltics, for example, we didn't really have any expected loan losses hadn't we added this model overlay during Q1.
So on the next page number 17, just to try to explain how we reasoned around making this model overlay SEK 1.1 billion. Now this is -- I have to say it's very qualitative. It's not a quantitative model in the sense that you put in a GDP number and something is put into place in terms of what kind of reserves you do. So it's a very holistic approach using different top-down scenarios and then adding a bottom-up analysis on the individual customer level. And then to that adding an analysis of the exposed sectors you see.
Here we try to show you two different scenarios we've used one that we call a mild COVID-19 and one that we call a severe COVID-19. If you compare these scenarios for example to the current forecast by IMF, you can see that the mild scenario here is more positive, especially, on 2020 whereas 2021 and 2022 is slightly more negative. But then the severe scenario is pretty much in line with the IMF forecast for 2020, but then it's much more negative for 2021 and 2022 where IMF expects a recovery of around 5% growth globally in those two years.
We've used the kind of a hybrid of these two scenarios. We cannot quantify to what extent one of each of these scenarios has been used when coming up with this model overlay, but trust that we've tried to do -- make the best assumptions we can make at this point in time given the uncertainty there is in the market.
Next slide number 18, the operating leverage that we show every quarter. With the weak Q1 when it comes to market valuations this has dropped quite a bit. But if you at least make the CVA adjustments it's more in line with the recent Q1 quarters, we've had in recent years. What's good to see is that expenses are flat versus last year after a slight increase end of last year leading to at least some stability in operating profit on average in the last quarter.
Next page number 19. Looking at different divisions try to be pretty quick, we see the largest drops in Large Corporates & Financial Institutions as well as Life. For LC&FI it's mainly driven by the CVA adjustments as well as the higher expected credit losses. For Life it's driven by the asset values coming down because of the stock market falls during Q1.
C&PC had a very good quarter, if you adjust for the fact that we've done a model overlay of about SEK 500 million for them in terms of expected credit losses. Baltics same kind of development there. It would have been up hadn't we done the model overlay. And then Investment Management is the only division showing an improvement this quarter versus same quarter last year mainly as assets under management has increased quite a bit. Within the group functions you have the negative effect from the strategic shares that I commented on before mainly explaining the drop from Q1 last year.
Next page 20 some key ratios. I think you've seen most of this. A couple of comments, I would like to make. Even though we've had very strong lending growth during Q1 and we still see a strong pipeline for Q2 deposits continue to outgrow lending. So to that extent we have been more than self-funded through deposits.
In that sense, the liquidity position in the bank has improved post Q1 compared to pre Q1 and it was very strong already pre Q1. And you can see in one of the charts in the appendix for how long we can survive without having any access to the capital markets. It's more than 13 months at this point in time.
On capital, there's a large decline Q-on-Q 80 basis points. That's mainly driven by FX and lending and to some extent also due to higher market risk REA. Still the buffer is up to 310 basis points. This is due to the countercyclical buffers being reduced or removed in the jurisdictions where we operate. So we have a buffer that is 60 basis points above the level ending last year.
That was it. I think we can open up for Q&A.
[Operator Instructions] Your first question comes from the line of Magnus Andersson. Your line is open. You may ask your question.
Yes. Good morning. Magnus Andersson at ABG. Just first of all starting with a quick one on your trading income, since it's the weakest quarterly result probably in 25 years or so. Just -- first of all on risk mandates etcetera has anything changed at all over the last, let's say couple of years two, three years? That's the first one.
And secondly is there anything you can do to offset this kind of volatility? I understand obviously most of the strategic shareholdings etcetera. But the CVA/DVA etcetera is it just as it, is this is something we have to accept also going forward? Thank you.
Hey Magnus, Johan here. Nothing has changed in the risk appetite or the mandates of strategic or any other reason over the last few years. So this is not a result of excessive risk taking prop trading or anything like it. And just that one step back this is an assessment of every single counterpart that we have a financial derivative with. We do an assessment of the potential future exposure of that derivative and then put a probability of default in a mechanical way using CDS spreads and/or proxies from the credit market to assess it.
So this is a very mechanical thing. This is a credit reservation as well. It's just driven by a mechanical process rather than credit losses on loans which are driven by IFRS 9 credit department modeling process with an expert overlay so to speak. We have in the appendix Page 22 included it, everything else being equal, this just means reverting to 0. So you should not expect us to now change the narrative around what this line is. We continue for the purpose of this discussion to believe in 1.2 to 1.4 in this line as the average over time with high volatility.
Okay. Good. And then secondly just going to -- back to corporate lending and NII. First of all of that lending of the SEK 133 million perhaps you mentioned it and I missed it, but how much is already negotiated credit lines being drawn and how much is new lending? And also if you could comment on margins what do you think about margin development, margins on new facilities versus already negotiated facilities?
Yes. I'll refer to Page 8 again. So if you start looking at the green area, as you can see a very close to 50-50 split between drawn and undrawn. The blue area is impossible to say, but there's no reason to think it is going to start mostly as undrawn because these had a tendency to be a little bit of an insurance policy driven for a rainy day.
So we put a lot of these on -- as credit commitments that might be later drawn. And in the '09 and '10 crisis there was a higher propensity to leave it undrawn than actually draw on it. So there's a little less propensity to create NII from that perspective of the pipeline.
Pricing has -- directionally it more or less follows the public market pricing of credit. So there is an uptick also in the loan market less easy to observe than the credit market, but the direction is the same. So it is more expensive today than before but the loan market is much less volatile on pricing and more slowly moving. So you don't get the full -- if I use the iTraxx for example as a leading indicator of where things are heading, it doesn't move in a day or two like iTraxx, but you can clearly see that there has been a margin improvement on the new loans.
Okay. And how do you think the mortgage lending market will be impacted? What kind of -- there's a lot of discussion obviously about corporate lending since we haven't seen much on housing mortgages yet. How do you see that developing?
Well first it's slower moving so it will take time. And I won't make a prediction, but I'll reason around it. There is a very critical question and that is how will this affect the housing market and the real estate and property market? And right now we have some signals that is affecting the commercial side where particularly strained retail businesses are struggling with meeting rents. But we've seen very little stress, I would say nothing on the household side.
But it's fair to assume we check with our macro economist and they all are putting in a lower house price, but it's similar to '09. It's similar to what we saw in 2017 and it didn't really affect it in a material way. So, we're fairly comfortable right now.
The increased competition from start-ups and the mortgage markets participants of more let's say established nature continues. So, there's no change here. This is still a very desirable place in the market to be and that new technology and new ways of working are still disrupting this market. Then you have the very sharp movements in interest rates when it comes to margins. So those you can assess as well as we can. Right now we've seen margins go around because the funding costs are moving around, but the output price has been absolutely stable. So we haven't really changed the prices. So continued in the medium to long term to be margin pressure, right now we'll see the underlying funding cost for banks go. And if that actually spreads into changing the prices towards the customers not yet happened.
Okay. Thanks. And just finally on NII, is there anything we should be aware of in terms of trading-related part in NII et cetera, or is the 6201 a sustainable number we should start at when we make our estimates for the remainder of the year?
Hi Magnus, it's Masih. It's a very small effect. NII in -- within Markets it's slightly elevated and I think you can generally disregard from it.
Okay. Good. And just finally a detailed one for you perhaps Masih. Do you still have a pension surplus, or do you have a deficit now by the end of Q1 considering the market development that impacts your capital position?
We have a surplus.
You have a surplus. Okay. Thanks. That’s all from me.
Next question comes from the line of Chris Hartley. Your line is open. You may ask your question.
Great. Thanks very much guys. Can I just ask one about the outlook for lending growth, please? So obviously we're seeing a lot of an increase in liquidity-type lending. Have you begun to see an offset from that in terms of lower investment lending type yet? Is that kind of visible in your numbers? And how do you kind of see the balance of that going forward for the rest of the year?
And then secondly just on your provision. Just, so I can understand it properly this is your expectation for sort of total future credit losses. So maybe it's not technically an IFRS nine number sort of done in the full spirit of IFRS nine so you have got your guesses bang on the nose. We wouldn't expect to see any increased credit losses going forward. Is that right?
Okay. Thank you. And I'll start with lending and just invite Masih to chip in. The -- did you say sorry investment lending? Is that how...
Well I -- yes a lot of people are borrowing for liquidity purposes whereas I suspect there's going to be less kind of investment by corporates.
I see. I see. Yes. No you're very correct in what you imply with your question. It is much more liquidity securing type of lending facilities which means that if you look at it and compare it to what's normal, they tend to be shorter larger, more highly spread priced and they are there in case it worsens. So, the vast majority of what we've seen on lending volumes we're talking here billions and billions are coming from the large corporates. It is a similar pattern. So we have high activity on SMEs and mid-cost but the volumes are very small I mean we're talking millions rather than billions.
So that is the nature of it. I think 2009 and '10 serves as a very good example to see how the balance sheet expanded during the crisis and then contracted. And that was because it's a lot of six-months one-year and two-year facilities put in place in order for a rainy day. And if things calm down you don't need to renew them. So there is definitely a medium-term kind of a little bit of -- I don't know how we say it in English increase that is not permanent. So this is not necessarily optimal capital structure being put in place now for a stable state.
On provisions, you should not think about it if you are -- as we have taken every single credit loss in this quarter that should cover. If you rather think of it like we are doing the best we can to make a guesstimate because that's really what this is all about these days on what is an appropriate credit loss level that we expect to satisfy our needs and that is to be prudent and accurate.
We don't need to be overly conservative and we don't for sure want to have too little. And that is probably what every bank is quite struggling with and this is our outcome. So, if we would have had this type of reserves and they actually over time this year materializing having this as an average reserve level or loss level 1.5 per quarter or six for the whole year, I think if this is the deepest recession we've seen in history and that is the outcome that must be seen as a very good one.
Okay. Thanks. Can I actually just quickly follow up on something you mentioned? You mentioned a few times before by talking about the global financial crisis it's a good kind of example of when you are able to expand your balance sheet. But that sort of was a banking crisis and so perhaps some of your peers stepped away because of that crisis. So is that a fair comparison now, or would we expect competition for new business to be tougher now than it was post the GFC?
Yes. There is very large similarities in what corporates are actually preparing for the -- like a kind of a rainy day. The reason is very different. It's not that banks aren't necessarily going to go under and financial assets are priced in an unfavorable way because the financial banking system is hard. Now it's a pandemic, but the result is very similar from a corporate perspective. I think you're right in assuming because we are -- banks are much, much stronger now generally speaking than they were last time. So we will have less of that effect that banks are withdrawing and hence if you want to protect your domestic market, you have an extra uptick in demand coming from a market share increase that people are exiting. So that shouldn't be as strong.
But that being said, we've already seen the tendencies. There are some articles published and some research reports published that banks do tend to go closer to home in crises. And all of a sudden, you cannot afford to support everybody. And SEB last time was a real outlier globally, because we expanded the balance sheet by 30%.
Today after two months of this one, we are talking about a 10%-plus increase. So we are looking at one-third to half of what we've seen should this materialize this time around. And there is a tendency, but less strong that European banks are not as active in the Nordic region as they were before the financial crisis in the 2000s. And the Americans have also changed quite dramatically in the Nordics when and who commit balance sheet. And those things go you can track your public numbers.
Okay. That’s great. Thanks very much.
Next question comes from the line of Andreas Hakansson. Your line is open. Your may ask your question.
Good morning, everyone. A few different questions. First one, could you just give us an update what you're currently saying about your 2019 dividend please?
Okay. So the originally proposed dividend was canceled in conjunction with the AGM being canceled. And the thing was that we need to come back to market and revise what the proposed dividend should be. And right now there is no new information, but that we are aiming to have an AGM on the 29th of June. And according to law, you need to call to that AGM at least a month in advance, four weeks. And there the Board needs to conclude that is then late May, what's to propose for the AGM. So that's the latest update.
Excellent. Thanks for that. And then on the trading, I mean, we are seeing trading losses. They're not losses really I mean they're valuation impact. Could you see -- since credit spreads have tightened in the beginning of the second quarter, and equity markets are up I don't have it exactly now for the holdings you have, could you say how would those volatile lines have developed in the beginning of this quarter?
Yeah, I can take that Andreas. You're right. I mean credit spreads are coming down and asset prices are going up to -- so to some extent, the negative effects you've seen in Q1 will have reversed in Q2 if this holds, but we're only one month into the second quarter.
Yeah, of course. But it would be -- because if it's just reversing a bit, it's still going to be a positive impact in the second quarter for staying its current level?
Everything else equal, it will be a positive effect. The strategic shares have gone up in value in Q2 so far, credit spreads have narrowed in Q2 so far. So if it stays here, it will be a positive effect. And over time the CVA adjustments will go to zero unless you think some of our counterparts will default.
Sure. Thanks. And then finally just, Masih, you were saying that you expect mortgage margin pressure to continue. But if we think about retail margins overall, because you have quite a lot of retail deposits as well, what do you think the net margin would be between the two lines?
I don't know and I don't think I said mortgage margins will continue to go down. I think they continue to be under pressure. There's continuing to be intense competition. It's difficult to say exactly. I mean, in general since we have a larger exposure to large corporates than we have on mortgages and since to some extent large corporate lending margins are going up, maybe for us the negative effect won't be that large if you take the mixed NIM going forward, but I think it's just too early to say.
Okay. Thank you.
The next question comes from the line of Sofie Peterzens. Your line is open. You may ask your question.
JPMorgan. I was wondering, if you could just give a little bit more details on your cost guidance. Assuming you get a similar report to what we saw for Swedbank, does your cost guidance still hold, or is there downside risk to your 2020 cost guidance?
Thank you, Sofie. We don't have a 2020 cost guidance. We have a 2021 cost target of SEK23 billion with 2018 FX, which right now is about SEK23.3 billion. We haven't changed that. There are some positive factors happening this year, but there are also some headwinds. And so everything that's happening right now is leading to some cost inflation in terms of digital capabilities and contingency plans, but then there is some tailwinds in terms of less travel entertainment. We spend about SEK100 million per quarter on travel entertainment. In Q1 this year that came down SEK28 million versus Q1 last year. I'm assuming that that drop will be greater in Q2.
But overall, the way we look at it right now, it's still early in this process and the business plan we have set forward is a strategic business plan. And we invest based on a very sort of long-term development of the bank and we have decided not to change that. So it still holds. And right now we're not planning for anything but to come in at that target.
Okay. That's clear. And in terms of the new corporate loans that you put on your books what kind of risk rating do they have? I think one of your peers was mentioning that it has an average around 40% risk rating. Is it similar to what you're seeing, or are you seeing higher risk rates than that?
As we – I think the large numbers to comment on those are investment grade. So these are lower risk weights than you said. We just say, let's say around 30% plus/minus a bit.
Okay. And how should we think about – I know, you made a comment on the 2019 dividend. But how should we think about the 2020 dividend in coming quarters? Will you – is the plan to allocate profits to dividends, or are you going to follow the European approach where you basically don't allocate any profits to dividend, or how should we think about that?
Yes. So as long as we haven't decided on a dividend for 2019, that's going to come later from the Board. We are reserving for a 2020 dividend, which is in line with the average payout ratio last three years, which is right now 69%. So in Q1, we have reserved for a dividend for 2020 corresponding to 69% of the profit in Q1. And that's just the way of doing this following the rules you have to follow and not signaling anything really before we know exactly how this will pan out in the end.
Okay. And then my last question would be on oil exposure. I can see you have oil and gas exposure of around SEK 33 billion, but provisions are only 3%. If I compare that to one of your peers, you have that 25% provision against oil and gas exposure, do you feel comfortable with this level of provisions? They seem relatively low at least compared to your peers?
I don't know, if they're low or not. We do feel comfortable, but that is comfortable for what we know right now. I think oil and gas is probably the sector right now which you have low visibility on. I mean an oil price that dipped down to negative territory, and now yesterday I read 11 on WTI it is of course incredibly hard to say how that industry. We have seen estimates now that – the widest I've ever seen that you can have a recovery here with enormously high oil price in Q3 and 4. And this could be another argument saying, we will never see the old highs of oil prices, because sustainability and other things are actually being accelerated here. So we have done our best assessment. You saw that 50% of the increased overlays coming for that exposure and that is as far as we can comment now.
Next question comes from the line of Nicolas McBeath. Your line is open. You may ask your question.
Yes. Hi. A question on – a follow-up question on loan losses and you mentioned an earlier figure of around 6 billion per year for 2020 if we extrapolate the current level from Q1. So I was just wondering, if this is your best estimate of the expected loan losses for 2020. Or if you have some kind of estimate you could share with us given your current view on the macro outlook of course acknowledging the uncertainties but yes according to your best estimate.
Yeah. No, we don't estimate it and we don't guide on it. So the only thing you can do is that was just a mathematical technical comment that, if we would be there and this is a deep recession I think we would be pretty – we will be pretty okay. I think the way that credit estimates have been done by banks this quarter will be the thing I expect we will discuss for a while, because we are seeing very low transparency – I shouldn't say transparency, I should say comparability. When the U.S. reported and now we have had four or five here in this part of the world, it's a quite wide range on how this has been treated. And it is of course this is of course supported by the European Banking Authority and the local regulators who all went out with different statements, during the last month saying that, we need to deploy with them rather than mechanical.
So that IFRS 9 doesn't make it unnecessarily pro-cyclical that those numbers that come out of the model needs to be assessed. So don't read too much into it, but that we are expecting an elevated level that should be clear.
Okay. So could you give any further comment on what kind of level we should expect, or should we just take those comments as they are?
Take them as they are please.
Okay. And then I was also wondering if you have made any assessment of the impact from the European Commission's proposal earlier this week? Yeah.
Hi, Nicolas. Yes, we saw that yesterday coming out. We have started to look at it and make some calculations. The main impact on us is coming from the extended SME discount factor as well as some capital relief for infrastructure exposures. I think it's too early to give a clear indication. But if this is passed in the Council and the Parliament now in June, which is what is planned you should see a positive effect in Q2 with some reduction in risk exposure amount somewhere for us in the range of maybe 30 to 50 basis points on the CET1 ratio with some uncertainty, because we have to dig into the details and obviously assuming it is passed in Q2. So, somewhere between 30 and 50 basis points.
Okay, perfect. Thank you.
Next question comes from the line of Martin Leitgeb. Your line is open. You may ask your question.
And the progression of the leverage ratio in the quarter and just looking at your historic disclosure it seems to be at one of the lower levels over the -- since 2014 or something like that. To what degree impacts -- the leverage ratio impacts your decision whether on corporate lending or whether on capital return, or do you see essentially yourself as mainly core Tier 1 capital constraints, so the leverage ratio is a backstop but not really a consideration at this stage? Thank you.
Yeah. I mean it's come down quite a bit from year-end. That is very much driven by the liquidity portfolios within Treasury expanding and the very strong deposit growth we've had. And you've probably seen there's a lot of discussion in the U.S. as well as in Europe and you saw the proposal from the EU Commission yesterday to exclude a lot of safe assets from the calculation of leverages. I think they are starting to understand, it doesn't really make sense that you require banks to have more liquidity and then you put a constraint on how large the balance sheet can become because of that liquidity you put on. So, I think we generally disregard from it. At this point in time, it's very easy to fix. You just reduce your liquidity and your safety buffers. And you can see year-end every year we're above 5% on leverage ratio. So it's a very true than at least in our view a strange measure. But yes, we've noted, it's come down now in Q1.
[Operator Instructions] There are no further questions at this time. Please continue.
Okay. Then I would just thank you all for your attention in these unusual times. We, of course, also want to send a signal to stay healthy. And we hope that next time, if everything goes well, we'll be able to meet face-to-face again. But for this time, we will now start a series of investor calls and they will all be done by phone. So thank you very much for today, and looking forward to seeing you again. Bye-bye.