Good morning, everyone. Welcome to Nordea second quarter 2020 financial results presentation. We will start this webcast with a presentation from our President and Group CEO, Frank Vang-Jensen. This will be followed by an audio cast, where investors and analysts also have an opportunity to ask questions from Frank, as well as from our Acting CFO, Mark Kandborg, our CRO, Matthew Elderfield, and Head of Investor Relations, Rodney Alfvén. Thank you again for joining. With this, I'll turn it over to Frank.
Thank you so much. Good morning. Today, we have published our second quarter result and half year's financial report for 2020. The impact of COVID-19 became increasingly evident during the second quarter, and the pandemic continues to severely affect individuals, businesses, and societies. The crisis has also accelerated many existing trends. During the past months, societies have adapted new ways of living, working, and consuming. We have witnessed an increasing trend towards e-commerce, mobile payments, and digital customer interaction. In all these areas, we have a strong position as a bank. For example, the number of mobile payment transactions has been more than doubled compared to this previous year. Most of our customer meetings have been online, while we have been fully operational with more than 70% of our people working remotely.
These extraordinary times really show what is all at the core of our customer promise, supporting our customers through good times and challenging times, anywhere and any time. Thanks to the dedication and commitment of our employees, we have stayed true to our purpose, enabling dreams and everyday aspirations for the greater good. I'm proud to see all our efforts are paying off as customer satisfaction is improving in all business areas. The challenging societal and economic conditions have tested resilience of our business model, and we came out very well of that test. For the second quarter, we reported another solid result and continues to progress towards our 2022 targets. All key activities to improve our operational efficiency delivered on target. Cost decreased by 8% from the previous year.
This resulted in a clear improvement of our cost to income ratio, which in the quarter was down to 52% compared to 58% in the same period last year. Our other financial target, the return on equity, was heavily impacted by loan loss provisions made in the quarter, as well as our large capital base. We saw an increase in customer volume for lending and for deposits in Q2, with strong growth rates. The pandemic reduced economic activity during the second quarter, especially affecting the fees. Our income was 2% lower, but decisive cost reductions led to a profit before loan losses that were 4% higher than last year. We entered the COVID-19 crisis with a strong financial position that we have meant to maintain. Our capital position remains very strong with a CET1 ratio of 15.8%, which is 5.6 percentage points above the requirement.
Clearly, our financial strength enables us to support our customers and maintain our dividend capacity. Of course, the board of Nordea intends to follow the ECB's recommendations and will refrain from deciding on a dividend payment before 1st of October 2020. Regarding credit quality, and as communicated in our Q1 report, we have now updated our macroeconomic scenarios, including our longer-term view on the expected impact of the economic downturn. Furthermore, we have completed a thorough review of our loan book. Our conclusion is that the underlying credit quality of our loan book remains very strong. This is evident in the numbers for the quarter. Based on the updated assumptions and the analysis made, we project that total net loan losses for the full year 2020 will be below EUR 1 billion, equivalent to less than 41 basis point.
Underlying net loan losses were EUR 310 million in the quarter. On top of that, we have made additional management judgment allowances of EUR 388 million. Including earlier management adjustment allowances, we have now a total buffer of EUR 650 million to cover future loan losses and our IFRS 9 model improvements. All in all, these provisions are expected to mostly cover for the full year loan losses. We deem this to be a prudent and appropriate approach given the current economic uncertainty, and I'll come back to this topic in a few minutes. Naturally, our results and profitability are highly impacted by our loan loss provisions. If we look at the income lines, our business performance in the second quarter continued to show the promising signs seen in the previous two quarters. Net interest income increased by 2%, supported by sound volume growth in all markets.
Net fair value recovered and was up 12%, mainly driven by improved trading activity. The lockdowns and the market turbulence had a negative impact and affected fee and commission income, which declined by 9%. Our net interest income is driven by volume growth, especially in mortgage users in all countries. Mortgage volume are steadily increasing, and we are growing above or well in line with our target. In the quarter, we've also experienced strong deposit growth. Margins have been improving slightly and contributed to the net interest income growth compared to the previous year, with some pressure in Q2. That was mainly triggered by the sharp interest rate decrease in Norway. As mentioned, net commission income was negatively affected by the lockdowns, reduced activity in the corporate advisory space, as well as lower asset management fees impacting our income.
Fee income from payments and cards was naturally impacted by lower consumption and economic activity. We saw an improving trend towards the end of the quarter. By the end of June, consumer card volumes recovered and were close to normal in all the Nordic countries. In Sweden, recovery has been slightly slower than in the other Nordic countries, although also with an improving trend. Our net fair value bounced back in the quarter, primarily driven by trading activities and recovering market valuations. We recorded a solid performance in our customer areas, supporting the growth. On the cost side, I'm pleased to see how we continue to optimize our operational efficiency, create new ways of working, and building a strong cost culture. We are progressing according to plan. Costs were down 8% compared to the previous year. This led to an improved cost-to-income ratio of 52%.
That is over five percentage points better than last year. We are closely tracking our cost-to-income ratio, and we will ensure that it is moving towards our 2022 target. As a bank, we entered the COVID-19 crisis from a position of strength. We have maintained all our position through the first phase of the pandemic. The CET1 ratio at the end of Q2 was 15.8%. The CET1 capital buffer was 5.6 percentage points above the requirement. This is one of the highest buffers relative to requirement in Europe. Our strong capital position gives us a solid foundation to continuing supporting our customers, although the future is uncertain. Both stress testing and historical CET1 volatility confirm that we are well prepared to face even the most extreme scenarios. The capital buffer has significantly increased since the beginning of the year.
The current CET1 buffer is twice as much as the extended impact from a stress test, both when we compare with the EBA stress test and when we compare with our own latest internal COVID-19 stress test. Given the ample CET1 capital buffer, our dividend capacity remains intact. The Board of Nordea has the mandate from the AGM to decide on the 2019 dividend, an evaluation will take place during the autumn. As I said earlier, the board intends to follow the ECB's recommendations to refrain from deciding on a dividend payment before October. In light of COVID-19, banks' role remains crucial to keep the economies and our societies running.
We have a robust liquidity position to respond to this situation and to support our customers. Our substantial liquidity buffer amounts to more than EUR 100 billion, with a liquidity coverage ratio of 160% and a net stable funding ratio of 113%. Customer activity increased with growth in both loans and in deposits. Deposit inflow increased 4% in the quarter. The group's funding activity and credit spreads largely normalized during the second quarter. We issued approximately EUR 9 billion in long-term debt across Nordic and global funding markets at competitive spreads. In some instruments, spreads are back to pre-crisis levels. I'll now go through our loan loss provisioning for the second quarter and projections for the full year 2020. We are comfortable with our strong credit quality and well-diversified loan portfolio. Our exposure to the sectors significantly affected by COVID-19 is very limited.
In addition, our de-risking actions over the past years have lowered the expected loan loss levels even further. As planned, and as stated in the Q1 report, we have now updated our macroeconomic scenarios and assessed the expected impact of the economic downturn on our loan portfolio in a larger and a longer-term perspective. For the full year 2020, we project total net loan losses below EUR 1 billion, equivalent to less than 41 basis points. In Q2, underlying loan losses were mainly driven by our macroeconomic updates and individual losses in a few sectors, such as the oil and gas and offshore segments, resulting in underlying loan losses of EUR 310 million. Aside from the items mentioned, net loan losses were at a relatively low level of EUR 69 million. We didn't observe any major rating downgrades or defaults in the quarter.
On top of the underlying loan losses, we have made additional management judgment allowances of €388 million in the quarter. Given the longer-term view, we have now built a buffer of €650 million. This already covers for estimated future losses. Our credit portfolio is well-diversified across our Nordic home markets that are low risk and stable due to well-structured social safety net, strong official positions, and effective legal systems. We have an even distribution of lending across the four countries, with an equal distribution between household and corporate exposures. The largest part, approximately 85% of the retail portfolio is mortgages, and the corporate portfolio is well-diversified across many sectors. During the quarter, we have developed a deeper understanding of what impact COVID-19 will have on our customers, and we have updated our analysis done in March.
There is a wider impact on a broader group of sectors, but the significant impact appears to be more limited than in our initial analysis in the first quarter. Based on our updated analysis, the significantly affected sectors account for only 4% of our loan book. In the first quarter report, we assessed the immediate impacts of the COVID-19 outbreak. Given the high uncertainty and low visibility during that time, we mentioned that further assessment would be made in the second quarter. Now we have completed a thorough review of our loan book. Our full-year loan loss projection is based on a bottom-up business assessment, a special review of individual exposures in the significantly affected sectors, and the outcome of our stress tests. All three approaches produced broadly similar outcomes and were based on our updated baseline macroeconomic forecast.
The macroeconomic forecasts we use are at least as conservative as those published by the Nordic authorities in almost all aspects. The scenarios are fully in line with the guidance from the ECB. For the full year 2020, we project total net loan losses to be below EUR 1 billion. These projections also cover improvements to our IFRS 9 models and take into account the ECB's new guidance on non-performing loans that will come in force in the fourth quarter of this year. We are therefore in a position to provide the forecast that our costs for risk for the full year 2020 losses will be less than 41 basis points. Our understanding of the underlying net loan losses remained on a relatively low level during the second quarter. These amounted to EUR 310 million. Underlying net loan losses are mainly coming from the oil and offshore sectors.
Individual provisions for the railing part of our credit portfolio were largely on par with the previous quarters. The other driver of the underlying loan losses was the update of the macroeconomic scenarios in our IFRS 9 models. This accounts for approximately 50% of the underlying losses. Based on the analysis completed, we have established an additional management adjustment in order to have a significant buffer to cover future loan losses. This additional buffer amounted to EUR 388 million in the second quarter. We consider that our approach is prudent and have now built up a significant buffer in total of EUR 650 million for future loan losses. Our total provisions in the first half of the year, therefore, amount to EUR 852 million, which mostly cover the full year loan loss estimate. We have a long history of low and stable loan losses.
In the past year, we have actually continued to lower our risk profile by continuously exiting the non-Nordic markets. We have further reduced our risk appetite in several risky sectors. Let me now move on to the business area results. All our business areas are taking promising steps with high customer activity and improving underlying financial performance. However, there are still further improvements to be made to reach the communicated 2022 targets. In Personal Banking, mortgage volume growth continued strongly in all four countries. We're satisfied with our high activity and improving customer satisfaction. Rate movements are affecting both lending and deposit markets slightly. In total, revenues declined by 3% in local currencies, primarily due to lower consumer activity, which impacted especially payment and card fee. Our savings income was subdued due to lower levels of assets under management, but it bounced back during the quarter.
We continue to focus on improving operational efficiency, costs declined by 3%, leading to a decrease in cost-to-income ratio by 3 percentage points to 54%. In business banking, we have been proactive in reaching out and supporting our corporate customers. Our customer activity has been 20%-30% higher compared to the normal activity level. The solid and steady improvements we have seen over several quarters continued in Q2. Lending volumes were up 4% and deposit volumes were up 15%. As a result, revenue increased by 2% in local currencies. Lockdowns had a negative impact on fee and commissions. However, income was picking up towards the end of the quarter. Costs declined by 3%, leading to an improved cost-to-income ratio of 48%. Large Corporates & Institutions continued its repositioning to create a more focused, less complex, and a more profitable business.
Revenues grew, net fair value was up, driven by an increased customer activity, strong markets business, and recovered asset valuations. Costs were significantly lower and declined by 14%. This led to an improvement cost-to-income ratio of 44%, down from 63% last year. Economic capital was adversely affected by an increase in market volatility. Together with loan losses risk led to a clearly lower RORAC level. A number of mitigating actions to reduce capital consumption are ongoing. In assets and management, revenues declined 4% due to the market turmoil. High customer activity and a market environment with solid inflow increased assets under management by EUR 31 billion compared to the previous quarter. Total assets under management now amount to EUR 311 billion, coming closer to pre-crisis levels.
Costs continued to decrease, and cost to income ratio improved by 3 percentage points to 55%. After the past extraordinary months, it has been encouraging to see the number of countries starting to reopen their societies step by step. This creates hope, consumer confidence, and growth. We see signs of this in the macroeconomic data and in our own cards and payments data. However, this might be a bumpy ride. We will probably face setbacks, hopefully temporary. This great uncertainty is a true test of resilience and collaboration. We need all on board, individuals, corporates, and societies. As a leading bank in the Nordics, we are actively contributing and doing our part to fulfill our responsibility. My leading principle is to do what we say. As a bank, we have a clear direction. We are focused on our three key priorities.
One, to optimize operational efficiency, two, to drive income growth, and three, to create great customer experiences. We have taken steps forward in the right direction, and we will continue to do so, a little bit better every single day. The COVID-19 pandemic has created challenges for many businesses, including us, and it's still too early to conclude on the longer-term consequences of the crisis. We remain committed to our plan and key priorities. We are ready to act to ensure that we meet our financial targets for 2022. Thank you for listening.
Okay. Thank you all for listening in, and thank you, Frank, for that. We will now start the Q&A session. This is Rodney Alfvén, outgoing head of IR in Nordea. At the Q&A, we will have CEO, Frank Vang-Jensen, we will have the acting CFO, Mark Kandborg, our Chief Risk Officer, Matthew Elderfield, and our incoming Investor Relations, Matti Ahokas. Operator, please start the Q&A session.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press 01 on your telephone keypad now, and you'll enter a queue. Our first question comes from Magnus Andersson from ABG. Please go ahead. Your line is now open.
Yes. Hi. Good morning, guys. Just starting off with, I think, the most striking deviation in the quarter, which was the cost line. Even if I annualize the H1 number, which includes EUR 200 million of resolution fund fees, I end up below EUR 4.7 billion. This report indicates that we should be all else equal much below your guidance for this year unless something will happen in Q2. I also note that staff cost was down 8% quarter-on-quarter, while the average number of employees, which continues down, but it's down 2% quarter-on-quarter. I guess there's some profit-based remuneration or something in there. I'm just curious, what is it that we are going to see in the second half, which means that costs are going to be as high as in the first half, despite the fact that you don't have resolution fund fees?
That's my first question.
Yeah, let me start, and then I'll hand over to Mark. We are running the bank structurally with a lower cost base compared to one year ago, and we are following our plan. The overall message we are giving that we are quite confident when we restate the cost target for the full year 2020. What is important to be aware of is that structurally we have lowered our costs. That is the aim. Every day, we want to create a strong cost culture. We are overall in the bank really challenging ways of working, bureaucracy, you can say number of people in meetings, the way we interact, how we travel. That is leading to both a stronger culture, but also thereby a lower cost run rate. Mark, anything to add here?
Yeah. No, I think it's a fair observation, but we should also take into account that we have seen a significantly weaker Swedish and Norwegian kroner during the first half that has been supporting the underlying lower cost. We have also seen almost non-existing traveling and marketing costs, which we would expect to normalize as the crisis begin to abate. Then finally, there has also been delays to some certain IT developments that will also come back in the next second half. Yes.
Okay. On staff costs, is there anything particular there that will bounce back in the second half as well?
We had some reversals in relation to the variable pay in the second quarter, but not something in a significant amount.
Okay. Thank you. Thanks for that. Then just on NII. First of all, two detailed questions. I noted just in the NII bridge [call from quarter] that you had quite some support from lower cost of funds. That was EUR 22 million, if you could comment on that. Secondly, you mentioned earlier this morning that the Norwegian rate cut cost you EUR 20 million of NII in Q2. Obviously, we will get something of this back when you lowered your deposit rate. I just wonder if you will share with us how much in the second half.
The EUR 22 million relating to a lower funding cost comes in some adjustments in relation to internal pricings. Overall, we do see that our funding costs remain to be in line with what we have seen in the previous quarters. We do see a significant increase in our deposit volumes, which means that our net stable funding ratio has reached 113 percentage points, which gives us some flexibility also in relation to funding in the next quarter. In relation to the question on the Norwegian deposit impact, we would expect roughly EUR 10 million improvement.
Okay. Just on the outlook for funding costs in the second half, will funding costs be a tailwind or a headwind in the second half relative to what we see now?
I think that is too early to say. Overall, we see funding costs are in line with what we have seen in the first half.
Okay. Thank you. Just on capital, the SME supporting factor, can you tell us what impact that had on risk-weighted assets in Q2, and whether you took 100% of that now, or if we will see some additional impact in the third quarter?
Yeah, it had a EUR 1.6 billion RWA impact here in.
Sorry, I didn't hear you. One point
1.6 billion positive RWA impact in Q2, and we expect additional EUR 1 billion in Q3.
Okay. Thank you very much. That's all for me.
Thank you. Our next question comes from the line of Robin Maule from Kepler Cheuvreux. Please go ahead. Your line is now open.
Hey. Good morning. A follow-up on the costs. Would you say that as we stand now with more than the half a year passed, are you in a better position now than you were at the beginning of the year looking ahead in 2020, would you say, on the cost given the OpEx movements and the traveling, and so on? In that case, would you prefer to make more investments or actually lower the guidance or the cost for the year that you had anticipated?
Yeah. For the first, I can take that one. It's Frank speaking. We are in the best position. That I expect us to be continuously, basically. Of course, Q2 has been, as Mark stated, a little bit special. It's important to note that structurally, and that is what we are looking at, that the structural continuously with the reduction of the cost that is progressing as planned. In the Q2, on the second half, I should say, we will probably do more on the digital sales side. We ramp up further there. We also will try to see if we can do even more on our, you can say, buy functionality digitally. It is too early to conclude what amount we will talk about. We are down structurally. Of course, when societies reopen and so, there will be some bounce back.
We are really looking for how to work differently in light of the learnings we have had during COVID-19.
Okay. Thank you. Then on fees, brokerage and advisory was relatively low in the quarter, as was the cards, as you mentioned before. How does the pipeline look now on the advisory side, and could we expect some bounce back there in the second half? Also on cards, could you elaborate a bit on how you see the cards recovering? You said that consumer cards transactions were back at normal levels, but on the corporate side, how does it look there? Also, is it possible to give the split between corporate and private cards that you have or the income on that?
Yeah. Thank you so much. Rodney, will you take this question, please?
Yes. I didn't hear the first part of the question, but on cards, we have around 80% household cards and 20% corporate. That's approximately the split. Can you please repeat the first question?
That was advisory fee.
Yes. On advisory, yes.
Yeah. Well, first of all, we had a very strong Q1, so the Q1 was a good level. Secondly, these fees varied between quarters depending on when these are down and so forth. There's a very fairly natural volatility between quarters always, and then this quarter was a bit extra volatility.
Okay. Thank you. Lastly, on the lending rates, looking at the three-month mortgages in Sweden, the average lending rates negotiated in June bounced up a bit, I think, also relative to competition. Have you seen any effect on volumes? More generally, how do you see lending rates on mortgages and competition develop from here in the other markets as well?
Yeah. Let me take the competition and also the overall picture of the mortgage business, and Rodney then do have the details about the expected margins and so. In general, I would say that we are doing quite well in the mortgage area. I'm pleased to see the way we develop, and that is in all countries. If you look particularly in Sweden, we are taking around 14% of the front book, a net increase in market for the first five months. Our back book market share is somewhere between around 13.6%. We are at a good level. The June figures we haven't seen yet. In general, the speed and the activity level within mortgage business, which is a very important business, and for our customers, probably the most important business, is progressing very well. Rodney, the margins, please.
Yes. In this quarter, we had a fairly negative impact on deposit margins, minus EUR 31 million. Almost everything of that came actually in Norway. Then we had some improved margins in Denmark following the rate increase there. Also we had some pressure on lending margin. It's fairly moderate, driven, for instance, by higher euro rates, which means that we will have zero rate floors in Finland. You get some margin pressure there. Obviously also improving lending margins in Norway following these rate cuts.
Thank you.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Andreas Håkansson from Danske Bank. Please go ahead. Your line is now open.
Thank you. Good morning, everyone. First one, on capital distribution. You now seem to be probably the best capitalized bank in ECB-regulated, you also have one of the highest profitabilities, you seem to have taken IFRS 9 fully upfront, which makes you also quite unique in Europe. From a regulatory point of view, could you see any reason why you should not be allowed to distribute capital late in the year? Let's say, for whatever reason you won't be, given that you have a capital distribution target of distributing excess capital for buybacks, should we then expect a larger buyback program next year, or how should we consider that dividend for 2019 if it's not being paid out this year? That's my first question.
Yes. Thank you, Andreas. Let me just start and then Mark take over. Happy for you saying so, and we agree that we are very well capitalized. Even though in the different severe stress tests we have done, we clearly have the strength to support our customers and pay out dividends. Then we have the exceed capital, which we aim to distribute to our investors through buybacks. That has not changed. As I also said in my introduction, we have accrued for 2019 dividends, and we are accruing also for 2020 dividends. Mark, please, how to do that, and what is our picture as of now?
As we are all well aware of ECB's guidance of not paying out dividends before October 1st, and then the Systemic Risk Board's recommendation also on not paying out before 2021. There we are awaiting ECB's vulnerability assessment and guidance later in July, is our understanding, on updated guidance towards banks. In what shape and format this will look, depending on their guidance, we will take a notice of. Just reiterating that we have this very strong position, and we have the capacity to distribute, whether it is as dividends according to our dividend policy or through buybacks.
Perfect. Thank you. A bit more detailed question. If I look at your stage 2 loans, you have a coverage ratio there of 4.8%, up from 4.4% in Q1. That is three or even four times higher than some of your local peers. Could you tell us why are you so conservative there, or is that really just you up-fronting IFRS 9 and how should we be thinking about this line going forward?
Thank you. Matthew, would you take that one, please?
Thanks for the question.
He's waiting now.
Sorry. Thanks for the question. The context here is our approach to credit risk that Frank's talked through. Really the three key elements that we've taken a forecast for full-year loan losses of below EUR 1 billion, less than 41 basis points cost of risk. Point 1. Point 2, we see our underlying loan losses at EUR 310 million. Thirdly, that we wanted to build up a significant buffer of EUR 650 million for future loan losses. Your question speaks a bit to the second element there, and also the management judgment. What's happening on stage 2? The underlying position on stage 2, the increase there is really driven exclusively by the macro scenario, by using the new conservative baseline scenario, feeding that through the IFRS 9 model, and by creating the management judgment buffer.
Just to drill down to that a little bit, we see the stage 2 balances have increased by EUR 4 billion. The stage 2 provisions have increased by EUR 201 million. When you take away the management judgment effect, and when you take away the macro scenario effect, we actually see very stable underlying credit development. There's actually a small reversal in stage 2. It's really management judgment in the macro scenario. In terms of coverage ratios, as Frank said, we think it's prudent to take these actions, and we now have much stronger coverage ratios. Overall, our coverage ratios increased from 39% to 43%, and for those five significantly affected industries, our coverage ratio is now up to 49%. That's a bit of detail on what's happening on stage 2.
That's perfect. Finally, just Frank, you were talking about travel, and we all know that internal traveling has been quite high during the past, and I think we now realize that we don't need to travel as much. Could this actually have a meaningful lasting impact on your costs beyond 2020, you think, if you now start to do things differently?
Absolutely. It's one among many thing learnings I clearly believe that we have had during the crisis. We were very well prepared when it comes to meeting customers online, and we probably start a little bit early, several years ago, and of course, have continued to gotten some learning from how to handle it, and how to help our customers move in that direction in order for those to be more available. The customers have embraced that very, very well. At the same time, as we have been having 70% of our people working remotely, we have embraced also internally to work differently, yeah, lead differently. That learning we, of course, want to keep with us going forward, and thereby changing our habits. There's many thing actually, and it's back to operational efficiency.
Also, when you have 70%, meaning more than 20,000 of our employees working remotely, then you really need to empower your employees to do what is needed, of course, within the frames of all our policies, but trust and empower them to do what is right. They have done so fantastic activities during this pandemic. Thereby also we have some learnings, and helping our leaders to be even better to empower our people and thereby you can say decide closer to our customers. I think that's how we see it.
Good. Thanks so much.
Thank you. Our next question comes from Nicolas McBeath from DNB. Please go ahead. Your line is now open.
Thanks. One question on the volume outlook you see in the corporate segment. There was a decline also Q on Q in the lending in the LC&I division. Is that a reflection of you getting more cautious in some segments, and what do you see in terms of volume growth for the next two quarters in corporate? Thanks.
Thank you. Rodney, would you take that question?
Yes. You can say the decline in LC&I very much came from a high level in Q1. If you remember in March, it was an exceptional high activity and requests for loans. We peaked a bit. Actually, if you look at the average volumes in Q2 versus Q1, we are actually up a bit, but the ultimate numbers are lower because of the very high level in March. You can say in terms of outlook, I don't think you should expect any drama here. What we do see is that corporates are still cautious. For a few months, they didn't have any OpEx at all. Now we see that they're coming back on OpEx, but in terms of CapEx, they are very, very limited activity level. I don't think you should expect any real volume growth before the corporate starts to do more investments, basically.
Okay. Thank you. Taking a couple steps back to the capital markets day you had in October last year, regarding the repositioning of the wholesale banking or the LC&I division. You mentioned then EUR 8 billion in RWA reductions from the repositioning. If you could please update on the progress here, how much of those have been taken up by now?
Yeah. Thank you. Mark, would you take that question, please?
We have seen within the segment of the low-yielding customers a reduction in economic capital, and that activity is progressing. What it has been countered by is that there has been an increase in the market risk RWA due to the volatility that we have seen affecting the other market risk. This means that it basically, in combination, this effect is countering the reduction that we are seeing in economic capital.
How much of the reduction have you taken out at this point? Is the EUR 8 billion gross reduction you're targeting then, is that still valid? How much of that has been taken out?
Mark or Rodney, do we have that figure?
We have not disclosed that. We will come back probably in Q3 when we have a year into the program.
Good. Thank you. Okay. Then final question, just also on the financial targets, if you could reflect a bit on those 10% ROE and 50% cost-income ratio by 2022. How has the outlook to reaching these targets been impacted since then on the back of COVID-19 and potentially also other effects such as changes to your capital requirements since then? If you could just elaborate on that, please.
Yes. Thank you. We are reconfirming of our targets. We will and are committed to deliver on the 2022 targets, and we are ready to act to ensure that we will meet the targets, and our priority is leading and will lead us to the targets. That's the confirmation we are doing in this quarter again. On the cost to income of 50%, we are showing good traction. Q2, we are doing 52%, down from 58% a year ago, and the structural improvements are visible. It is about continuing the work, improving our efficiency by creating a strong cost culture across the entire bank. That work is progressing as planned, and I'm pleased with what I see. When it comes to the return on equity, then we are confirming our targets, and many things are delivering on plan.
There will always be some areas where we have some headwinds. We will take mitigating actions. As of now, we are holding quite a lot of capital. We have, as I stated, accrued for the 2019 dividend. We are accruing for 2020 dividend. We also intend to use buybacks to distribute capital. There we are dependent on waiting for ECB to come up with their recommendations. It's too early to conclude on that part. All in all, we are on our plan, following our plan.
Okay, perfect. Thank you.
Thank you. Our next question comes from Sofie Peterzens from J.P. Morgan. Please go ahead. Your line is now open.
Yeah. Hi, here is Sofie from J.P. Morgan. Just a question on your-- I know you usually don't guide on kind of beyond this year on loan losses, but you guide for EUR 1 billion of loan losses in 2020. How should we think about kind of bankruptcies, non-performing loans problems within your customer base next year? Do you think that's the year where we will potentially the NPLs kind of reach the peak, or how do you think about kind of the developments in 2021?
Yeah. Thank you for that question. Matthew, would you take that one?
Yes. As you say, the quantitative guidance, if you like, we're giving is for 2020 with the full year loan losses below EUR 1 billion and less than 41 basis point cost of risk. We're not going to give a number quantitative guidance for next year. I can say a couple of things. In terms of the modeling that we've done that has led to our forecast, we see 2020 as the peak year, and that we see 2021 loan losses being significantly lower than 2020.
Okay. That's clear. In terms of kind of your NPLs for Stage 3 loans, do you expect them to peak in 2021, or do you think we're already see a peak in 2020?
Like I said, in terms of the way we've forecasted and modeled it, we see the peak in 2020. It might be that the timing will be later, but as we've heard from Frank, we've already built up the management judgment buffer now. Regardless of whether they actually are incurred in 2020 or 2021, we've already made provisions, and we have that buffer in place.
Okay. Just going back on the buyback question. You've mentioned a couple of times on the goal that you plan to do buybacks. What's the timeframe? Can you, hypothetically speaking, already do buybacks in 2020, assuming you would get the green light from ECB to pay dividends? Are there any constraints on pay or doing buybacks in 2021?
Mark, can you take that question, please?
Buybacks are obviously subject to the same guidance from ECB as on dividends. Our plan pre the COVID crisis was buyback in 2021, and we will, of course, have to see how the updated guidance looks before, and guiding level of this.
Okay. Buybacks would be more a 2021 thing than a 2020.
Yes. We do not see any buybacks in 2020.
Okay. That's clear. My final question would be, could you just remind us how much the benefit would be from the IT intangibles that is expected to come now from Or, yeah, the IT software intangible benefits that we expect from the ECB now in the third quarter?
Rodney, would you take that, please?
Yes. As you know, we have quite a lot of intangibles in the balance sheet that the impact in the CET1 ratio will be very limited. We're talking a few individual basis points.
Great. Thanks so much.
Thank you.
Thank you. Our next question comes from Riccardo Rovere from Mediobanca. Please go ahead. Your line is now open.
Good morning to everybody, and thanks for taking my question. A couple, two or three, if I may. The first one is on provisioning, on the approach you use. I am curious to know whether that approach has been somehow subject to some kind of coordination/supervision by the regulator, by the ECB, basically, or is just the managerial judgment of Nordea? This is my first question. The second question I have is on the EUR 650 million overlay. If I understand it correctly, this should cover the overall lifetime of the credit exposure, so it must be something that related to losses that you expect to see at some point in 2020, 2021, I would say, and probably 2022 too.
If that is the case, is it fair to say that this overlay should actually cover any bankruptcy that you don't see now, but you expect to see over the next two, maybe three years? It's like saying that the overlay, at some point, you will have to allocate it to single names showing in the real world, the deterioration of PD and LGD and so on. The third question I have is, if assuming this year, for whatever the reason is, you are not allowed to pay a dividend, would you consider at some point in 2021, let's say, to have a payout ratio or distribute more than 100% of your earnings? Like saying, recovering, maybe at least partially, what you were not allowed to pay, provided the macro allows it. Thanks.
Okay. Thank you. Matthew, would you take the credit risk parts, and then we will handle the dividend or the capital distribution question separately, please.
To your first question, this is our judgment as what we think is the appropriate and reasonable level of provisions to make. We, of course, talk to our supervisors, do it consistent with ECB guidance. Secondly, how did we get to the EUR 650 million, and what's it designed for? The EUR 650 million follows from our forecast. We did the forecast for the year up to EUR 1 billion of losses. That was informed by a stress test, our IFRS 9 model, a review of affected sectors, and that gave us a view as to the potential level of losses ahead. What we've decided to build that buffer for the losses for the rest of the year.
By having that EUR 650 million buffer in place, that means we already have in place a buffer for full-year loan losses, because we've already taken a provision of EUR 852 million compared to our guidance that full-year loan losses will be below EUR 1 billion. We'll decide in the coming quarters the exact amounts to charge off against that. That'll depend on the exact timing of losses. If there's a lot of uncertainty, we'd be likely to hold that buffer into next year. That's the reasoning behind the EUR 650 million.
Thank you, Matthew. When it comes to the capital distribution, I think the way we will phrase it is We have no intentions holding excess capital, we are aiming to distribute that to our investors. We are dependent on the guidance from ECB at the moment we are waiting for the guidance. When we have more information, we also know what tools we have and how to use these tools. As you remember, the board has the mandate from the AGM to decide on a dividend, intend to follow recommendation, not to do that before from ECB, not to do that before 1st of October. Let's see what will happen during the summer when ECB concludes their recommendations. This was the last question. We are out of time. Thank you so much for your questions.
I would like, before we close this session, to just thank one of our employees in the bank, and that is Rodney, for his great job during many years within IR. Rodney has been in that role for more than 10 years and has done a great work. Rodney is now moving on to another role in the bank, and Matti is taking over, has started his participation now in the meeting and during the summer, the handover will happen. Welcome Matti, and thank you Rodney for the great work, and we all look forward to talking to all you again after the summer. Rodney, anything concluding from your side?
I would just also thank you. It's been 44 quarters. It's been a very interesting time, and now being head of investments and sustainability in life and pension is something I'm really looking forward to, and also very happy that we have Matti, an old friend of mine, coming in as IR. I know that all analysts and investors, and also you Frank, will be very well taken care of.
Good. Thank you. Thank you so much for this call, and looking forward to talk again