Morning, everyone, and welcome to Nordea Second Quarter 2020 Financial Results Presentation. We will start this webcast with a presentation from our President and Group CEO, Fred Van Jenssen. 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 Kanborg our CRO, Matthew Elderfield and Head of Investor Relations, Rodney Paolten. Thank you again for joining. With this, I'll turn it over to Frank.
Thank you so So good morning. Today, we have published our 2nd quarter results and half year's financial report for 2020. The impact of COVID-nineteen became increasingly evident during the Q2, and the pandemic continues to severely affect individuals, businesses and societies. The crisis has also accelerated many existing trends. During the past month, 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. All and in all these areas, we have a strong position at the back. For example, the number of mobile payment transactions has been more than doubled compared to the 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 anytime.
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. And 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 Q2, we reported another solid results and continues to progress towards our 'twenty two targets. All key activities to improve our operational efficiency delivered on target.
Costs decreased by 8% from the previous year. This resulted in a clear improvement of our cost to ecom 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. By contrast, the pandemic reduced economic activity during the Q2, especially affecting the fees.
Our income was 2% lower, but the sizable cost reductions led to a profit before loan losses that were 4% higher than last year. We entered the COVID-nineteen 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 percent, which is 5.6 percentage points above the requirement. Clearly, our financial strength enabled us to support our customers and maintain our dividend capacity. But of course, the Board of Nordea intends to follow the ECB's recommendations and will refrain from deciding on a dividend payment before 1st 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 forward 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. However, based on the updated assumptions and the analysis made, we project that total net loan losses for the full year 'twenty will be below €1,000,000,000 equivalent to less than 41 basis points.
Underlying net loan losses were €310,000,000 in the quarter. On top of that, we have made additional management adjustment allowances of €388,000,000 Including earlier management adjustment allowances, we have now a total buffer of EUR 650,000,000 €50,000,000 to cover future loan losses and RFS 9 model improvements. All in all, these provisions are expected to mostly fall 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 2nd quarter continued to show the promising signs seen in the previous two quarters. Net interest income increased by 2%, supported by sales volume growth in all markets. Net fair value recovered and was up 12%, mainly driven by improved trading activities. However, the lockdowns and the market turbulence had a negative impact and affect fee and commission income, which declined by 9%. Our net interest income is driven by volume growth, especially in mortgages in all countries.
Mortgage volumes are steadily increasing and we are growing above or well in line with our target. In the quarter, we also experienced strong deposit growth. Margins have been improving slightly and contributed to the net interest income growth compared to the previous year. However, there's 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 cuts was naturally impacted by lower consumption and economic activity. However, we saw an improving trend towards the end of the quarter. For example, by the end of June, consumer cat volumes recovered and were close to normal in all the Nordic countries. In Sweden, the 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 that we 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 5 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 targets. As a bank, we entered the COVID-nineteen crisis from a position of strength, and we have maintained all our position through the first phase of the pandemic. The CET1 ratio at the end of Q2 was 15.8%, and that and the CET1 canceled buffer was 5.6 percentage points above the requirements. This is one of the highest buffers relative to requirements in Europe.
Our strong capital position gives us a solid foundation to continuing supporting our customers, although future results 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 large as the extended impact from a stress test, both when we compare with the EVA stress test and when we compare with our own latest internal COVID-nineteen stress test. Given the ample CET1 capital buffer, our dividend capacity remains intact.
The Board of Directors has the mandate from the AGM to decide on the 2019 dividend and an evaluation will take place during the autumn. And as I said earlier, the Board intends to follow these recommendations to refrain from deciding on a dividend payment before October. In light of COVID-nineteen, 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 €100,000,000,000 which with a liquidity coverage ratio of 160% and a net debt and funding ratio of 113%.
Customer activity increased with growth in both loans and in deposits. Deposit inflow increased 4% in the quarter. The deal's funding activity and credit spreads largely normalized during the Q2. We issued approximately €9,000,000,000 in long term debt across Nordic and global funding markets at competitive spreads. In subaclements, spreads are back to pre crisis level.
I'll now go through our loan loss provisioning for the Q2 and projections for the full year 'twenty. We are comfortable with our strong credit quality and well diversified loan portfolio. Our exposure to the sector significantly affected by COVID-nineteen 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 on 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 'twenty, we projected total net loan losses below €1,000,000,000 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 310 €1,000,000 Aside from the items mentioned, net loan losses were at a relatively low level of €69,000,000 We didn't observe any major rating downgrades or defaults in the quarter. On top of that, Gon, on top of the underlying loan losses, we have made additional managed and customs allowances of €388,000,000 in the quarter. Given the longer term view, we have now built a buffer of €650,000,000 This already covers for estimated future losses. Our credit portfolio is well diversified across our Nordic home market 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 4 countries with an equal distribution between household and corporate exposures. The last part 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 deep understanding of what impact COVID-nineteen 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 Q1. Based on our updated analysis, the significant affected sectors account for only 4% of our loan book.
In the Q1 report, we accessed the immediate impacts of the COVID-nineteen outbreak. And given the high uncertainty and low visibility during that time, we mentioned that further assessment would be made in the Q2. Now we have completed a forward 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 forecast we use are at least as conservatives as though 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 €1,000,000,000 These projections also cover improvements to our IFRS nine models and take into account the ECB's new guidance on nonperforming loans that will come in force in the Q4 of this year. We are therefore in a position to provide the forecast that our cost for risk for the full year 'twenty losses will be less than 41 basis points. Our understanding of the underlying net loan losses remained on a received a low level during the Q2.
These amounted to €310,000,000 Underlying net loan losses are mainly coming from the oil and offshore sectors. Individual provisions for the revenue 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 RFS-nine models. This accounts for ex 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 €388,000,000 in the Q2. We consider that our approach is prudent and have now been up a significant buffer in total of €650,000,000 for future bill losses. Our total provisions in the first half of the year, therefore, amounted to €852,000,000 which mostly cover the full year loan loss incident. 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 Nordic markets the non Nordic markets already.
We have further reduced our risk appetite in several risky segments. Let me now move on to the business area results. Overall, 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.
Satisfied with our high activity and improving customer satisfaction. Rate movements are affecting DOLF lending and deposit marketing slightly. In total, revenues declined by 3% in local currencies, primarily due to lower consumer activity, which impacted especially payment and coffee. Our savings income was subdued due to lower levels of asset under management, but it bounced back during the quarter. We continue to focus on improving operational efficiency, And 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% to 30% higher compared to the normal activity level. The solid and steady improvements we have seen over 3 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. Cost decline by 3%, leading to an improved cost to income ratio of 48%. Large Corporates Institutions continued its re positioning to create a more focused, less complex and a more profitable business. Revenues grew and net fair value was up, driven by an increased customer activity, strong markets business and recovered asset valuations.
Costs are 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 loss, losses led to a clearly lower ROPA level. A number of mitigating actions to reduce capital consumption are ongoing.
In Asset and Management, revenues declined 4% due to the market turmoil. High cost activity and a market environment with solid inflow increased assets under management by €31,000,000,000 compared to the previous quarter. Total assets under management now amount to EUR 311,000,000,000 coming closer to pre crisis level. Cost 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 we see signs of this in 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 3 key priorities: 1, to optimize operational efficiency 2, to drive income growth and 3, 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-nineteen 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. However, 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 and A session. This is Rodna Albian, outgoing EBITA IR in OREA. And at the Q and A, we will have CEO, Hans Van Janssen.
We will have the acting CFO, Mark Jan Volk our Chief Risk Officer, Matthew Elda Field and our ongoing Investor Relations, Matti Ahokas. So operator, please start the Q and A session.
Thank you. And 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. I mean even if I annualize the H1 number, which includes €200,000,000 of resolution fund fees, I end up below €4,700,000,000 So 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 your the average number of employees, which continues down, but it's down 2% quarter on quarter. So I guess there's some profit based remuneration or something in there. So 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.
Yes. Let me start and then I'll hand over to Marc. We are running the bank structurally with a lower cost base compared to 1 year ago, and we are following our plan. So the overall message that we are giving that we are quite confident when we restate the cost target for the full year 2020. But what is important to be aware of is that structurally, we have lowered our costs.
And that is the aim. Every day, we want to create a strong cost culture. So we are, overall, in the bank, really challenging ways working, bureaucracy, you can say number of people in meetings, the way we interact, how we travel. And that is leading to both a stronger culture, but also a lower and thereby a lower cost run rate. Marc, anything to add here?
Yes. No, I think it's a fair observation, but should also take into account that we have seen significantly weaker Swedish and Norwegian krona during the first half has been supporting the underlying lower cost. We have also seen almost non existing traveling and margin costs, which we would expect to normalize as the crisis begin to abate. And then finally, there has also been delays to some certain IT developments that will also come back in the next second half.
Okay. And on staff costs, is there anything particular there that we bounce back in the second half as well?
We had some reversals in relation to the variable gain in the Q2, but not something in a significant amount.
Okay. Thank you. Thanks for that. And then just on NII. First of all, 2 detailed questions.
I noted just in the NII bridge quarter on quarter that you had quite some support from lower cost of funds. That was 22 €1,000,000 if you could comment on that. And secondly, you mentioned earlier this morning that the Norwegian rate cut cost you SEK 20,000,000 of NII in Q2. Obviously, we will get something of this back when you lowered your deposit rate. And I just wonder if you would share with us how much in the second half?
Yes. The $20,000,000 $22,000,000 in relation to lower funding cost comes in relation to some adjustments in relation to internal pricings. But 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 understable funding ratio has reached 113 percentage points, which gives us some flexibility also in relation to funding in the next quarter. And in relation to the question on the Norwegian deposit impact, then we would expect roughly €10,000,000 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. But overall, we see funding costs are locked in line with what we have seen in the first half.
Okay. And then 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 and or if we will see some additional impact in the 3rd quarter?
Yes. It had a SEK1.6 billion impact to the impact
Sorry, I didn't hear you. SEK1.6
€1,000,000,000 positive year impact in Q2, and we expect additional €1,000,000,000 in Q3.
Yes.
Our next question comes from the line of Robin Reeb from Kepler Cheuvreux.
A follow-up on the costs. So would you say that as we stand now with the half more than the half a year past, 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 FX movements and the traveling and so on? And in that case, would you prefer to make more investments or actually lower the sort of the guidance or the cost for the year that you have anticipated?
Yes. For the first, I can take that one. It's Frank speaking. So we are in this position. So and that I expect us to be continuously basically.
Then of course, Q2 has been, as Mark stated, a little bit special. But it's important to note that structurally and that is what we are looking at, that's the structural continuously reducement 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, 5 functional subjectively.
But it's too early to conclude what amount we will talk about. But we are down structurally. And then, of course, when societies reopen and so, there will be some bounce back, although we are really looking for how to work differently in light of the learnings we have had in COVID during COVID-nineteen.
Okay. And then on fees. So brokerage and advisory was relatively low in the quarter as was the card, 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?
And also on cards, could you elaborate a bit on how you see the cards recovering? You said that consumer cards transactions were back at level at normal levels. But on the corporate side, how does it look there? And also how is it possible to give the split between corporate and private cards that you have or the income on that?
Yes. Thank you so much. Rodney, will you take this question, please?
Yes. On the I didn't heard the first part of the question.
But on cards, we
have around 80% household cards and 20% corporate. That's approximately the 3. Can you then please repeat the first question?
That was advisory on
On advisory. Yes. Well, first of all, we had a very strong Q1. So the Q1 was a good level. And then secondly, these fees varies between quarter depending on when deals are down and so forth.
So there's a very fairly natural volatility between quarters always. And then this quarter was a bit extra volatility.
Okay. And then lastly, on the lending rates and looking at the 3 month mortgages in Sweden, the average lending rates negotiated in June was bounced up a bit, I think, also relative to competition. Have you seen any effect on this on volumes? And then more generally, how do you see lending rates on mortgages and competition develop from here in the
other markets as well? Yes.
So let me take the competition and also the overall picture of the Novus business. And and then you have the details about the expected margins. And so in general, I would say that we are doing quite well in the mortgage. I'm pleased to see the area. I'm pleased to see what the way we develop, and that is in all countries.
So if you look particularly in Sweden, we are taking roughly 14% of the front book, a net increase in market for the 1st 5 months. And our back book market share is somewhere between around 13.6%. So we are in a good level. The June figures, we haven't seen yet. And in general, the speed and the activity level within Morgan's business, which is for Nordea, 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 SEK 31,000,000 Almost everything on that came actually in Norway. And then we had some improved margins in Denmark following the rate increase there. Then also we had some pressure on lending margin. It's fairly moderate, driven, for instance, by higher euro rates, which means that when we have 0 rate floors in Finland, you get some margin pressure there.
But the biggest thing and then obviously also improving lending margins in Norway following these rate cuts.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Andreas Hopington from Danske Bank. Please go ahead. Your line is now open.
Thank you. Good morning, everyone. First one on capital distribution. I mean, you now seem to be probably the best capitalized bank in ECB regulated. And you also have one of the highest profitabilities and you seem to have taken IFRS 9 fully upfront, which makes you also quite unique in Europe.
I mean, from a regulatory point of view, could you see any reason why you should not be allowed to distribute capital late in the year? And 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 then 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. So let me just start and then Marc take over. Happy for you saying so, and we agree that we are very well capitalized. And we even though in different severe stress tests we have done, we clearly have the strength to support our customers and pay out dividend.
And then we have the exceed capital, which we aim to distribute to our investors through buybacks, and that has not changed. And as I also said in my introduction, we have accrued for 'nineteen dividends, and we are accruing also for 'twenty dividends. Mark, please, how to do that and what is our picture as of now? As we are all well aware of,
ETB's guidance of not paying out dividends before October 1 and then this is in Greetbaud's recommendation also on not paying off before 2021. There, we are awaiting ECB's vulnerability assessment and guidance later in July is our understanding on updated guidance towards banks. And then in what shape and format this will look depending on their guidance, we will take notice of. But 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 Ipags.
Perfect. Thank you. Then a bit more detailed question. If I look at your Stage 2 loans, you have a coverage ratio there of 4 point 8%, up from 4.4% in Q1. That is 3 or even 4 times higher than some of your local peers.
Could you tell us why are you so conservative there? Or is that really just you upfronting IFRS 9? And how should we be thinking about this line going forward?
Thank you. Matthew will take Benoit, please.
Sorry. Thanks for the question. So the context here is our approach to credit risk that Frank talked you about, really the 3 key elements that we've taken a forecast for full year loan losses of below $1,000,000,000 less than 41 basis point cost of risk, dollars 1,200,000 We see our underlying loan losses at $310,000,000 And thirdly, that we wanted to build up this significant buffer of $650,000,000 for future loan losses. So your questions speaks a bit to the second element there and also the management driven, what's happening on Stage 2. So 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 nine model and by creating the management buffer.
So just to drill down to that a little bit, we see the Stage 2 balances have increased by 4,000,000,000 dollars The Stage 2 provisions have increased by $201,000,000 But 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. So it's really a management judgment and a macro scenario. And 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 5 significantly affected industries, our coverage ratio is now up to 49%.
So that's a bit of detail on what's happening on Stage 2.
That's perfect. Then finally, just Frank, you were talking about travel. And we all know that internal traveling has been quite high in the past. And I think we now realize that we don't need to travel as much. And could this actually have a meaningful lasting impact on your costs beyond 2020, you think, if you now start to do things differently?
Absolutely. So and it's one among many learnings, I clearly believe that we have had during the crisis. We were very well prepared when it comes to meeting 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, EME differently.
And that learning, we, of course, want to keep with us going forward and thereby changing our habits. So and there's many things actually. Also, 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 our all our policies, but trust and empower them to do what is right. And they have done so fantastic activities during this pandemic.
And 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. So I think that's how we see it.
Good. Thanks so much.
Thank you. Our next question comes from Nicholas Baef from DNB. Please go ahead. Your line is now open.
Thanks. So one question on the volume outlook you see in the corporate segment. And yes, there was a decline also Q on Q in the lending in the LC and I division. Does that is that a reflection of you getting more cautious in some segments? And what is in terms of volume growth for the next few quarters in Corporate?
Thank you. Rodney, will you take that question?
Yes. You can say the decline in LC and I very much came from a high level in Q1. As you remember, in March, it was an exceptional high activity and requests for loans. So we peaked a bit. And actually, if you look at the average volumes in Q2 versus Q1, we are actually up a bit, but the optimal numbers are lower because of the very high level in March.
You can say the in terms of outlook, I mean, 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.
So I don't think you should expect any real volume growth before the corporate starts to do more investments basically.
Okay. And then taking a couple of steps back to the Capital Markets Day you had in October last year regarding Wholesale Banking or the LC and I division, you mentioned that SEK 8,000,000,000 in rea reductions from the repositioning. If you could please update on the progress here, how much of those have been taken out by now?
Yes. Thank you. Marc, would you take that question, please?
Yes. 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 we had due to the volatility that we have seen affecting the other market risk. And this means that basically in combination, this effect is countering the reduction that we have seen in economic capital.
Okay. And how much of the reduction have you taken out at this point? Is the SEK 8,000,000,000 gross reduction you're targeting then, is that still valid? And how much of that has been taken out?
Not roughly do we have that figure?
No, we have not disclosed that. We will come back probably in Q3 when we have a year into the program.
Yes. Thank you. Okay. And then final question, just also on the financial targets. If you could reflect a bit on those 10% ROE and 50% costincome ratio by 2022.
If the or how has the outlook to reaching these targets been impacted since then on the back of COVID-nineteen 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. So we are restating our not restating, but 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 priorities is leading and will lead us to these targets. That's the confirmation we are doing in this quarter again.
We on the cost of income of $50,000,000 we are showing good traction. Q2, we are doing 52, down from 58 a year ago. And the structural improvements are visible. Then it is about continuing the work, improving our efficiency by creating a strong cost culture across the entire bank. And then that work is progressing as planned, and I'm pleased with what I've seen.
When it comes to the return on equity, then we are confirming our targets and many, many things are delivering on plan. There will always be some areas where we have some headwinds and then we will take mitigating actions. As of now, we are holding quite a lot of capital, And we have, as I stated, accruing for the 2019 dividend. We are accruing for 2020 dividend. And we also to have intend to use buybacks to distribute capital.
And there we are dependent and waiting for vis a vis to come up with their recommendations. So it's not it's too early to conclude on that part. But all in all, we are on our plan, following our plan.
Okay, perfect. Thank you.
Thank you. Our next question comes from Sophie Peterson from JPMorgan.
Here is Sophie from JPMorgan. 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 $1,000,000,000 of loan losses in 2020. But how should we think about kind of bankruptcies, non performing those problems within your customer base next year? Do you think that's the year where we will potentially see NPLs kind of reach the peak? Or how do you think about kind of the developments in 2021?
Thank you for that question. Matthew, would you take that?
Yes. So as you say, the quantitative guidance, if you like, we're giving is for 2020 with the full year loan losses below €1,000,000,000 and less than 41 basis point cost of risk. We're not going to give a number of quantitative guidance for next year, but I can say a couple of things that 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 significant
lower than 2020.
Okay. That's clear. And in terms of kind of your NPLs for Stage 3 lines, do you expect them to peak in 2021? Or do you think you will 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. So regardless of whether they actually are incurred in 2020 or 2021, we've already made provisions and we have that buffer in place.
Okay. And just going back on the buyback question. You've mentioned a couple times on the goal that you plan to do buybacks. What's the time frame? Can you, hypothetically speaking, already do buybacks in 2020, assuming you would get the green light from ECB to pay dividends?
Or are there any constraints on doing buybacks in 2021?
Yes. So buybacks are obviously subject to the same guidance from ECB as on dividends. And our plan, pre the COVID crisis, was by lag in 2021. And we will, of course, have to see how the updated guidance looks before and adding further risks.
Okay. The buybacks would be more at 2021 thing than at 2020?
Yes. Yes, we do not see any buybacks in 2020.
Okay. That's clear. Then my final question would be, could you just remind us how much the benefit would be from the ID intangibles that is expected to come now from Orion? Yes, the ID software intangible benefit that we expect from the ECB now in the Q3?
Rodney, would you take that, please?
Yes. You can say, as you know, we have quite a lot of intangibles in the balance sheet that the impact in the CET1 ratio will be very, 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. Cap 2 or 3 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 subjected to some kind of coordinationsupervision by the regulator, by ECB basically? Or is just the managerial judgment of Nordea?
It's my first question. The second question I have is on the €650,000,000 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. So 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 2, maybe 3 years?
And the third question I have is, so it's like saying that the overlay at some point you will have to allocate it to single names showing in the real world that the deterioration of PD, LGD and so on. And third question I have is, if assuming this year for whatever the reason is, you are not allowed to pay a dividend, could you consider at some point in 2021, let's say, to have a payout ratio or distribute more than 100% of your earnings. So like saying recovering maybe at least partially what you were not allowed to pay, provided the macro allows it?
Okay. Thank you. Matthew, would you take the risk, the credit risk parts and then we will handle the dividend or the distribution capital distribution question separately, please. So 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 supervisor to make consistent with ECP guidance. Secondly, how do we get to the CAD630 1,000,000 and what's it designed for? The €650,000,000 follows from our forecast. So we did the forecast for the year up to €1,000,000,000 of losses.
That was informed by stress test, our IFRS nine model, a review of affected sectors and that gave us a view as to potential level of losses ahead.
And so what we've decided is to
build that buffer for the losses for the rest of the year. By having that $650,000,000 buffer in place, that means we already have in place a buffer for full year loan losses because we've already taken the provision of the 852,000,000 compared to our guidance that full year loan losses will be below 1,000,000,000 dollars So we'll decide in the coming quarters the exact amounts to charge off against that. That'll depend on the exact timing of losses. And if there's a lot of uncertainty, we'd be likely to hold that buffer into next year. But that's the reasoning behind the 650,000,000
When it comes to the capital distribution, I think the way we will phrase it is that we have no intentions holding excess capital, and we are aiming to distribute that to our investors. We are dependent on the guidance from ECB. And at the moment, we are waiting for the guidance. And 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 and intend to follow recommendation, not to do that before from ECB, not to do that before 1st October.
So let's see what will happen during the summer when ECB concludes recommendations. This is this was the last question. We're 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, many years within IRR.
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 Nazi is taking over, has started, is participating now in the meeting. And during the summer, the handover will happen. So welcome, Natty, and thank you, Ravi, 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 and Life and Pension is something I'm really looking forward to. And also very happy that we have Masdi, an old friend of mine coming in at IR.
So I know that all analysts and investors and also you, Frank, will be very, very well taken care of.
Good. Thank you. So thank you so much for this call and look forward to talk then.