Good morning to everyone, and welcome to this audio cast, when we will then present our first quarter result for 2020. We're actually sitting in three different locations, but we will try to do this as good as possible. We will start this event with a presentation of our President and Group CEO, Mr. Frank Vang-Jensen. This will be followed by a Q&A session for investors and analysts. I hand over the word to you, please.
Thank you, Rodney. Good morning, everybody. Today, we have published our first quarter results for 2020. Before going deeper into the results, let me take you back to our last result announcement. In early February, I mentioned that the macroeconomic outlook or environment looked somewhat weaker. Geopolitical risks and trade tensions were increasing, that we were facing new unpredictable health risks. None of those risks are gone, who would have anticipated the magnitude of the COVID-19 outbreak? In recent months, we have witnessed an exceptional time in our history. The pandemic has affected all of us. What started as a health crisis has now escalated into a crisis for the economy and for societies worldwide. At Nordea, we have assessed the effects of the COVID-19 in all the Nordics. One example is our assessment of changed consumer behavior by analyzing data from our card business.
The sectors that have been hit the hardest by the COVID-19 related downturn include travel, accommodation, entertainment, restaurants, and leisure activities. Whereas the impact on groceries is very limited or even slightly positive. Our data shows a drop in consumers' credit card volumes by approximately 30%. The drop for debit cards has been more limited because those are used for everyday shopping. On the commercial card side, we see volumes dropping by more than 60%, and these cards are primarily used to pay for travel and business expenses, which now is close to zero. On the other hand, we see that e-commerce is picking up and that many small merchants are quickly adjusting to more digital business models. Should this continue for longer, the effects for various industries and the largest companies will naturally be even wider and more severe.
Under these extraordinary circumstances, we have been standing firm in our vision and our purpose to be a strong and personal financial partner for all customers. We have also taken measures beyond what we could have imagined only a couple of months ago. We have supported our customers in multiple ways. We have kept the bank fully operational, even with most of our employees working remotely, and we have kept our employees safe. We are now seeing some early signs of societies opening up again, gradually and cautiously. We welcome this development, it is important to remember that the duration and extent of the economic impact of COVID-19 remains highly uncertain. It is too early to predict the shape of the recovery. Despite the economic challenges, we have delivered solid first quarter results.
Compared to the first quarter of 2019, our net interest income was up 5%, net commission income was up 4%. Increased customer activity was the driver for both. However, due to net fair value being highly affected by the turbulence in financial markets, our overall revenues decreased 5%. We continue to deliver on our cost targets. Our overall cost increased 8% compared to the Q1 in 2019. All this led to an unchanged cost-to-income ratio of 57. We are entering this crisis with robust capital ratios, a solid liquidity position, and a strong and a highly diversified credit portfolio across Nordic countries and segments. At the end of the first quarter, we had a strong CET1 ratio at 15%, which is 5.8 percentage points above the regulatory requirement and corresponds to EUR 8.8 billion.
Our liquidity position remains robust with a buffer of over EUR 100 billion and a liquidity coverage ratio of 182%, which means that we have almost twice as much liquidity as required. During past years, we have significantly de-risked our balance sheet. We remain focused on the credit quality of our existing book and new business opportunities in order to grow the bank. Our portfolio is well diversified with limited exposures to industries highly affected by COVID-19 in the near term. We have reviewed the sectors which are expected to be highly impacted in the short term. This is resolved with a loan loss provision of EUR 154 million in the quarter, of which EUR 120 million was an additional management adjustment to provide coverage for the likely near-term increase in loan losses.
Adding the special provision we made in Q3 last year, we now have EUR 327 million in additional provisions, which are made on top of the model-based collective provisions and individual customer-based loan loss provisions. This means that the total amount of allowances is EUR 2.4 billion. It is still too early to conclude on a longer-term outlook of future loan losses as the economic impact of COVID-19 is very uncertain. Further assessments will be made in Q2 following updated macro assumptions. This is aligned with the guidance given by the regulators. In any circumstances, we are ready to adapt to the developments of the crisis and take mitigation actions over time. We will remain committed to delivering on our financial targets in 2022. COVID-19 is an extraordinary crisis for all parts of societies. There has been a dramatic change. In this situation, banks are significant contributors to societies.
We want to be, and we are, part of the solution. Let me be very clear. All actions we are taking in the current situation are fully focused on our immediate priorities. Doing all we can to support our customers, ensure business continuity, and keep our employees safe. Our customer activity level and accessibility have remained high despite limitations and even lockdowns in our branch offices in certain countries. In several parts of the bank, transaction levels have never, ever been higher. At the same time, we have doubled the share of remote meetings from 40%- 80%. In the first wave of the crisis, we quickly launched extended installment free periods and also extended credit facilities to our customers. Through this, we are supporting our customers and societies. These actions have been very well received.
By now we have received more than 60,000 applications from households and corporate customers, and we are steadily approaching 70,000 applications in total. In the corporate sector, customer transactions has been at record high levels. We have proactively contacted more than 30,000 corporate customers and received credit requests worth EUR 13 billion in March alone. Thanks to our committed employees, we have been able to stay fully operational and active during the crisis. More than 70% of our employees have worked remotely from different locations. We have taken several actions to create a safe, healthy, and smooth working setup, and we have secured trading and other critical business operations. Our group crisis management team has led and coordinated all measures taken to strengthen our operational stability and increase cybersecurity measures.
I would like to take the opportunity to thank our customers for their flexibility and our employees for their dedication and extremely hard work during this crisis. Let me now move over to our results. Overall, I'm pleased to see that our business is resilient, and we have been able to report solid numbers. Net interest income increased by 5% and net commission income by 4% due to our continued high business activity. Net fair value was significantly affected by the volatility we experienced in the financial markets, especially the lower interest rates, and the dramatic fall in asset prices which impacted the total operating income negatively. Our efforts to improve operational efficiency are reflected by 8% decrease in cost compared to the same quarter last year, and this led to an unchanged cost-to-income ratio of 57%.
The return on equity was 7.1% in the quarter impacted by significant market turnover and our large capital base. In terms of loan losses, our net loan losses in Q1 amounted to EUR 34 million. As I just said, on top of that, we have made management adjustments of EUR 120 million in total to cover a likely near-term increase in loan losses. I'll get back to this and our credit portfolio later. If you double-click on the income lines, we are seeing a continued positive business performance. Three out of our four business areas are reporting higher income compared to the first quarter last year. Net interest income was up 5% following increased lending volumes, which were up 4%, and with net margin remaining largely stable. Our increased customer interaction levels grew net commission income growth by 4%. Net fair value was down 59%.
The market turmoil led to valuation adjustments in Markets and Treasury, while customer areas were holding up well. Costs were down by 8% compared to the first quarter last year. I'm pleased to see that we are improving our operational efficiency and progressing according to plan. We are heading towards our 2020 targets below EUR 4.7 billion. Part of the big decrease is explained by lower resolution fees in Q1 2020. Adjusting for this, costs are down 3%. In light of COVID-19, bank lending and funding have become even more crucial to keep the economies and our societies running. Nordea has a solid liquidity position to respond to this situation. By the end of the quarter, we had a liquidity buffer of over EUR 100 billion. Our Liquidity Coverage Ratio was 182%, which was an increase of 16 percentage points from the previous quarter.
In addition, our long-term liquidity risk, our Net Stable Funding Ratio also strengthened from the previous quarter to 109.7%. We have witnessed increased customer activity with loans and facility drawdowns, and the positive inflows has been even more pronounced so far. In the first quarter, we issued approximately EUR 5.7 billion in long-term debt, of which approximately EUR 4.8 billion was in covered bonds and EUR 0.9 billion in senior debt. The Nordic covered bond market has been functioning throughout the crisis. In these first weeks of the COVID-19 turmoil, we witnessed challenges in the international funding markets. After news initial shock, and the introduction of central bank facilities and support, the market started to stabilize towards the end of the quarter. Beside our robust liquidity position, we have chosen to participate in selected central bank liquidity facilities to ensure additional capacity to support our customers and their funding needs.
Our funding pricing has remained competitive in the volatile market environment and is among the best within our Nordic and European peers. Our strong capital position gives us a solid foundation to face the next phases of COVID-19. It is also an important building block for sustainable long-term growth, supporting both our economies, and the societies around us. Our CET1 ratio was broadly stable at 60%. Together with the reduction in macro-prudential buffers, this led to a total CET1 buffer above requirement of 5.8 percentage points corresponding to EUR 8.8 billion. We have room to meet increased credit demands while also having the capacity to absorb potentially higher loan losses and credit migration during these exceptional times. The Board of Nordea has decided to postpone the Annual General Meeting to 28th of May, and propose to postpone the dividend decision following the ECB guidelines.
The maximum 2019 dividend amount will be continued to be deducted from the capital position. Our Risk Exposure Amount remained fairly stable. We are increased by EUR 1.9 billion, driven by stronger lending activities, high market risk, and increased counterpart credit risk. The overall rate increase was partly offset by favorable FX effects. Our balance sheet expanded by 8% in Q1 following the increased lending and our participation in central bank facilities in all countries. Fair value changes and repo activities increased the balance sheet by EUR 32 billion. As mentioned, we have a strong capital position entering this crisis. Moreover, we have demonstrated the stability of our capital base during the past years, which gives us resilience in times of high volatility. Our solid capital position gives us a buffer to absorb unexpected shocks like the current COVID-19 situation.
While the EBA 2020 stress test experience was postponed, utilizing EBA 2018 stress test, our current capital buffer of 5.8 percentage points is more than double the size of that result. This stress test was particularly tough on the Nordic economies. In summary, we are entering the crisis with a solid capital position and the willingness to stand by and support our customers. Let's now move on to our risk picture and loan portfolio. We have a long history of low and stable loan losses. Our average loan loss ratio amounts to 19 basis points since and including the most recent financial crisis. During the financial crisis between the year 2008 and 2010, the annual loan loss ratio amounted to 33 basis points, well below the average level of our Nordic peers.
Since then, we have furthermore actively lowered our risk profile by continuously exiting the non-Nordic markets, and we have further reduced our risk appetite in several risky segments. Our credit portfolio is very well diversified across our stable Nordic home markets. We have an even distribution of lending across the four Nordic countries, and 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 distributed across many sectors. We are in close dialogue with our customers, also to follow our credit risk position closely during the ongoing and very uncertain COVID-19 outbreak. For the time being, we have identified that the most immediately affected segments make up 9.6% of our total loan portfolio.
We have made loan loss provisions, taking into account all factual development until end March, not on the basis of indications for our customers that have not yet materialized. We have added a management adjustment into our allowances of EUR 120 million based on the already identified possible losses in the near term. We have not estimated the total loan losses that might occur due to the pandemic because of the great uncertainty about the economic outlook. We consider that our provisioning approach is prudent and fully aligned with regulatory guidance. Nordea is well-positioned to cover future losses with a total of EUR 2.4 billion of allowances on the balance sheet, including the total of EUR 327 million of extraordinary management adjustments. Our underlying credit quality remains solid, the stable trend continued up until start of the pandemic.
In the first quarter, we had a largely unchanged level of impaired loans and a non-performing loan ratio of 1.7%, well below the European average. We have also readily increased our coverage of non-performing loans. This has now increased to 39%. With underlying loan losses of EUR 34 million and the additional management adjustment, our loan losses amounted to EUR 154 million. We are taking care in managing the crisis and have not changed customer ratings due to temporary COVID-19-related liquidity problems. We will continuously monitor the situation, update credit assessments on our customers, and plan to adjust the macroeconomics scenarios used for our collective provisions models in Q2. To conclude, while the crisis imposes challenges for our customers, the bank, and societies as a whole, we enter the situation from a position of strength with a well-diversified low-risk Nordic portfolio and a prudent provisioning approach.
Let's have a closer look at the business area results. We start with Personal Banking. In Personal Banking, mortgages volumes continued to show good growth rates in all four markets, and net interest income increased by 1% and by 3% in local currencies. Net fee and commission income increased 2% and by 5% in local currencies. Total income was 5% lower compared to last year or compared to a year ago, the main reason being lower net fair value. Cost decreased 11%, and the cost-to-income ratio improved to 54%. In Business Banking, our customer activity was very strong, and revenues increased by 12% with double-digit growth in Norway and in Sweden. We have had good customer activity in market products and see a strong trend on all income lines. Cost decreased by 5%, leading to an improvement in the cost-to-income ratio to 46%.
In Large Corporates and Institutions, total revenue were up 3% despite the net fair value decrease. The main driver was strong commission income from equities and advisory. Lending was up 14% from Q4, with high demand in March. Cost came down by 11% from Q1 last year. As mentioned before, net fair value was strongly affected by valuation adjustments of negative EUR 46 million. Operating profit decreased from higher net loan losses in the quarter of EUR 52 million, which includes a management adjustment of EUR 26 million.
The repositioning of LC&I is progressing. It is about reducing capital consumption, increasing active capital reallocation, and taking down costs. Asset & Wealth Management's performance was affected by the financial turbulence, and assets under management decreased by 14% to EUR 280 billion due to low asset prices. The market turbulence also caused negative flow of EUR 3 billion, this was partly offset by higher deposits.
However, total income was still up 2% and net commission income by 7%. Costs were down 14%, leading to a reduction in the cost-to-income ratio to 48. When setting the new direction for Nordea last year, we decided on a new business plan and new financial targets. That means that we will improve our operational efficiency, drive income growth initiatives, and create great customer experiences. We are progressing in line with the plan, and we are focused on execution, also during these challenging conditions. We remain committed to delivering on our financial targets in 2022. It is a bit too early to conclude on the long-term economic consequences of COVID-19, but we are staying agile and ready to take mitigating steps over time. Our immediate priorities are clear, to continue to support our customers and societies, keeping our employees safe, and the bank fully operational during these extraordinary times.
Thank you for listening.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. If you change your mind or start to withdraw your question, simply key zero two. Please wait for your name to be announced, and I do apologize if your name is said incorrectly. The first question we have is from the line of Peter Kessiakoff from SEB. Please go ahead.
Yes, good morning. Thank you for the presentation. Just a few questions from my side. To begin with, the press release that you sent out yesterday evening with the announcement to the AGM, and where you state that you hope to get or hope to pay out the dividend during the autumn or after October. Could you perhaps, to start off with, elaborate on what do you think that you need to see in order to be able to pay it out during the autumn? That's my first question.
Yes. Let me take that one. What we have said is that we have postponed the decision to after October, and what we need is more visibility or better visibility. We will keep the AGM, the annual AGM, the 28th of May, and the decision of the dividend will be postponed to later on in the year, after 1st of October. It is about visibility.
Okay. Is there anything tangible that you could say that this is what we're looking for or anything like that? Is it just?
We think the right thing to do is to postpone it and try to get some more information, what is happening in the world, how does it look, and so on. Of course, as you mentioned, we are entering this with a very strong capital position. We have all the capital we need. We also need to be very humble about the situation right now, and that is the decision the board has taken. Better visibility is what we would like to see.
Okay. Just on the cost savings, and you're, of course, reiterating your message on cost for this year and the long-term ambitions. Are there any challenges that you see on the back of COVID-19 for cost savings during 2020? The savings that you expect to see during the year, could you elaborate on how much is related to staff reductions and how much is related to consultants and perhaps reducing external services, et cetera?
Yeah. We don't give any guidance on the detailed number within the cost line. What we have said is that our target is for the cost line for 2020 to deliver a cost base below EUR 4.7, and that we confirm. I can't really see any changes and why we should not be able to do that. If you look at the composition of the cost line, if you can say so, until now, we have reduced the number of FTEs in the bank by 700, and quite a big number also on the consultant side. What we have also done a lot of other actions. It is less a combination of many, both small and larger initiatives. That drop will continue.
All right. In order to reach the cost savings for this year, is there a need to reduce FTEs further in order to reach that during the year term?
The way we look at it is that we want to increase the operational efficiency in the bank and how then the conversation of, you can say the cost savings will be, that's a little bit secondary. Of course, as 70% of our cost base or nearly 70% of our cost base is related to people, then there will be a people impact. We know that, and that will continue.
Okay. Just kind of a final question from my side. On the provisions, and as you mentioned, you have the allowances, which are management judgment-based. How should we take these and the provisions that you took under the ECB specific ones during the latter part of last year? How should we look at this in combination with IFRS 9, where you will update your macro scenarios, et cetera, in Q2? Does these two tie into each other in any particular way, which means that IFRS 9 could be a smaller effect in Q2?
Yeah. Matthew, are you on the line?
Yes, sir. If you can hear me.
Matthew, Chief Risk Officer, I think that Matthew try to explain how we have done and how it all is interlinked, please.
Yeah. Let me first of all differentiate between the underlying loan losses and then explain the approach we use for the management judgment. I think it's very important to emphasize, we think it's too early a stage to assess the full impact of COVID for the loan losses, and therefore we're not providing an outlook on these. Let me try to break down what the numbers are, and if you look at the net loan losses section in the quarter you'll be able to see the detail that I'm going to give you. In terms of underlying loan losses, I think the key points are as follows. The Q1 underlying net loan loss was at EUR 34 million. In our view that shows positively on the solid underlying credit quality, and that's better than the average quarterly run rate we've had in the past.
The gross losses, again, we give you the detail in the quarter on this, but for write-offs, reversals, and asset sales were EUR 84 million for Large Corporates & Institutions, EUR 21 million for Business Banking, and EUR 39 million for Personal Banking. That LC&I number is mostly driven by increased provisions for offshore customers. That's already a very heavily provisioned book. We could get into that if you want, but the lower oil price impacted collateral values. In all those cases, we did Q1 loan losses based on observed credit developments. We have not at this stage updated the macro scenarios in the IFRS 9 model. We've not attempted to bring forward a re-rating of customers based on coronavirus factors on the liquidity on the firms. That to our mind is very much in line with regulatory guidance.
As Frank emphasized in the presentation, we have provided an additional management judgment on our provisions. An additional buffer we've added to above and beyond the calculated provisions. In addition to that EUR 34 million underlying loan losses, we've made a management judgment of EUR 120 million, and that's for the likely near term impact of COVID-19. Again, important to emphasize, doesn't cover the full impact, but the most likely near term impact. What I could do is take a moment to explain how we assess that. Again, there's more detail in the Q. For the large corporates, we individually assessed the high risk customers in the most affected sectors, and Frank showed you the most affected sectors. That was one reference point for the large corporates.
The Business Banking portfolio, we did a downwards rating adjustment for those small businesses, again, in those most impacted sectors. For Personal Banking, I think important to differentiate between mortgages and unsecured. We don't see a near term impact on mortgages. We have very strong LTV levels. Nordic economies have a strong safety net. If there's going to be an impact in a more severe stress scenario, it'll be over the medium term. We did assess the impact on the unsecured consumer lending and credit cards, and we did that through a downwards rating adjustment. We sat back, looked overall as a matter of judgment, to come up to the EUR 120 million, considering again, the likely near term impact, but not all the way out to the future.
In terms of that future level of loan losses, it's very unclear, too early to conclude on the long-term impact, due to the factors you're very well aware of, uncertain macroeconomic forecasts, uncertainty around lockdown periods, uncertainty around the benefit of government actions. Let me just add, I think it's important to emphasize that whilst we can't forecast the loan losses through to the end of the COVID stress, we do believe we come into the crisis with a very strong starting point. As you would've seen, the current trend on loan losses is very low. We've built up our allowances to EUR 2.4 billion with the latest management judgment of EUR 120 million in addition to the previous ones in Q3 of EUR 100 million. Before that, we have EUR 327 million of management judgments above and beyond the calculated provision level.
We have a very strong track record of credit risk management. You look at our loan losses compared to our peers during the financial crisis. Indeed, since the financial crisis, there's been a significant sustained period of de-risking. Exiting the Baltics, reducing Russia, reducing the offshore portfolio. We think that by having a well geographically diversified portfolio for the four Nordics, good sector diversification, and relatively low exposure to those most impacted areas, we start this situation with a strong credit risk profile. Thanks.
All right. Very thorough. Thank you for that. I'm happy there. Thanks.
Thank you. The next question we have is from the line of Andreas Håkansson from Danske Bank. Please go ahead.
Thank you. Good morning, everyone. Could we just start with a quick follow-up on your loan loss comments there? You say you haven't changed the macro assumptions, but have you made any changes to your oil price assumptions or what's actually being reflected in the market already today? Just a small detailed question as to quality. We see a sharp drop in Stage 2 loans. I think it's 18%. Could you confirm, is that mainly FX? Given that it's in Norway, is that the way I should read it? Let's start there.
Thank you, Andreas. Matthew, could you start and then Rodney and Chris, you can chip in, please.
We have factored in the oil price, as I mentioned briefly, in terms of the collateral values for the offshore book. Our offshore book is one that's shrunk over time. It's gone down by over 40% since 2014. We have already a heavy level of provisions in place there for the impaired customers of EUR 1.7 billion. We've already got a 40% loan loss provision coverage. What happens is the broker values of the collateral is impacted by oil. We've already taken big reductions in broker values over time. We have a very significant haircut there, 25%-50%. Those broker values have come down by 60% over the last five years. We've got quite heavy provisioning on that portfolio.
We took some additional adjustments in that gross LC&I number that I mentioned to you. In terms of oil more generally, we only have 10 customers in the oil segment. One high-risk customer, the other eight majors. Limited exposure to oil and limited impact on the numbers from oil.
Thank you. Just on the Stage 2 loans, the big decline there?
Yeah. Rodney here. You're right, it's 18%, but it's fairly small. It's only EUR 8 billion of our loans that's Stage 2, so it's not a big EUR amount. It's been movements between Stage 2 and Stage 1. It's in percentage big, but given that Stage 2 is so small part of a total loan book, it's been a small movement in EUR terms.
If things have moved from Stage 2 to Stage 1, we're actually seeing an improvement of the quality of loan book in the quarter if it's not FX, right?
We have actually seen a small improvement in the credit quality, yes. That has had a positive impact on the Stage 1, but it's small.
Yeah. Thanks. Yeah, sure. If we start with the mitigating actions, Frank, that you talked about. I remember in the Capital Markets Day, you stressed that your target is overall a cost-to-income target, and if revenues are falling, you're going to do more on costs. Is this what you're thinking about when you talk about mitigating actions, that you're going to look for more potential cost savings if revenues would be on the weak side?
Yeah. Among lots of things, but yes. Our focus now is, as I said, to, of course, continue to support our customers, keep our employees safe, and keep the bank fully operational. Of course, if longer term plays out in a different way than we expect or had hoped, then the mitigating actions will be, one of the tools of course, will be the cost cut.
Yeah. Thanks. Finally, could you tell us a little bit about the momentum on the corporate volume side, how and when it happened in the quarter? What type of margins you saw. Did you see a meaningful improvement in margins as you were adding new clients in a more difficult environment, so reflecting the credit environment, credit spreads and so on? What's the development there? Thanks.
Yeah. In general, we had a quite good momentum or a high activity level during also from the start of the year. The activity level increased even on the corporate side in March. That was very much about credit requests in different ways. The number was actually EUR 13 billion in credit requests in March.
What that then leads to is, of course, an open question, and still there are dialogues and so on. I think it is like the larger companies now, they have started to, of course, ask for, you can say revolver, committed credit facilities, or not to handle the immediate liquidity issue now, but to basically cover for the future. The pricing of these facilities in the market has increased, while the pricing for the more SME broad, you could say, lending, that has been stable.
Okay. Thanks very much.
Thank you.
Thank you. The next question we have is from the line of Magnus Andersson from ABG. Please go ahead.
Yes. Good morning. First two follow-ups on Peter's and Andreas' questions. First of all on costs. Frank, you mentioned the headcount development, which has been quite dramatic now in both in Q4 and in Q1, almost 500 down in Q4 and now 700. With the lion's share for the year, what do you expect to see taken, or do you think headcount will continue down quarter -by -quarter throughout the year from the Q1 level? That's the first one on cost.
Yeah. Let's see how it play out. The cost will come down. Operational efficiency will increase, and then how the composition will be exactly, that's too early to conclude on. The cost will come down.
Yeah. Headcount should obviously continue down below in Q4 than it is now, I guess.
Yes. I don't want to ride on the, you can say, the steepness of the curve. That's for sure.
No.
Yes.
Okay. Thank you. Just on corporate activity and loan demand, if you compare the situation or the two most hectic weeks in March with what you've seen so far in April without revealing any figures or anything, has the behavior changed? Have the corporates calmed down? Also about the impact, when I look at the NII bridge, there's not much impact from lending quarter-on-quarter. Do you think we will see a significant impact quarter-on-quarter in Q2 from that?
I don't want to guide on that one. What I sense and what I hear is that our customers they are calm. Of course, they're concerned. We all are concerned. You can say March was a special month. On the SME side, it was very much about, you can say installment free periods. We had a lot of these. We had a lot of credit, you can say, requests in order to handle the more, you can say, immediate liquidity potential challenges. I should say now it's more ordinary, if you can say so, in the middle of a crisis, but it's more like looking forward now. It is a little bit different type of questions we have from our customers right now or dialogue we have.
Okay. Finally, just on risk-weighted assets, obviously you have a huge capital buffer, it's not the problem, or far from it. Just do you think we will see any procyclical effects on your risk-weighted assets coming into Q2, Q3 from potentially deteriorating asset quality? Will this be a very small effect, most likely?
Chris. Will you take that one, please?
Yes. Thank you, Frank. I can take that one. I think quite frankly, it's a little bit like Matthew said, it's too early to tell. As he said, we will update some of our macroeconomic scenarios as we go into Q2. You will also see from this quarter that risk-weighted assets did go up a bit because of the very significant market risk developments. That will remain, I believe, elevated in Q2 as that is model based and based on a moving average. Of course, as we go through this, we will have to see and wait what the rating migration will be. It is, as said, too early to tell. However, we can all imagine that the pressure, of course, will be more likely upwards on REA than downwards.
As said, you mentioned yourself, we come in with a very strong management buffer, 580 basis points above the requirements. If you look at some of the stress tests, that is a well-covered, particularly if you refer to the 2018 EBA stress test. We are going into the platform a strong position, and we will have to wait and see how the economy and the ratings develop in Q2 and onwards.
Okay. Thank you very much. That's all for me.
Thank you. The next question we have is from the line of Matti Ahokas from Danske Bank. Please go ahead.
Yes, good morning. Matti Ahokas from Danske Bank here. You said you're going to update your macro assumptions and macro scenarios in the second quarter. Yesterday we got some news from the European Commission that they're basically saying that banks should not mechanically apply the expected loss approaches in these times. What's your take on this? Does it mean basically that you have to bring or have to have less aggressive assumptions on, and will you actually apply these commission suggestions, and what are basically your regulators saying about this? Thanks.
Thank you. Matthew, would you take that one, please?
Yes. A couple of points. I think first of all, to say we're still digesting the announcements from the commission. I think it's been welcomed, the actions of the ECB and the EBA and the commission to provide more flexibility and to try to take some of these procyclical effects out. That's certainly behind the reasoning of the actions we took in Q1. We are looking at what the appropriate macro assumptions to take will be. We're doing our own analysis. We also know the ECB will be providing an updated view, the key question also, as Frank mentioned, is what's the rating migration development over the quarter, and what's the best way to differentiate between the short-term liquidity impact and the longer-term solvency impact.
I think all banks are thinking about that, and we want to get some more data points in terms of our customer interaction, see how the macroeconomic facts evolve on the ground, see what's happening in the lockdowns. I think it's helpful that the regulators have provided this flexibility to not be procyclical, but there's still some decisions to be made in Q2 and some facts to be observed before we can approach our Q2 provision levels and how the IFRS 9 model is going to work in practice.
If I may have a follow-up, does it basically mean that it's not 100% sure whether you're going to use these more lenient approaches, that you actually might use their existing models anyway? Is that a possibility?
Like I said, I think in terms of the commission package, which was quite a heavy one last night, a lot of detail there, we're still working through that to decide what's the best approach there. We've not made a judgment call yet on what to do on the commission proposals. We have a lot of dialogue with the ECB, and we will take account of that in terms of the macro, looking through the cycle and then thinking about what the right weights are and what the right micro scenario. That's still to be decided.
Great. Thanks.
Thank you. The next question we have is from Johan from UBS. Please go ahead, sir. Hi, sir, from UBS, your line is open. Can you please say your name and ask your question?
Sorry about that. It's Johan Ekblom from UBS. Just a few follow-ups. Number one is when we think about the capital, clearly we have some volume growth that's likely to come, potentially some procyclicality, and you highlight the big buffers that have strengthened partly because of lower requirements. How do you think about that lowering of the requirement in terms of what is temporary in nature, and we could see reverting to old levels in the future, and what's a kind of permanent reduction? That's the first question. The second question is just, as one of the few banks with big operations across the Nordics, can you talk a little bit about what kind of impact you are seeing across the different countries, given the slightly different approaches to the lockdown, et cetera?
If you expect that to translate into material differences in credit quality on a one or two-year forward-looking basis. Thirdly, just on the cost savings, you mentioned that part of the reason that costs are lower are there's less travel and less entertaining and things like that. What proportion of the cost saves that we're seeing could sort of come back in a more normal operating environment and is driven by these temporary factors?
Thank you. Let me take the cost part and then also try to talk about the Pan-Nordic perspective and also the different government actions. Then we can finalize with the capital side. Of course, you can take that one, please. Let me start with the cost. If you look at the Q1 performance on cost, there is no really positive impact from the COVID-19 situation. Of course, traveling went down a bit in the end of the quarter and so on, but nothing substantially. There will, of course, as we basically nobody is really flying anywhere at the moment, at least very little portion, then of course, this line also aligns potential management and so on with global. It's many small, we can say, pieces that of course, adds up to a certain number. We're not talking about substantially amount.
We're talking about a pretty large amount. The question now, I think, for most companies and also for the areas. What is it that should not come back? What is it that we have learned to do in a different way, creating great customer experience and supporting our customers, aligning our business, coordinate things across, and then still be very efficient? That we want to see more. I think the time, of course, is now to focus on running the bank, helping our customers through the crisis. It is also, and that has started in Nordea, that is, of course, what is it that we want to change? What is it that we don't want to come back to? What is it that we want to do already now? One thing, for example, is traveling. We are truly a pan-Nordic bank.
We have a lot of traveling. One thing is the immediate cost on the traveling as such, it also takes up a lot of time, and so on and so on. We have started to move into how that pattern should look like going forward, for example. That's just one out of many questions we are asking ourselves now, and will, I should say, during the next coming months have follow through. That's one. We take the question two, the different impact, if we can say so, due to the four countries, of course, to some extent common, but also different approaches to the crisis. I think general, I should say that it's encouraging to see the speed and we can also see power behind the decision that has been taken by the governments and also the authorities in the four Nordic countries.
That, of course, will help us as society through this crisis better. It is too early to conclude, I should say, if the slightly different approaches will lead to any longer-term difference in impact on the economies. I think all the countries' governments has taken quite strong decisions, acted fast. Now the question is about how to exit, how to gradually, cautiously starting to open up. At the same time, we can fight the crisis, the COVID-19, but on the other hand, also starting to, you can say, kickstart the economy. That's the question. That part we need to see, and that part is very important. One thing is to close down, another thing is to open up again, and that has just started very cautiously. I think the next coming months also will show how things will play out.
The capital situation, Chris, would you take that one, please?
Yes, I could take that one, Frank. Just to recap what has actually happened here, I think I would put it into three buckets. First, we've seen a significant reduction in the countercyclical buffers both in Sweden, Norway, and in Denmark. Of course, they are there for a reason, and the authorities' action to take them away means actually they are working by reducing the requirements. That for us has actually been the biggest effect. You've had the Finnish authorities reducing the SRB from 3%- 0%, which means the O-SII buffer becomes a binding constraint for us, which is at 2%, so that's a reduction of one. You have the ECB also allowing to dip into P2G, but most importantly, to put forward the proposed CRD V implementation in terms of the capital composition for the P2R which reduced our CET1 requirement.
To come back to your question, I think the P2R, given that is a future regulation that has come forward, I think that is more of a permanent nature. I think the countercyclical buffers, they're there for a reason. They've been taken away now given the crisis that we're going in. One could envisage a time when the economy is better, we're through the COVID, and we know the scenario where I would expect some authorities to cautiously start building that buffer up a little bit again. I would assume that one could be more of a temporary effect, but I think it will take some time before that comes back. The SRB is also related to the overall CRD V implementation. I would expect that one or hope that that could slightly be more of a permanent nature.
That remains, again, to be seen what the authorities do.
Thank you.
Thank you. Due to time constraints, the final question will be coming through, and then we'll be handing over to Rodney, Nordea's Head of Investor Relations, for closing. The last question we have is from Sofie Peterzéns from JPMorgan. Please go ahead.
Hi, you're Sofie from JPMorgan. I was wondering if you could just make a comment on what level of payment holidays you have seen in your portfolio, both on mortgages in the different countries, also on consumer lending. I'm sorry to go back to the question on provisions, but the management overlay provisions of EUR 124 million, how were those distributed across the different countries? I know you gave a distribution across the divisions, but how should we think about that distribution across the different countries? What is your outlook on Swedish and Danish mortgages, the growth based on newspaper articles, it seems like demand has come down quite significantly. Lastly, could you just make a comment on what you expect the capital benefits of the software deductions to be on Nordea? Thank you.
Could you just repeat the last part of the question? I didn't get that one. You broke up there, that came out there.
Okay. Sorry. The capital benefits from the software intangible deduction on capital.
Yes. Okay. Let me take the payment holidays. Matthew, if you have the country numbers, that's about the way we normally divide our business. If you have the numbers, then you can take it afterwards. Chris, the software part that was announced yesterday evening, I think it was, you can take that one. When it comes to payment holidays, it has been between six and 12 months payment holiday. It has been primarily on the mortgages. Of course for corporate customers, it is on their traditional facilities, credit facilities. Consumer finance is not really a big area for Nordea. Of our retail portfolio, it is 5% in mortgages, and that's a very strong book we have. LTV is, I don't have the exact number here, but it's 60+, you can say, in LTV. In the Nordics, you're not experiencing dramatic problems on the mortgage book.
6- 12 months, that's the same way it has been across the Nordics. With different tools due to the one bank, one is different compared to the Swedish one and so on. Matthew, could you take the other question on the book too?
I can give you that. The split is Denmark, EUR 21 million. Finland, EUR 52 million. Norway, EUR 24 million. Sweden, EUR 20 million. The international unit is EUR three million.
Thank you. Chris, would you take the software impairment?
Yes. I can take that one. I think it was supportive information that came out yesterday. As you know, we are still waiting for the EBA to develop the standards with the specifications on how this exemption will be applied, and in particular, the specification of what type of software. We are, of course, at this point in time, digesting this and looking into, in particular, the difference between own development and what we purchase from vendors. In short, we're waiting for more specification, digesting it, and it's a bit too early for us to come out with a guidance on what the impact will be on the CET1. Overall, the direction is helpful.
Could you also make a comment on the outlook for Swedish and Danish mortgages that you are seeing at the moment in terms of new production? For example, there is another European bank saying that new production in some of the European countries is down 80%. Are you seeing anything similar in terms of new production on mortgages?
The new production is not really the biggest driver. If I look at the activity level at the moment in these two countries, it's good activity. You can say Sweden has been a little bit less new homeowners. On the other hand, it has been much higher activity within top-up loans. I think the Danish activity, last intelligence I had, and that is two days old, good activity. We don't see a dramatic change in the activity. We expect, of course, the activity to become lower the coming quarters, that's for sure. No dramatic activity within our businesses right now.
Okay, that's very clear. Thank you.
Thank you. Rodney.
Yes, thank you. This concludes the Q&A session. I know that there are more analysts who wanted to have questions. Please don't hesitate to call me or the IR team. If you want to have a more detailed split up of the loan losses between countries and BAs, you have that on page 13 in the report. This concludes the Q&A and this presentation. Thank you very much for attending this very special quarter. Let's meet again when we disclose the second quarter report in July. Thank you very much.