Good morning
to everyone, and welcome to this call you, Kaust. When Rudi will then present our Q1 result for 2020. We're actually sitting in 3 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 van Janssen.
Then this will be followed by a Q and A session for investors and analysts. So I hand over the word to you, please.
Thank you, Rodney. So good morning, everybody. Today, we have published our Q1 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.
Due to political risks and trade tensions were increasing and that we were facing new unpredictable health risks. None of those risks have gone, but we would have anticipated the magnitude of the COVID-nineteen 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 Lottea, we have accessed the effects of the COVID-nineteen in all the noise. One example is our assessment on of changed consumer behavior by analyzing data from our card business. The sectors that have been hit the hardest by the COVID-nineteen 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 consumer's credit card values by approximately 30%. The drop for debit cards has been more limited because those are used for everyday shopping.
On the commercial cut side, we see volumes dropping by more than 60%, and these cuts are primarily used to pay for travel and business expenses, which now is close to 0. 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 very firm in our vision and our purpose to be a strong and personal financial partner for our 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 back fully operational, even with most of our employees working remotely, and we have kept our employees safe. We're now seeing some early signs of societies opening up again readily and cautiously. We welcome this development, but it is important to remember that the duration and extent of the economic impact of COVID-nineteen remains highly uncertain, it is too early to predict the shape of the recovery. Despite the economic challenges, we have delivered solid Q1 results.
Compared to the Q1 of 'nineteen, our net interest income was up 5%. Net commission income was up 4%. Increased cost and 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, and our overall cost decreased 8% compared to the Q1 in 'nineteen.
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 highly diversified grid portfolio across Nordic countries and segments. At the end of the Q1, we had a strong CET one ratio at 15%, which is 5.8 percentage points above the reversal requirement and corresponds to €8,800,000,000 Our liquidity position remains robust with a buffer of over 100 €1,000,000 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 derisked our balance sheet, and 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-nineteen in the near term.
Still, we have reviewed the sectors which are expected to be highly impacted in the short term. This has resulted in loan loss provision of €154,000,000 in the quarter, of which €120,000,000 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 €327,000,000 in additional provisions, which are made on top of the model based collective provisions and individual customer based loss provisions. This means that the total amount of allowances is €2,400,000,000 However, it is still too early to conclude on a longer term outlook for future loan losses as the economic impact of COVID-nineteen is very uncertain. Further assessments will be made in Q2 following updated macro assumptions.
This is in line 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 'twenty two. COVID-nineteen 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't just 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 has never ever been higher. At the same time, we have doubled the share of the local meetings from 40% to 80%. In the first wave of the crisis, we quickly launched extended installment free barriers and also extended credit facilities to our customers. Through this, we are supporting our customers and societies.
These actions have been very well received, but 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 interactions have been at record high levels. We have proactively contacted more than 30,000 customers and received credit requests worth €13,000,000,000 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 also criticals of business operations. Our group business our group price management team has led and coordinated all measures taken to strengthen our operational stability and increase cybersecurity measures. I'd like to take the opportunity to thank our customers for their flexibility and our employees for their dedication and extremely hardworking 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 at lower interest rates and the dramatic fall in asset prices with 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 percent in the quarter, impacted by significant market turnaround on our large hotel base.
In terms of loan losses, our net loan losses in Q1 amounted to €34,000,000 And as I just said, on top of that, we have made management adjustments of €120,000,000 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. 3 out of our 4 business areas are reporting higher income compared to the Q1 of last year. Net interest income was up 5% following increased lending volumes, which were up 4%, and with margin remained 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 errors were holding up well. Costs were down by 8% compared to the Q1 last year. I'm pleased to see that we are improving our operational efficiency and progressing according to plan.
We are heading towards our 20 targets below €4,700,000,000 Part of the decrease is explained by lower resolution fees in Q1 'twenty. Adjusting for this, costs are down 3%. In light of COVID-nineteen, bank lending and funding have become even more crucial to keep the economies and our societies running. Maria has a solid liquidity position to respond to this situation. By the end of the quarter, we had a liquidity buffer of over €100,000,000,000 Our liquidity coverage ratio was 182 percentage, which was an increase of 16 percentage points from the previous quarter.
In addition, our long term liquidity risk, our net savings summing ratio, also strengthened from the previous quarter to 109.7 percentage. We have witnessed increased customer activity with loans and facility drawdowns, and the positive growth has been even more pronounced so far. In the Q1, we issued approximately €5,700,000,000 in long term debt, of which approximately €4,800,000,000 was in covered bonds and €900,000,000 in senior level. The newly covered bond market has been functioning in 2 of the crisis. In these 1st weeks of the COVID-nineteen turmoil, we witnessed challenges in the international funding markets but often used immediate shock and the introduction of central bank facilities and support, the market started to stabilize towards the end of the quarter.
Despite our robust liquidity position, we have chosen to participate in selected Central Bank liquidity facilities to ensure additional capacity to support our customers and the 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-nineteen. It is also an important building block for sustainable long term growth, supporting both our economies and the societies along us. Our CET1 ratio was broadly stable at 60%, and together with the reduction in macroprudential buffers, this led to a total CET1 buffer above requirement of 5.8 percent points corresponding to €8,800,000 We have room to meet increased credit demands while also having the capacity to absorb potentially higher loan losses and credit migration during the exceptional times.
The Board of Nordea has decided to postpone the Annual General Meeting to 28 May and proposed to postpone the dividend decisioning decision following the ECB guidelines. The maximum 2019 dividend amount will be continued to be deducted from the capital position. Our risk exposure amount remains fairly stable. We are increased by €1,900,000,000 driven by stronger lending activities, 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 €32,000,000,000 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-nineteen situation, while the IBAN-twenty stress test experience was postponed. Utilizing the Iber 20 18 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 loan and stable loan losses. Our Rx loan loss ratio are not to 19 basis points since and including the most recent financial crisis.
During the financial crisis between the year 20082010, the annual loan loss ratio amounted to 33 basis points, well below the average level of our NOI 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 4 Nordic countries and with an equal distribution between household and corporate exposures. The largest parts, approximately 85% of the retail portfolio is mortgages, and the corporate portfolio is well distributed across 9 sectors.
We are in close dialogue with our customers also to follow our credit risk position closely during the ongoing and very uncertain COVID-nineteen outbreak. For the time being, we have identified that the most immediate and effective segments make up of our total loan portfolio. We have made loan loss provisions taking into account all fashion development until end March but not on the basis of indications for our customers that have not yet materialized. We have added a management adjustment into our allowances of €120,000,000 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.
However, we consider that our provisioning approach is prudent and fully in line with regulatory guidance. Midea is well positioned to cover future losses with a total of €2,400,000,000 of allowances on the balance sheet, including a total of €327,000,000 of extraordinary management adjustments. Our underlying credit quality remains solid, and the stable trend continued up until start of the pandemic. In the Q1, we had a largely unchanged level of impaired loans and a nonperforming loan ratio of 1.7%, well below the European average. We have also readily increased our coverage of nonperforming loans.
This has now increased to 39 percentage. With underlying loan losses of €34,000,000 and the additional management adjustment, our loan losses amounted to €154,000,000 We have taken care in managing the crisis and have not changed customer ratings due to temporary COVID-nineteen related liquidity problems. We will continuously monitor the situation, update credit assessments on our customers and plans to adjust the macroeconomic 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, reenter the situation from a position of strength with a very diversified low risk Nordic portfolio and a prudent provisioning approach. Now let's have a closer look at the business area results.
We start with Personal Banking. In Personal Banking, mortgages volumes continue 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 and or compared to a year ago, the main reason being lower net fair value.
Costs decreased 11 percentage, and the cost to income ratio improved to 54%. In Business Banking, our customer activities 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. Costs decreased by 5%, leading to an improvement in the cost to income ratio to 46%. In large corporates and institutions, total revenues 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 €46,000,000 Operating profit decreased from higher net loan losses in the quarter of €52,000,000 which includes a management adjustment of €26,000,000 The repositioning of Bell C and I is progressing. It is about reusing capital consumption, increasing active capital reallocation and taking down costs.
Asset and Wealth Management's performance was affected by the financial turbulence, and asset under management decreased by 40% to €280,000,000,000 due to lower asset prices. The market turbulence also caused major growth of €3,000,000,000 but this was partly offset by higher deposits. However, total income was still up 2% and net commission income by 7%. Costs were down 14 percentage leading to a reduction in the cost to income ratio to 48. When setting the new direction on the year last year, we decided on a new business plan and new financing topics.
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 for 'twenty two. It is a bit too early to conclude on the long term economic consequences of COVID-nineteen, 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 back fully operational during these extraordinary times.
Thank you for listening.
The first question we have is from the line of Peter Kessiakoff from SEB. Please go ahead.
Yes. Good morning, and 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 kind of elaborate on what do you think that you need to see in order to be able to pay it out during the autumn?
So that's my first question.
Yes. So let me take that one. So what we have said is that we have postponed the decision to after October. And what we need is more visibility or better visibility. And so we will keep the AGM, the LOBE or AGM, the 28th May, and the decision of the dividend will be postponed to later this from the year after 1st 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? Or is it just
We think the right thing to do is to perform it and try to get some more information, what is happening in the world, how does it look and so on. But of course, as I mentioned, we are entering companies with a very strong Brexit position and think we have all the capital we need. But we also need to be very humble about the situation right now, and that is the decision the Board has taken. So better visibility is what we like to see.
Okay. Then just on the cost savings. And you're, of course, reiterating your message on cost for this year and the long term ambitions. But is there any are there any challenges that you see on the back of COVID-nineteen for cost savings during 2020? And the savings that you expect to see during the year, could you elaborate on kind of how much is related to kind of staff reductions and how much is related to consultants and perhaps reducing kind of external services, etcetera?
Yes. We don't give any guidance on the detailed number within the cost line. What we have said is that we are our target is for on the cost side for 2020 to deliver a cost base below 4.7 percent, and that we confirm. And 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, then until now, we are we have reduced the number of NPEs in the bank by 700 and quite a big number also on the consultant side.
But what we have also done, a lot of other actions. So it a combination of many, many, many go small and larger initiatives. That job will continue.
All right. But 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 or so?
The way we look at it is that we want to increase the operational efficiency in the back and how then the composition of, you can say, the cost savings will be that's a little bit secondary. But 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. And I know that, and that will continue.
Okay. Then 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 ECB specific while during the latter part of last year. How should we look at this in combination with IFRS 9, which you will update your macro scenarios, etcetera, in Q2?
Does that does these 2 tie into each other in any particular way, which means that IFRS nine could be a smaller effect in Q2?
Yes. So Matthew, are you on the line?
Yes. If you can hear me. So in regards to I'm
Chief Risk Officer, and I think that and Matthew, try to explain how we have done and how it all is intellect, please.
Yes. So let me, first of all, differentiate between the underlying loan losses and 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. So let me try to break down what the numbers are. And if you look at the net loan losses section in the Q, 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 €34,000,000 And 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, and again, we give you the detail in the queue on this, before write offs, reversals and asset sales were €84,000,000 for large corporates and institutions, €21,000,000 for Business Banking and €39,000,000 for Personal Banking. That LTI number is mostly driven by increased provisions for offshore customers. So that's already a very heavily provisioned book.
We could get into that if you want, but the lower oil pipes impacted collateral values. But in all those cases, we did Q1 loan losses based on observed credit developments. So we have not, at this stage, updated the macro scenarios in the IFRS nine model. We've not attempted to bring forward a rerating of customers based on coronavirus factors on the liquidity on the firms. And that, to our mind, is very much in line with the regulatory guidance.
But as Frank emphasized in the presentation, we have provided an additional management judgment on our provision. So an additional buffer we've added to above and beyond the calculated provisions. So in addition to that €34,000,000 underlying loan losses, we've made a management judgment of €120,000,000 And that's for the likely near term impact of COVID-nineteen. Again, important to emphasize, it doesn't cover the full impact, but the most likely near term impact. So I thought 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 effective sectors, and Frank showed you the most effective sectors. And so 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. And then for Personal Banking, I think important to differentiate between mortgages and unsecured, we don't see a near term impact on mortgages.
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 will be over the medium term. But we did assess the impact on the unsecured consumer lending and credit cards, and we did that through a downwards rating adjustment. And then we sat back, looked overall as a matter of judgment to come up to the €120,000,000 considering, again, the likely near term impact, but not all the way out to the future. So 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 fact that you're very well aware of the uncertain macroeconomic forecasts, uncertainty around lockdown periods, about the benefit of government actions. But 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 have seen, the current trend on loan losses is very low. We've built up our allowances to CHF2.4 billion with the latest management judgment of €120,000,000 in addition to the previous ones in Q3 of €100,000,000 before that. We have €327,000,000 of management judgment above and beyond the calculated provision level.
And 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. And indeed, since the financial crisis, there's been a significant sustained period of derisking, exiting the Baltics, reducing Russia, reducing the offshore portfolio. So we think that by having a well geographically diversified portfolio for the 4 Nordics, good sector diversification and relatively low exposure to those most impacted areas, we start at this situation with a strong credit risk profile.
Thank you for that. I'm happy there. Thanks.
Thank you. The next question we have is from the line of Andreas Hakansson from Danske Bank. Please go ahead.
Thank you and good morning everyone. So could you just start with a quick follow-up on your loan loss comments there? Have you made any you said 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? And then just a small detailed question as you call it, we see a sharp drop in Stage 2 loans, I think it's 18%. Could you confirm, is that mainly FX?
And is that 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, Rachael and Chris, you can chip in, please.
Yes. So we have acted 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 1 point €7,000,000,000 We've already got a 40% loan loss provision coverage.
But 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% to 50% of broker values have come down by 60% over the last 5 years. So we've got quite heavy provisioning on that portfolio, but we took some additional adjustments in that gross LCI number that I mentioned for you. In terms of oil more generally, we only have 10 customers in the oil segment, 1 high risk customer, the out there of 8 majors.
So limited exposure to oil and limited impact on the numbers from oil.
And that's on the Stage 2 loans, the big decline there?
Yes, Roden here. You're right. It's 18%, but it's fairly small. It's only SEK 8,000,000,000 of our loans that's Stage 2. So it's not a big euro amount.
So it's been movements between Stage 2 and Stage 1. So it's not I mean, it's a percentage big, but given that Stage 2 is so small part of a total loan book, it's been a small movement in euro terms.
But 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 CET1, But it's more
Yes, sure, sure. Then on 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 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?
Yes. I'm not going to say it. But yes, so our focus now, as I said, to, of course, continue to support our customers, keep our employees safe and keep the bank fully operational. But 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 side.
Yes. And then finally, could you tell us a little bit about the momentum on the corporate volume side? How and when it happened in the quarter? And also 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?
Or what's the development there? Thanks.
Yes. So it picked up. We have again, we had a quite good momentum or a high activity level during the quarter and from the start of the year. But the activity level increased yield and usage on the corporate side in March. And that was very much about credit requests in different ways.
And that the number was actually €13,000,000,000 in credit question in March. What that then leads to is, of course, an open question. And still there are dialogues and so on and so on. And I think the it is like the larger companies now, they have started to, of course, ask for, you can say, revolvers, committed credit facilities, not to handle immediate liquidity issue now but to basically cover for the future. And the pricing of these facilities in the market has increased.
While the pricing for the more SME block would contain lending that has been stable.
The next question we have is from the line of Magnus Andersson from ABG.
Yes. Good morning. First, two follow ups on Peter's and Andreas' questions. First of all, on costs and Frank, you mentioned the headcount development, which has been quite dramatic now in both in Q4 and in Q1, almost taken? Or do you think to see taken?
Or do you think headcount will continue down quarter by quarter throughout the year from the end Q1 level? That's the first one on costs.
Yes. 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.
Yes. But headcount should obviously continue down below in Q4 'twenty than it is now.
That's the effect, yes. But I don't want to write on the, you can say, the steepness of the curve. That's for sure.
No, no, no.
Okay. Thank you. And then just on corporate activity and loan demand. If you compare the situation or the 2 most hectic weeks in March with what you've seen so far in April without revealing any figures or anything, it's just is has the behavior changed? Have the corporates calmed down?
Or and 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. I think our customers, what I sense and what I hear is that our customers, they are calm. Of course, they are concerned. We all are concerned. But you can say March was a special month.
Because on the SME side, it was very much about, you can say, installment 3 paradox. 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 a middle of a crisis. But it's not the it's more like looking forward now.
So it is a little bit different type of questions we have with from our customers right now, what dialogue we have.
Okay. And then finally, just on risk weighted assets. I mean, obviously, you have a huge capital buffer. It's not a problem, but or far from it. But just do you think we will see any procyclical effects on your risk weighted assets coming into Q2, Q3 from potentially deteriorating asset quality?
Or will this be a very small effect most likely?
Chris, would 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 motor based and based on a moving average. And then of course, as we go through this, there will we will have to see and wait what the rating migration will be. It is, as I said, too early to tell. However, we can all imagine that the pressure, of course, will be more likely upwards on Ria than downwards.
But as said, you mentioned yourself, we come in with a very strong management buffer, 5.80 basis points above the requirements. And if you look at some of the stress tests, that is a well covered, particularly versus 2018 EBITA stress test. So we are going into the price from a strong position, and we will have to wait and see how the economy and the ratings develop in Q2 and onwards.
The next question we have is from the line of Marty Orhafas from Danske
Bank.
Matti Orhafas from Danske Bank here. You said you're going to update your macro assumptions and macro scenarios in the Q2. And yesterday, we got some news from the European Commission that 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 the 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?
Thank you. Marcio, would you say that one, please?
Yes. I mean 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 ECA and the commission to provide more flexibility and to try to take some of these post cyclical 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. And the key question also is, 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. So I think all banks are thinking about that, and we want to get some more data points in terms of customer interaction, see how the macroeconomic facts evolve on the ground, see what's happening in the lockdowns. So I think it's helpful that the regulators provide 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 nine 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 heavy, long last night, a lot of detail there. We're still working through that to decide what's the best approach there. So we've not made a judgment call yet on what to do on the commission proposals, but 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 macro scenario. So that's still to be decided.
The next question we have is from Umit from UBS.
Sorry about that. If you have an excellent one from UBS. Just a few follow ups. Number 1 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 buffer that have strengthened partly because of lower requirement.
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. So 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, etcetera, and if you expect that to translate into material differences in credit quality on a 1 or 2 year forward looking basis? And then thirdly, just on the cost savings, I mean, you mentioned that part of the reason that costs are lower are there's less travel and less entertaining and things like that.
To 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, let's say, the pan Nordic perspective and also the different government actions. And then we can finalize with the capital side. And Chris, you can take that one piece. So let me start with the cost.
If you look at the Q1 performance on cost, there is no really positive impact from the COVID-nineteen situation. Of course, traveling went down a bit in the end of the quarter and so on, but nothing substantially. The well, of course, as we basically nobody is really flying anywhere at the moment, at least very lean ocean. Then of course, this line also also lines for sales and management and so on and so on with low So it's many, many small, I would say, pieces that, of course, adds up to a certain number. But we're not talking about substantially amount.
We're talking about a pretty, pretty large amount. So but the question now, I think, for most company and also for Levea is 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, supporting our customers, aligning our business, coordinate things across and be then still be very efficient. And that we want to see more. And I think the time, of course, is now to focus on running the bank, helping our customers through the crisis.
But it is also and that has started in the year, that is, of course, what is that we want to change? What is that we don't want to come back to? What is that we want to do already now? And one thing, for example, is traveling. We think we can work.
We are truly pan Nordic bank. We have a lot of traveling. And one thing is the immediate cost on the traveling as such, but it also takes out a lot of time and so on and so on. That we have started to look into how we that passenger should look like going forward, for example. But that's just one out of many, many questions we're asking ourselves now.
And we'll, I should say, during the next coming months have fall through. So that's 1. When we look when we take the question 2, the impact on a different impact, if you can say so, due to the 4 countries, of course, to some extent common, but also different approach to the crisis. I think generally, I should say that what I think we can it's encouraging to see the speed and the and also see power behind the decision that has been taken by the government and also the authorities in the foreign occupancies. And that, of course, will help us as a society through this crisis better.
It is too boring to conclude, I should say, if the different a small slightly different approaches will lead to any longer term difference in impact on the economies, I think all countries, CorMed has taken quite strong decisions at this fast. And now the question is about how to exit, how to rapidly, cautiously starting to open up. So at the same time, we can fight the crisis, the COVID-nineteen, but on the other hand also starting to even say kick start the economy. That's the question. And so that path we need to see and that path is very, very important.
One thing is to close down and another thing is to open up again. And that has just started very cautiously. Cautiously. So I think the next coming months also will show how things will play out. And then the capital situation, Chris, and the would you take that one, please?
Yes. If I
could take that one, Frank. Just to recap what has actually happened here, I think I would put it into 3 buckets. First, we've seen a significant reduction in the countercyclical buffers in the, both in Sweden, Norway and in Denmark. And of course, they are there for a reason. And the authorities' action that take them away means actually they are working by reducing the requirements.
And that, for us, has actually been the biggest effect. Then you had the provincial authorities reducing the SRB from 3% to 0%, which means the OSI buffer is even more kind of binding constraint for us, which is at 2%, so that's a reduction of 1. And then you have the ECB also allowing to dip into P2G, but most importantly, to put forward the proposed CRD-five implementation in terms of the capital composition for the P2R, which reduced our CET1 requirement. So 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. So one could envisage a time when the economy is better withdrew the COVID, and we know the scenario where I would expect some authorities to cautiously start building that buffer up a little bit again. So I would assume that one could be more of a temporary effect, but I think it will take some time before that comes back. And the SOB is also related to the overall CRD 5 implementation. I would expect that one or hope that, that could be slightly be more of a permanent nature.
But that remains, again, to be seen what the authorities do.
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 Sophie Peterson from JPMorgan.
Yes. Hi. Yuri Staphyl 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. And I'm sorry to go back to the question on provisions, but the management overlay provisions of €124,000,000 how are those distributed across the different countries?
I know you gave distribution across the divisions, but how should we think about that distribution across the different countries? And what is your outlook on Swedish and Danish mortgages? The growth based on newspaper articles, it seems like demand has come down quite significantly. And lastly, could you just make a comment on what you expect the capital benefit of the software deductions to be on Nordea?
Could you just repeat the last part of the question? So I didn't get that one you broke up there that bring up there. So please
Okay. Sorry, the software is there the capital benefit from the software intangible deduction on capital?
Yes. Okay. Let me take the way the payment holidays. Matthew, if you have the country numbers, that's about the way we normally divide our business. But if you have the numbers, then you can take it afterwards.
And 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 6 12 months payment holiday. It has been primarily on the mortgages. And of course, for corporate customers, it is only our traditional facilities credit facilities. Consumer finance is not really a big area for Nordea.
Of our recent portfolio to 5% to mortgages, and that's a very strong book we have. So we is I don't have the exact number here, but it's 60 plus, you can say, in LTV. And in the Nordics, you're not experiencing dramatic problems on the mortgage book. But 6 to 12 months, and that is the common and that's the same way that has been happening across the Nordics. But with a dividend, too, is due to the bond market.
And Denmark was different compared to the Swedish one and so on. Matthew, could you take the other question? Yes. I can
give you that. So the split is Denmark, dollars 21,000,000 Finland, dollars 52,000,000 Norway, 24,000,000 Sweden, 20,000,000 and international units at 3,000,000.
And Chris, would you take the software impairments? Yes.
I can take that one. Yes, I think it was supportive information that came out yesterday. But as you know, we are still waiting to for the EBA to develop the standards with the specifications on how this exemption will be applied and, in particular, the specification of the what type of software. We are, of course, at this point in time, digesting this and looking into, a particular difference between owned developed and what is we purchase from vendors. So 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 of what the impact will be on CET1.
But overall, the direction is helpful.
And could you also make a comment on the outlook for Swedish and Danish mortgages that you're seeing at the moment
in terms of
new production? So there was for example, there was another European bank saying that new production in some of
the European countries is down 80%. Are
you seeing anything similar? The new production is not really the biggest driver. So
And the new production is not really the biggest driver. So what if I look at the activity level at the moment in these two countries, it is good activity. So there has been you can say Sweden has been
a little bit less, you
can say, new homeowners. But on the other hand, it has been much higher activity within top up loans. I think that then activity last in the intelligence I had and that is 2 days old, good activity. So we don't see a dramatic change in the activity. We expect, of course, the activity to be quite lower in the coming quarters, that's for sure, but no dramatic activity within our businesses right now.
Yes,
thank you. This concludes the Q and A session.
I know that there
are more analysts who wanted to have questions, and please don't hesitate to call me or the IR team. So if you want to have a more detailed split up of the loans of the loan losses between countries and BH, you have that on Page 13 in the report. So this concludes the Q and A in this presentation. Thank you very much for attending this very special quarter. And let's meet again when we disclose the Q2 report in July.
Thank you very