Good morning, everyone, welcome to this presentation where Nordea Bank will present its second quarter results for 2019. My name is Rodney Alfvén, Head of Investor Relations. We will start this event with a presentation of our Group CEO and President, Mr. Casper von Koskull. We will open up for questions for him. After this, it will be followed by a Q&A session with me and Christopher Rees, our Group CFO. Casper, welcome on stage.
Thank you, Rodney. Greetings from a sunny Helsinki, welcome to this Q2 presentation. I'm happy to say that the improved business momentum that we've had in the first quarter has continued and even accelerated in the second quarter, despite a rather tough environment. We are recovering our market share in mortgages. We have even stronger inflow in our asset and wealth management business, and our customer satisfaction is improving in all segments. The volume growth is, however, not offsetting the margin pressure that we see. Costs are a little bit higher in the quarter, mainly due to depreciations and seasonal effects, but we are still on track to meet our guidance. I can reiterate our cost targets for both 2019 and 2021. Credit quality remains solid with 10 basis points of loan losses in the quarter. We expect credit quality to remain largely unchanged in the coming quarters.
On capital, our CET1 ratio improved by 20 basis points to 14.8%. We have in recent years de-risked the bank, invested heavily into digital and compliance platforms, concentrated our operations into the Nordic markets, we have now entered a new phase of customer focus. The financial environment has also changed with expected lower rates for longer, we will soon have more clarity on our capital requirements within the banking union. Due to this, Nordea will review its financial targets, including also capital and dividend policy, with an expectation to present these later in the fall after the third quarter. Further information on timing will be disclosed when available. Let's start with an overview of the numbers. Our income lines are growing with single digit compared to the previous quarter. However, compared to the second quarter last year, both net interest income and fee and commission income is down.
This feeds into a similar trend on total income up by 2% from the last quarter, but down 4% compared to the last year on a like-for-like basis. With slightly higher cost, this gives us an adjusted operating profit of EUR 900 million, down 2% compared to the previous quarter. If we look at our income trend in a little longer perspective, we have now had two consecutive quarters of income growth. However, from a lower level. The large de-risking that we have undertaken, combined with the overall transformation of the bank's structure, has reduced our income. We can now start showing the results of these efforts. We had a trough in income in the fourth quarter of last year and have since been growing the business.
The underlying revenues are up 5% since the fourth quarter last year. When looking at income on a year-on-year basis, income is still down by 2% compared to last year. Costs are 3% higher, mainly due to higher depreciations and amortizations, which actually are according to plan. Q-on-Q, we are 2% up with dynamics similar to the first quarter, i.e. with increasing volumes, however muted by margin pressure. Gjensidige added EUR 80 million of income in the second quarter. We also have a currency headwind in the quarter and somewhat higher cost. Even though we are seeing business momentum pick up, it takes time before we see the increased activity levels fully reflected in our results. On net interest income. Net interest income in this quarter increased due to the accelerating income growth.
The momentum in mortgage lending is good in all four countries, especially in Sweden, where we had the highest monthly market share growth since 2016, and with record high new sales volume in Finland. The increased volumes are, however, not making up for the pressure on margins, and the net effect is still negative on net interest income, which is a similar trend that we also saw in Q1. The margin pressure is mainly on mortgage lending, but we also see some of that on the corporate side. Deposit margins, however, are largely unchanged. As mentioned earlier, lending volumes have been growing steadily and at an accelerated pace lately. Corporate volumes are now growing at a rate of 4.6%, and household volumes growth is now at almost 3% growth, which is positive.
Including Gjensidige, that would be 6.4%. Net fee commission income increased by 1% in the quarter and has been growing steadily since the third quarter of 2018. Here, the key elements are asset management commissions were supported by high asset under management. Corporate advisory fees had a positive development, mainly due to few large deals in the quarter. Payments and cards declined, but from a strong first quarter. In custody, we have some semiannual fees which increased the results in the quarter. Asset under management had a strong second quarter with the highest inflow since the third quarter of 2016. All areas are contributing to this development. Asset under management are now at EUR 307 billion. Private banking was also exceptionally strong. New products in institutional sales and increased sales activity adds additional support to that momentum.
On net fair value, the underlying customer business is stable and the customer activity remains strong. Strong improvements in treasury is driven by performance in fixed income and a positive swing in FX positions. Our market making activities have a continued weak result due to even lower rates, low volatility, and low margins. Looking at the individual business areas, we will start first with personal banking. The good trend in customer activity continued in the quarter in personal banking. Increased volumes and market share of new mortgage lending in all countries, especially in Sweden, where we increased our total market share for the first time in three years. However, as mentioned before, margin pressure is consuming the income from the increased volumes for now. Lending volume in personal banking has increased to EUR 153 billion. After a challenging period, we are showing a positive trend across all countries.
Customer satisfaction has risen to the highest level in six quarters. Especially in Sweden, customer satisfaction has an improving trend, but coming from a lower level. Even though satisfaction among our customers is improving, we are still not satisfied, and we will work to improve this further. One driver of customer satisfaction is improved availability of advisory services. A key enabler for this has been the continued increase in online meetings. This brings convenience and value to our customers as well as to Nordea as we can leverage our full pool of advisors in each of our markets. Our customers want to meet us anywhere, anytime, and the banking platform which we have been built in the past few years is designed to accommodate this. We will see more of this going forward.
We go to commercial and business banking, where we cater for all our small and medium sized corporate customers. Also here, the underlying income momentum continues. In the second quarter, we had high customer activity in particular in the Norwegian and Swedish markets. Although even here we see increased pressures on margins. Lending volumes are increasing also in commercial and business banking, and customer satisfaction is going in the right direction already from a higher and healthier level. Improving customer intensity is really our continued focus. In wholesale banking, customer activity is strong and customer satisfaction is high. We have a very strong position here in the Nordics. Lending volumes are growing at 3% on an annual basis, however, flat Q-on-Q mainly due to the planned further reduction in Russia. A competitive market and higher share of low-risk customers resulted in slightly lower lending margins.
Market making activities continued to be challenged in this low rate environment. Here we will accelerate our efforts to increase capital efficiency and capital velocity. The first half of 2019 marks one of the most active primary market periods on record for Nordea. It supports our leading position, making us the number one credit franchise in the Nordics. Primary activity continued to be high across corporate and institutional clients with several landmark transactions in the first half of this year. The equity markets also continued to be supportive of new issuance, and we participated in several primary transactions both on the corporate and shipping side. Activity in merger and acquisitions has also been high, and we currently see strong interest from corporates in pursuing acquisitive growth.
Lastly, our asset and wealth management division is performing very well with net inflows of EUR 4 billion in the quarter, which shows that it is really coming back to a growth path with 5% annualized growth in the quarter. The strong inflow in private banking continues and is supported by all countries. The persistent work on service excellence is starting to show results. We have initiatives to free up time for advisors to have more time with customers so that we can capitalize on these trends even further. Wholesale distribution, which is indirect sales through international partners, had a very strong performance in the second quarter. Also, the life business in Sweden and Norway delivered solid and strong inflows. 96% of our composites are outperforming their benchmarks year-to-date. If we look at this over the last three years, 81% are outperforming.
Investment performance is actually stronger than I'm ever seen. Customer satisfaction across the markets at a very high level and further improving, and I'm pleased to see that the growth plan in private banking is really now delivering. That's something that we put in motion a year earlier. Going back to the other line items. Let us look at cost. Cost in the second quarter increased by 3% from the previous quarter. This is mainly due, as I said, for seasonal effects and higher depreciations and amortizations. Depreciation amortizations are 7% higher compared to the previous quarter due to the start of new amortization on developed IT projects. This is according to plan, and as we have said previously, depreciations and amortizations will be peaking next year.
Our adjusted cost-to-income ratio increased from 57 to 58, which is not satisfactory. We want to see this decline going forward. We are reiterating our cost targets that cost in 2021 are expected to be 3% below 2018 levels and lower this year than last year. Looking at cash cost. Cash cost continues to decline by another 2% in the second quarter compared to the first. Here, we reiterate our guidance that cash cost is expected to be down by up to 10% by 2021 compared to 2018, and lower this year than last year. Asset quality remains solid. Net loan losses amounted to EUR 61 million in this quarter, which is up from last quarter. This means our loan loss ratio is at 10 basis points in the second quarter compared to seven basis points in the previous quarter.
The increase is mainly due to the fact that we did not have the same level of write-backs in this quarter. Our expectation is that net losses will remain largely unchanged in the coming quarters. Continuing on capital. Our Common Equity Tier 1 ratio increased by 20 basis points in the quarter to 14.8. Meanwhile, REA decreased somewhat to EUR 160 billion from EUR 163 billion in the previous quarter. The capital commitment which we made in the fourth quarter, i.e. to maintain capital at an unchanged nominal level of EUR 21.7 billion, translates to a core Tier 1 ratio of 13.6, which gives us a comfortable 120 basis point management buffer. Looking at some of the cost initiatives that we have launched. During the second quarter, focus has further increased on automation and robotics as levers to increase efficiency.
In the second quarter, 18 more processes were robotized, taking the total number of robotized processes to more than 300 year-to-date. Considering the growth in the robotics pipeline, we expect the favorable development to continue also in the coming months and quarters. In addition, it's important to note that the majority of these processes that are deployed brought non-cost-related benefits. We have continued to simplify products and services. We continue to consolidate the organization into common units. On the income side. As I've already mentioned, we have clear improvements in private banking following strong sales actions. Q-on-Q, private bank new inflows are up to EUR 1.4 billion, which is actually double that we had in the first quarter. This positive flow is from all four countries.
Retail fund flow is expected to continue to be improving also in the second half of this year. On asset under management, we have a new all-time high following strong net inflows in this quarter. All-time high is like-for-like basis after having sold Luxembourg and the Danish life business. We have, in the second quarter, signed an important distribution agreement with John Hancock in the U.S. The stable return product will now be distributed by John Hancock, one of the most well-known brands in the U.S. retail market for savings. A great achievement for and testament of our quality of our products. Mortgage volumes growth pace is picking up, as I have mentioned, in all countries. Month-on-month growth rates are clearly picking up, especially in Sweden and Finland, but also in Norway and Denmark.
Very importantly, we have seen a meaningful increase in employer satisfaction and engagement now for two consecutive quarters. This is very pleasing to me as it, of course, our people that are the key to achieving our ambitions. I thank you for listening, and we are taking some questions now. Rodney, please.
Thank you, Casper. We will have room for a few high-level questions. I guess the first question comes from Mr. Peter Kessiakoff . Please, go ahead.
Hi, good morning. Thank you for that. Just a question or two on the new financial targets that you are commenting on that you would present during the autumn. First of all, Are there any specific characteristics that you're looking for in terms of where you could do additional cost savings? You are mentioning, for instance, that the low-interest environment is making it tougher, for instance, on the trading side within FICC and markets. Looking at the ROCAR within wholesale banking, making some 6% year-to-date. Is that, for instance, one area that we should be looking at? Secondly, are there any big areas where you see that you have been underperforming compared to expectations that could be useful to highlight?
I think when I look at cost, actually I look at cost across the bank, and I think we can improve and should improve across the bank. It is actually also the structural going from four to one as we are doing. In wholesale banking, I think, of course, we look at cost in wholesale banking, but I think the wholesale banking, I think it's more of a capital question, and that's why I say that it's about capital velocity and increasing capital efficiency. Across the bank, we will look at, of course, look at cost and should look at cost. We need to take structural costs down, and I've said that it really, year by year, we need to go down. That is the nature of this industry, and we will deliver on that.
Okay. Just secondly, on the capital side and the dialogue that you're having with the regulators, is the time plan following your previous communication around that? What clarity would you have by autumn that enables you to come out with the new financial targets on the capital?
It will roughly, I think, follow what we have said, and we will have more visibility and clarity on the SREP in the fall. Exactly, that's why we say we cannot say exactly the timing of when that is. That is the reason why we now feel that we can review more broadly our business targets, including, of course, capital and dividend. We cannot say precisely the timing of that. It is in the fall, and I think we will have more visibility from the regulator as well.
Okay, thank you.
I guess the next question comes from Mr. Andreas Håkansson . Please.
Andreas Håkansson ? Yeah, please go ahead. Your line is open.
Maybe take somebody else.
You look at return on equity of 9.1%. You say that you're not happy with the development at the moment. Do you?
You got cut off now.
Yeah. Sorry, Andreas. It seems to be some technical problems. We will see if we can get you back. We don't hear you.
Can you hear me now?
Yes. Loud and clear.
Sorry for that. Now I was asking, Casper, do you think when you look at the return on equity of 9.1%, and you say that you're not satisfied with the financial performance at the moment, do you overall believe that you have a revenue problem or a cost problem?
I think that our focus is on both. I think to drive down cost income, it is about revenues and income. I think we've been very clear on our priorities this year, that will continue. Drive business momentum, which drives income, at the same time reducing cost and structural cost. Then you have the third element, which is capital, of course, not driving cost income, driving the return. I think it's an important element also going forward to make sure that we are rightly capitalized, we have a level playing field vis-à-vis our peers, actually drive a very efficient bank also as it comes to capital. When improving bank's profitability, I believe it is really all three components that we need to focus on. Of course, the fourth component is risk, make sure that risk is at the appropriate level.
When you talk about revisiting your capital targets and your dividend policy, if you're going to improve your profitability from capital, should we expect that you believe you can reduce your capital base?
Again, I said that we will have more visibility in the fall. I think to discuss either the financial targets, capital and dividend policy, the right moment will be in the fall when we are ready with that.
Okay. Thank you.
Thank you.
Thanks, Andreas. The next question, I guess, will come from Magnus Andersson. Please go ahead.
Yes, good morning. Just along the same lines, follow-up there. When I look at the last couple of years, the problem has obviously been that income is down significantly more than your cost base. In your guidance, your previous targets, you focused on absolute costs. Is it fair to assume that you will focus more on the cost-income relation going forward?
I think it's probably fair. I think we will, of course, look at absolute because that gives also tough targets internally. I think you're right. I think the cost income. I'm not a big believer to be too dogmatic on cost income because it's not always the right measure. It depends on which business you are looking at. I think on broad terms, yes, I think we need to look at Each business have a different dynamics. Some business are more capital-driven and some are more income, some more cost. Overall, yes, I would say that I think it's well put. We need to look at cost income going forward.
Okay. Thank you.
Thank you, Magnus. Do we have any further questions online?
Yeah, next question is from Jacob Kruse from Autonomous. Please go ahead, your line's open.
Hi. Thank you. I just wanted to ask, you made some comments earlier about the ECB review of your capital or I think you call it the stress test. Could you just clarify a little bit what the discussions with ECB so far has been with respect to your capital position? Also, do you have some sense of their attitude towards potential buybacks, if that will be something you would pursue for your capital policy? Then my other question was just quickly on the sensitivity to rates. If we do get interest rate cuts in Denmark, Eurozone, and then Sweden, do you have a guidance for how much that would impact your P&L? Thank you.
On regulatory kind of dialogue, of course, I can't comment, but I think we're going through the normal steps here. The AQR has been announced. We had the stress test announced, and we move into the SREP in the fall. Once we have a better picture, as I said, in the autumn, then we can comment on that. I think it would be premature to say anything now. Otherwise, those dialogues have been constructive and normal as everybody would have. I think we need to come back to specifically those questions in the fall. Then on the rate environment, I think if Yeah, Rodney, do you want to-
Yes, please.
go in?
Thanks. Yeah. It is always very difficult to give an exact number because it requires, so to say, how much can you pass on to customers and how much will you keep and so forth. Our assessment is that 50 basis point rate cut will lead to approximately EUR 400 million loss of NII annualized. We are most exposed to Finland, so that is our biggest market there. As long as we are below zero, we are not that dependent on Denmark. The second one is Sweden. That is how it works.
Okay, great. Thank you very much.
Thank you.
It is not an exact science.
No.
I guess it's good to-
It's more of a sign. Do we have any more questions on line?
Yes. Next question is from Paulina Sokolova from Barclays. Please go ahead, your line is open.
Hi. Thank you for taking my questions. Just coming back to the capital and dividend policy. Could you elaborate a little bit more on the rationale for changing these? More specifically, does it have to do solely with your new capital requirements that you're expecting, or is it fair to say that it's also linked to the disappointing operating trends which mean it's more difficult for you to deliver on a progressive dividend policy? That's the first question. The second one is on expenses. Some of your peers are making increasing investments into AML-related capabilities. Could you comment on whether there's additional pressure for you to invest as well? How comfortable are you with your guidance to reduce underlying costs this year versus last year? Thank you.
On the first one, I think, one, I said we will review our financial targets, including capital policy and dividends. We haven't drawn any conclusion yet where we are. I think the starting point, I think I said that it is the fact that we have de-risked the bank. We are now operating in a different environment. We are closer to understanding what the ECB actually wants. Actually it is the right time. We've actually operated with this capital dividend policy and our financial targets for the last three or four years, and we are very much a different bank today, given the shift that has taken place under the environment. That's why it's right to review it and then come. That's why I'm not going to yet speculate where that leads.
I think it is that combination that I mentioned in the beginning that really drives the fact that we need to review. It is really something that our shareholders and investors are welcoming that we do this, and it's the right time to do. The second question was related to.
Can you please repeat the second question?
Cost. Of course, I think the pressures on financial crime and compliance, additional kind of activity, I think is across the whole industry. Here, I have to say that we started this process three, four years ago, took it very seriously. It was my number one priority when I took over as a CEO. We had actually built a very much robust platform. Yes, it will need more things, but I think we have also ramped it up in a way that I'm quite comfortable that we can manage, and we'll be able to deliver on our cost targets, given the fact that we were ahead of the game, I would say. We were behind the game in the beginning, four, five years ago, but now I think we are partly ahead of the game, at least compared to some. This will need further effort.
I think in terms of cost, I think we can manage it with the levels we have. We need to do more efficiency, more automation, et cetera, in that. We'll manage with what we have.
Okay. Thank you.
Thank you, Casper. Thank you all for asking questions and listening in. We will now continue this session with a question and answer session with me and Christopher Rees, our Group CFO. Casper, thank you very much.
Thank you.
You're all welcome to continue. Thank you.
Please go ahead. Your line is open.
Yes, good morning. First, we can take a question on mortgages. We see that you take your market share for a moment in Sweden, and you say that you have good performance in most of the Nordic countries. What's your strategy going forward here? Will you focus on continued volume growth, or will you try to defend margins? We also see the margin pressure. More on costs. We previously got staff costs in different countries in the different business areas. Is that something you could disclose again and share with us? Also if you could just enlighten me, how do you measure customer satisfaction? You show an improvement and all the independent service I see and get when talking to people in the different regions show the opposite. How do you measure it, and is this something we could monitor from the outside? Thanks.
Thank you, and good morning. The first question was on mortgages. As you point out, we're regaining market shares in most of the countries. In Sweden, in the latest month here, we're actually above our back book. We are actually taking some market share, and we need to continue to get back to what our back book is. That's the same in Finland and in Denmark as well. We have come from behind a little bit in the last few years, as Casper alluded to, and now it's a matter of regaining that market share. Our strategy is to get back to that natural growth that we have, which we are well on track on doing. In terms of margin, I think there's an overall margin pressure. There's different dynamics in the different countries.
For example, in Denmark, it's more the lending mix rather than the mortgage margins per se. Sweden, there is, of course, a continuous pressure on the lending side that we see going forward as well.
I should read it that you're more focused on volumes than defending margins then.
I think if you look at our pricing, we are comfortable that in terms of pricing, we need to be competitive. If you're going to win the customers and the volumes, you need to be competitive. That doesn't necessarily mean you always need to be the best, but you need to be competitive. We're actually pretty much well in the middle of the corridor there. We are focused on getting the volumes in because of improving our processes, having more availability, and more client intensity. That is actually supporting the growth.
Okay. Yeah.
In terms of staff cost and the reporting, we will review that and consider it and come back to you on that. Please, there was a third question you had as well. Would you mind repeating?
That's how you measure customer satisfaction, because I don't see you show an improvement and all the service I see and read, and also when talking to different people and companies in the different geographic regions show the opposite. Just how you measure it, and if it's something I could monitor from the outside.
I think we measure customer satisfaction slightly differently depending on which business area you are in. For example, in wholesale banking, we have Prospera rankings and so on and so forth that are external, and I'm sure you can follow those, as well as league tables and so on and so forth. There you can see we have strong positions. We do surveys directly with the clients that we have, and there we look at the trends. They are done both in personal banking as well as in CBB, as well as in private banking. That's why we're disclosing them, so you can actually see the same trends that we see. This is clear questionnaire that goes out to all clients that we have as customers.
What you might see externally are surveys and so on and so forth, generally speaking, that may or may not be Nordea clients. We measure it through service to our clients directly, is the answer.
Okay. Yeah. Thank you.
Just as a reminder to all the participants, if you do wish to ask a question, please press zero one on your telephone keypad now. Next question is from Adrian Cighi from RBC. Please go ahead. Your line is now open.
Hi there. Thank you very much for taking my question. I have a follow-up question on capital. The ECB has done a stress test using the same methodology as the EBA 2018. The AQR was done using a separate, more updated methodology. The stress test is using the same. You had a meaningfully higher impact than the EBA average had last year. Do you expect that to feed into a potentially higher capital requirement, or do you not see the link between the two as direct as that? Any thoughts on that would be helpful. Thank you.
Yes, I think they refer to the EBA methodology, but of course, they've got their interpretation and their own assumptions in terms of what the stresses are on the economy as part of that. Clearly, given the prudential requirement they have, they have had taken some very conservative assumptions in that. That is really one of the differences in the impact. In terms of the impact it will have on capital, that is one of the inputs as we go forward in our dialogue with them in the second half of this year. And we will also have the SREP dialogue, so it's very early days to say. We will have to come back, as stated, when we have a bit more clarity as we go forward.
Let's be clear, you can look at some other banks back in 2014 and 2015, the stress test showed again our resilient capital position and was above all the thresholds that they had, both in the normal scenario as well as the adverse scenario. We have significant margin to those thresholds.
That's right. Thank you very much.
Next question is from Magnus Andersson from ABG. Please go ahead, your line is now open.
Yes. Hi. Just if I may follow up on costs there. When I look at your, and it was mentioned by Casper, amortizations on IT intangibles. When I look at your capital IT investments per year, i.e. the new production, it peaked in 2017 at just above EUR 600 million. It was a similar amount in 2016 and down to a little more than EUR 518 million . How do you see this trajectory going forward over the coming, let's say, three years?
Thank you, Magnus. As you say, we have invested a lot in IT over the last few years. We will continue to invest in IT. Those investments are likely to come down over time. That is also related to our cash cost, which will also come down over time. Hence, I suspect that the capitalization will also therefore come down over time.
What kind of level will you be at? What will be a normal level of annual capitalizations, just so that I get a feeling for how your amortization of intangible IT assets will develop until 2021, 2022. Will it drop significantly from here in 2020, 2021, or?
I think a good guide is to look at where we were now and where we were roughly before the investments in 2015. It will drop steadily-
Okay.
Not drastically.
Around EUR 200 million per year is what you would consider normal?
I think it's a bit higher than that. Technology is a lot more important for banking going forward. I think the overall level should be slightly higher than that. Yes.
Higher than that. Yeah. Okay. Thank you. Then just on headcount, if you can say anything about the outlook. It was up again quarter-on-quarter. When will we see headcount coming down?
The driver of the headcount up is mainly driven with our nearshoring and our workforce planning. The headcount in Poland has gone up significantly, and that is really the main change in this.
Okay.
As well as Baltics. There's always a little bit when you're transferring processes and activities, there is some overlap between the Nordics and the nearshoring here. Over time, you will see these headcounts come down, particularly more in the Nordic countries.
Okay. Net headcount should be down in the coming, let's say, two years.
Yes. Correct.
Yeah. Okay. Thank you.
Next question is from Jacob Kruse from Autonomous. Please go ahead, your line is now open.
Hi. Just wanted to follow up a little bit on the cost and the new target setting. I guess it's fair to say that you're starting to see some momentum in some of your business units after quite a few years of weakness there. How do you think about that kind of startup of growth in relation to coming out with more comprehensive cost reduction initiatives, which I guess to some extent would recreate some of the turmoil that you saw a couple of years ago with the layoffs? I guess my question is, should we think about this as new initiatives of what you will do for the next three years or more setting targets in light of what you're doing and the environment you're operating in?
My second question was just when you look at your projected headcount reductions, I guess we can track the headcount, but you also had quite a number of consultants that were meant to leave the bank. Where are you there? Because I would imagine you've added consultants over time with respect to the whole AML and financial crime focus that has come about. Those were my two questions. Thank you.
Thank you. I said we will revert with the new targets, but to make a point, our key ratios, quite frankly, are not good enough. As I said to all business leaders, business is about making profits and returns for the relevant risk. We need to focus on all the items. It's cost, income, capital, and risk. We are reviewing all our activities, and in terms of looking at the actions that can improve all those four metrics in balance. Cost is therefore a part of that equation, and we need to make the bank and continue to making the bank a stronger bank. We have clear priority of driving income. We are now structured in the group in a way that is going to be easier to drive income as well as cost.
We need to do those two things at the same time, and they need to be sequenced also with our automation initiatives. That is on the targets. The questions on consultants. Consultants, we have a lot. A lot of that is actually related to IT. It's also related to our offshore in India as well as in Poland. Overall, consultants have come down quite dramatically, particularly in Nordic consultants over the last two years. That will be continuing to coming down, of course.
Okay. Thank you.
Next question is from Andreas Håkansson from Danske Bank. Please go ahead. Your line is now open.
Yes, hi. First one, little bit higher level question. You said that your ratios are not satisfactory and 9.1% return on equity could look bad, but when I look at your peer group in the different countries, I mean, in Finland you have OP, and in Denmark you have Danske credit. When I look out in Europe, 9.1 isn't so bad in this environment. What is it really that you're comparing yourselves to?
Well, thank you for that. You're right. If you look at Europe, given where the European banking industry now is, it's a very challenging industry, and the environment is tough. We believe we can do more. If you look at a composite across Nordics and the balance of our business, we have opportunity to do more, and that's what we need to do.
Andreas, I think also what you should look at is in our annual report, we publish our ROE versus a mix of our peers. We have created, so to say, our own ROE index, depending on how big competition we meet country. There you can see that till 2017, we were largely in line with this peer group. Since then, our key ratios have performed less favorably. Now we are some 200, 220 basis points below in ROE.
I think it's important to note here over the next few years. We have, as you know, moved to the banking union, and therefore we are under a different regulatory regime. As we go through that, we need to have clarity on our capital requirements as well as the model development program that we have delivering to the ECB over time, because ROE is also driven by capital. We need to focus very heavily on capital velocity as we go forward.
Thanks. Then on NII. You talk about NII and the margin pressure basically across the board. If we start with retail, we've seen sharp remortgaging activities, particularly in Denmark and Finland, and people are moving over to longer duration mortgages. Could you tell us, should we see a meaningful margin pressure from that also spilling into Q3, or what's your outlook on that?
I think if you look at the margins, lending margin has actually followed a similar trend to what we had in Q1. In Q1, we also had an improving deposit margin of around EUR 20 million that quarter. This quarter it is about EUR 4 million. If you look at what is actually impacting this, is we are losing the tailwind of the deposit margin in Q2.
Sure.
If you look at the volumes contributed EUR 8 million this quarter, while last quarter was EUR 4 million. We are slowly also seeing a better impact of our volume growth coming through in NII. As we look forward, I expect that these pressures and margin pressures to continue. I still expect volumes to improve, I think the margin pressure will outweigh the volumes also in Q3.
Yeah, thanks. I do not know if that was on the retail, where do you see your margin pressure on the corporate side that you mentioned as well?
Maybe see a little bit of pressure. It is pretty much in all countries. I think there is also a lending mix in wholesale banking as some of the higher spreads loans, both in Norway are rolling off and being replaced with lower spread loans. Also we are making some business selections to improve the returns where the credit quality is going up and REA is going down. That also impacts the spreads at which we are doing those. If you look at, for example, CBB as well, there are certain areas where we are not participating as much, which is in tenant-owned associations in Finland and agriculture in Denmark, for example, where, from a risk-based approach, we are deselecting. That is also having an impact on the margins. Overall, we have seen a pickup in the corporate margin pressure.
Thanks. Last question related to NII. We've seen again that a group function had a quite large negative item. Could you tell us, have you had some sort of what we used to talk about hedge in that division or big derivatives position that have now been rolling off and therefore you don't have the same tailwind as before? What's happening here?
The treasury item is going to be volatile as we go forward. The various business have different accounting rules. Some NII is actually accounted for as mark-to-market, and some are accounted for accrual. That's a mismatch, and therefore we need to do eliminations. The eliminations between net for value NII this quarter was EUR 17 million, which explains a lot of that EUR 20 million. We do obviously manage the risk for the group in treasury. Most of the NII revenues we actually give back to the business, as that is where the actual risk comes from. We do have some hedges in place, and they remain in place. It's not related to that. It's more the NII traffic. Of course, spreads have actually come down somewhat, so the liquidity buffer NII is slightly lower this quarter as well.
If there's movement between the divisions, if you see an improvement in treasury, you could see a decline in the divisions rather?
No, it's more of a mix between the lines.
Lines.
in net fair value NII.
Okay. Thank you.
Next question is from Peter Kessiakoff from SEB. Please go ahead. Your line is open.
Yes, hi. Just two follow-up questions from my side. One is on the new financial targets that are due in 2% later during the autumn. Will the ambition be to meet the ROE target of being above peers? Is that something that you think that you could possibly reach in a three-year period, given the levers that you can pull?
We are reviewing that, we will revert back in the second half of this year or towards after Q3, as stated.
Okay. Just secondly on trading income, where you have your guidance of EUR 300 million per quarter, ± EUR 25 million. You mentioned that you expect to be below that level during 2019. Do you still expect that, and do you have any comments to make into 2020?
We still reiterate that. You can see there's very challenging market environments, in particular for the market-making activities. If you think about the last three quarters, we've had negative valuation as well, and in total adding up to over EUR 90 million in valuation adjustments. Negative, that is. That is quite challenging. If you look out, this is a short to mid-term view that it is unlikely we'll meet the bottom end of that range. I do want to stress, though, that the customer business over the last quarter has been pretty good. That business is very stable and at good levels. It is more the market-making activities that are the challenge here, and that will remain so in foreseeable future. You also saw it in May when there was a big flattening of the yield curve and reduction of rates.
That had an impact this quarter.
Okay. Does that comment also relate to 2020, or is it mainly-
That comment relates to the coming quarters going into 2020.
Okay. Thank you.
As long as we have this trading environment, you can say.
Okay.
You tell us when the environment changes. Then we can talk about the future.
Just as a reminder, if you do have any further questions, please press zero one on your telephone keypad now.