Good day, welcome to the second quarter report 2012 international telephone conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rodney Alfvén. Please go ahead, sir.
Thank you, welcome to this conference call. With us, we have CEO and Group President, Mr. Christian Clausen; CFO, Mr. Fredrik Rystedt; and CRO, Mr. Ari Kaperi. I would hand over to Mr. Clausen, and after the presentation, we'll also have a Q&A. Please.
Thank you, welcome to this telephone meeting. I will give a short introduction, hand over to Fredrik, and come back a bit later with some strategy issues. First of all, the key messages, which I'm sure you already heard today, we have a strong income development and a solid cost control, and also a solid credit quality, an improvement in ROE, a low cost-income ratio, and improvement in our quarter one ratio. Most importantly, we keep executing our New Normal plan, and it is indeed improving efficiency and growing income. It's all over the bank we're doing it. In retail, we are mainly redesigning our distribution model, which we have touched upon on previous occasions, and very much improving the capital efficiency.
In wholesale banking, we are deepening the relationships and ensuring that we have the right business selection and pricing in order to mitigate the effects of all the new regulation. Wealth management is very much about increasing efficiency and sharpening the offerings. I will come back to the effects of all these initiatives which we are conducting, but all in all, it's fair to say that they have clearly contributed for building a more efficient bank for delivering these results. Fredrik, will you continue?
Yes. Thank you, Christian. We have had a good quarter with good results, both in terms of income and also in terms of the expense level. Operating profit in the quarter is up by 6%, as you can see from slide five, and also for the full year, a good income generation that is 6% up and cost under control. Generally, a strong quarter. Let me take you through some of the different lines. The net interest income continues to increase as it has done, and this is despite the much lower interest rate affecting our deposit income. If you turn to page seven, you can see that the growth in the business, which has been primarily on the corporate side, but also to some moderate extent on the household side, has contributed with approximately EUR 11 million in the quarter.
The main driver for increased NII, of course, is the lending margin, and that has increased in most areas and in most geographies where the Norwegian market has been, from a margin perspective, the country most improving, followed by Denmark, Sweden, and after that, Finland. Needless to say, of course, the lower interest rate environment that was seen during the quarter has had a negative impact of EUR 27, but the net impact from margins, as you can see, is positive. Also on slide seven, you can see the spread cost that has increased. This has nothing to do with the fact that the funding cost, the funding level has not increased. It has been stable throughout the quarter.
This is merely a volume issue. We have continued to issue long-term funding throughout this quarter, and now we have issued for the first six months an amount equal to the full year redemption. You can see on slide eight that the blended margin has been fairly stable for a number of quarters, and it improved a little bit during Q2. Of course, the negative impact on deposit margins is mitigating the improvements on the lending margin. Volumes are increasing, as I said before. We have an increase up by 5% for the first half year and up 1.5% in local currencies for the quarter. We can see now in comparison to Q1, but also compared to last year, we have an improved demand from Nordic corporates, and especially among those in the bigger segments, up by 6%.
Household growth remains moderate with only minor growth in the quarter, but looking at it in one-year perspective, up by 5%. Deposit volumes continue to increase, 2% in local currencies in the quarter and up by 6%, a good development in more general terms. We continue to be benefiting from a flight to quality. Every time it is a problematic environment, we benefit and are able to attract good deposit volumes. Net commission income on slide 11. We had a good development during the quarter, driven primarily by lending fees, good cards, and custody fees, and in particular custody fees. The asset management fees, as expected, were stable, but we continued with a strong inflow in the quarter and reached very close to EUR 200 billion of assets under management. Net fair value continued at good levels.
We had a good demand also from the customer base, continuous good development throughout the last several quarters in net fair value. As I mentioned previously, we have a set target to remain with flat cost, as you can see from slide 13, we had a slight uptick in expenses during the second quarter, and this has to do with the fact that currency and variable pay slightly increasing. For the first six months, in comparison to 2011 first six months, the expense level is in fact down by 0.4%, adjusting for variable salaries and adjusting for currency fluctuations. I mentioned before that we have continued to have a good access to funding.
We have done several really good transactions in the first half year, and particularly notably in the second quarter, we did our first issuance of the Samurai bond with lots of interest, both as relate to volume and also attractive terms. We continue to receive favorable terms and also having a broad platform for our trading and for our funding. Of course, part of the reason is the fact that we have a maintained AA rating as one of the very few banks in Europe to have that still. The recommendation from the central bank in Sweden is that we also publish the LCR already from the start of the third quarter or in the second quarter report, and we have also done that. You can see that we are LCR compliant for all currencies, and the total group LCR level is 144%.
We have continued to increase the size of the liquidity buffer, reaching now EUR 68 billion. I think given the general situation on the financial markets, we have a very strong and prudent position. Finally, just a few comments on our business model as such and where we generate the results and the income. If you look at slide 16, you can see that we are, as part of our business model being a relationship bank, we have the absolute overwhelming majority of our income from customer-driven business. Only a very small portion relates to hedging activities for those flows that we have in our market business. Approximately 96% is customer-driven, and that has been the case for several years, as you can see from slide 16. With those words, I give to you, Ari.
Okay, thank you. On page 17, we start the asset quality section, the loan losses, they were at the same level as in Q1 and we have the same risk feature than we had in Q4 also. Very low loan losses in Norway, Sweden and Finland and also in other non-Nordic countries. We have two areas of higher tension, and that is Denmark and shipping, which has been at the elevated level. In the following page is a little bit more information from various portfolios. Page 18, as you can see, the pattern is more or less the same, has been the same for now some quarters. Very moderate flow loan losses in Finland, Norway and Sweden. Little bit variation between quarters depending on the few individual corporate customers. Higher levels in Denmark.
As you can see, also the Danish figures have been stable. Following page, we just split the Danish loan losses, split goes into two segments, household and corporate. As you can see, with the household losses, they have been a little bit up in the past three quarters. Whereas with the corporate loan losses, which was the source of highest loan losses in Denmark in the beginning of the crisis, they have stabilized. That was more or less the case also in Q2. No big changes there. Moving to shipping, which is the other area of higher tension on page 20. Still we book this same level, roughly between EUR 60 million and EUR 70 million of quarterly loan losses in Q2. Still the source for these loan losses is coming from these weak shipping sub-segments, i.e. tankers and dry bulk.
Also container market is very weak, but our exposure to the container market is also very low. Our losses are coming from these two sub-segments. You see also in the right-hand graph that the impaired loans in shipping, they are still up. This is what has happened now in the past three quarters. Every quarter there is one or two or three new shipping customers, where we have made an impairment and have booked loan losses. This continued also in Q2. This also indicating that these segments are still weak, and we expect that this will continue for the previous quarters. It's difficult to see that the losses would be so much up even from shipping, but at least it's also difficult to see that they would be dramatically down now in the coming quarters.
Talking about the impaired loans on page 21, you see the total picture, you see that our impaired loans in total, they were quite much up in the second quarter. In terms of euros, it was EUR 700 million. This EUR 700 million is composed by this shipping, which is roughly EUR 120 million of the increase. Denmark is the main part. It's EUR 450 million. The specific issue in Denmark, which is triggering this increase the amount of impaired loans and it is the new rules introduced by Danish FSA, how to impair loans and how to book for the loan losses. That impact on all the change regulation in Denmark, the magnitude of that was roughly two-thirds of these new impaired loans in Denmark, i.e., two-thirds from this EUR 450 million.
You see our total allowances on the right-hand side that we have now increased individual allowances and loan losses, taken down the collective loan losses. The background of this is exactly these new rules in Denmark. The impact of these new loan loss provision rules in Denmark was roughly EUR 808 million in our book. We had been covering for all that type of risk earlier because we had built up these additional buffers in our collective provisions in Denmark, and now we offset this impact from the change regulation by releasing respective amount of collective reserves.
We have built these collective reserves exactly for the reason that we have seen that the Danish situation is difficult, and we didn't see this kind of individual customers going into default, but we saw this kind of increased risk, and thereby we made this kind of additional collective provisions. When we see and we are forced to book more individual loan losses, it's very logical that we are releasing part of this collective provision for it. This change doesn't mean that, or this what we did there doesn't mean that we would expect much lower loan losses in the coming quarters in Denmark. There will always be this kind of new individual customers going into problems. Other ones that we have now booked for loan losses and paid so that still the situation in Denmark is continuing to be difficult.
This is, of course, taking down the likelihood that the individual losses would go up dramatically in Denmark. Impaired loans on page 22. I already mentioned this, that the main part of this increase in impaired loans came from Denmark, whereas in other countries, the situation was stable. All in all, this second quarter didn't change our credit risk picture, so that it was as expected, and that is also roughly in the way we expect this to continue. Moving from credit quality to profitability, page 23. Of course, when you have growth in income, stable cost, and stable risk, i.e., risk-weighted assets, then your return on equity will increase, and this was a good quarter, 12.5% ROE, one of the best or highest quarters in this period.
This is, of course, on the direction with our ambitions to stay at par with the strongest banks in Europe. Of course, it remains to be seen because we have not seen yet all the reports of the European banks, but this is a strong result. The same issue is also visualized in page 24, our profit generation is strong, so that we have been able to more or less double our CET1 capital in five and a half years. This is very important to have this kind of flexibility in our capital base in front of these new regulations, so that whatever these minimum requirements in the end will be, this is the way to adjust for those. Moving to risk-weighted assets on page 25. You can see that we have been able to manage our risk-weighted assets well.
They have been stable throughout this period. In the second quarter, they were down because of the credit quality, improved credit quality. We also were down in the market risk. On contrary FX issues drove true risk-weighted assets up. All in all, we were more or less stable, a little bit down. You can see that this is the level tier we have been now in this period of time of roughly two years. The peak in Q4 last year was because of this Basel 2.5 implementation, which impacted EUR 4 billion of risk-weighted assets, so that we have been able to digest already that part of the new regulation. It means that on page 26, as you can see, our CET1 ratio is improving in a stable manner so that it has been now up by 180 basis points in two years.
What is important to recognize is that we have been able to keep the risk-weighted assets stable or actually a little bit lower, and at the same time with the strong profits, which is partly coming also from the fact that we have been able to continue to support our customers in terms of lending so that we have not de-leveraged our balance sheet, we have not reduced our business. We have been continuing our growth agenda, but with good capital management, we have been able to keep risk-weighted assets stable. Moving to updated estimates related to new regulation. We gave this type of indication in our capital markets day in last autumn in London. We have updated the free cash.
The message is still more or less the same. Yes, there will be a negative impact because of new regulation mainly coming from this CVA risk, which is coming from our derivative exposures taking down the CET1 ratio by roughly 100 basis points. On the other side, we have these kind of new rollouts for our internal models, mainly model advanced model for our Nordic corporate exposures, as well as some additional risk-weighted asset business gains. Those are offsetting this impact of new regulations so that we are roughly talking about a neutral impact after these factors. There is some uncertainty related to this estimation, especially with the CVA risk charge because the regulation is not final, but this is now our best estimation what the impact will be. I'm moving to Christian.
Yes. I'll give a few comments on New Normal plan and strategy. First of all, my favorite slide on page 29, which is our market cap compared to our peer group, which we monitored in 2007, and you can clearly see how we have climbed the imposition. In relative terms, I think we have been given recognition for our efforts in creating a stronger bank and are now number three in the peer group. It's based on a relationship banking strategy, which is the key of Nordea. We are building relationships with our customers so we can advise them, we can be close to them, we can know their risks, and we can do all their business. It is a win-win. The customer gets value, advice, and feel very pleased about the service.
They rate us very high. We get all the business and good risk management. This is a successful strategy. It has been, but it will even more in the New Normal. In the New Normal, it is about finding the right solutions, which are capital, liquidity, and cost-efficient. That can only be done if you're very close to your customer and really have a chance to tailor-make a lot of solutions. All our resources are being directed to this core relationship banking. This also gives us a well-diversified and balanced model. We have both the lending and the deposits. We have all the transactions and all the off-balance sheet business. We run the bank fully integrated, very rate focused, and based on the Nordic structure.
I will not go through the highlights of the quarter, you have probably already heard about it, but dive a bit more into the New Normal plan. We have a large number of initiatives actually working at becoming more efficient in whatever we do. It is very much in capital. There are a lot of things we can do from getting more collateral, to changing products, to changing processes, and to changing models. There are a lot of things and they are all important. Capital is a super expensive resource now, and we have to post a lot of it, therefore this is important. Ari already went through the RWA development, but of course, it is clear that this effort has had a huge impact on our RWA development, which is flat or even down.
The costs we already accounted for, you see our FTE is down, and we will continue having unchanged costs for a prolonged period of time, i.e., taking out efficiency gains of at least 3%-4% a year, which is quite an achievement, I think, remembering that we have a high business momentum and we are not de-leveraging. We are actually adjusting to the New Normal. One of the most important part is actually funding and liquidity efficiency. This is important because there's a lot of efficiency to be gained here, because previously we didn't do that for two reasons. First of all, liquidity was free. It didn't cost anything. Secondly, we didn't really have to post any liquidity buffers. Now we have to post liquidity reserves for more or less everything we do or even post long-term funding reserves.
Therefore, the way we price and the way we put liquidity into the equation and every single customer and every single transaction is important. We are now rolling out our liquidity premium project. It's already out there, and as we go forward in the coming quarters, we will be able to price all transactions with the right to charge on liquidity, which will be very important. So it's not only a capital gain, this is at least as is impossible to get the liquidity equation right and ensure that we select the business we want to do that is priced right also here. We also educate our people and of course the customers in finding solutions which command less liquidity and funding reserves. The result of all these efforts, you can see on the next slide, all efficiency measures are going in the right direction.
In each of the business areas, we are doing exactly this. It has slightly different focuses. In retail, it has a lot to do with our distribution strategy. We have now come 80% through rebuilding our network. We have advisory branches and service branches. That works extremely well, increases efficiency, and we've been able to take out a large number of FTEs. The customers get more satisfied because when they go into a bank with advisory needs, they will meet an educated advisor. If they go into the bank to have a service need, then they will meet an educated service person, which is of course very important. This will continue in the coming years as people change behavior, our customers change behavior, and they start to go to the bank with their fingers instead of with their feet.
That will change considerably the cost of running especially our household strategy. The numbers from retail, as you can see, are developing very nicely. On wholesale, it's very much about business selection. It is about solving the customer needs in a different way, with less capital and liquidity, and ensuring that we only do the business that is priced right. This requires that we deepen the relationships even more, and we are today giving out the number that now 60% of the large corporate customers in the Nordic area post Nordea as a leading bank, which is, of course, a key to actually achieving this efficiency in the customer interface. Also in the wholesale area, we are of course also working very much on our value chains to ensure that we're even more efficient to announce the solutions to the customers.
In our wealth management, it's very much about efficiency in the front line in private banking, about an efficient fund universe, reengineering funds, closing funds which makes this more efficient. In life and pension, of course, keep migrating towards capital-light products. This is quite successful, as you can see from the numbers now, 75% of gross written premiums are in capital-light products or unit link, which means it's a big increase even compared to 2011. This development is important, and it's important to remember that our life and pension operation, when we're talking about capital-light products, is profitable on any ROE measure. It's only the old tradition which is not. By migrating, we increase the profitability a lot.
The conclusion, strong income, solid cost control, improved capital, and improved ROE. The execution of the New Normal plan is continuing exactly according to plan and delivering the expected results.
Thank you. With that, we would like to open up for questions.
Thank you, sir. If you wish to ask a question at this time, please press the star or asterisk key followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, press star one to ask a question. We will pause for a moment to allow everyone to signal. We will take our first question from Nick Davey of UBS. Go ahead, sir.
Yes, good afternoon, everyone. Thanks very much for taking the time. Two questions, please, from my side. First, if I could bring you back please to the slide 27 on the risk-weighted asset efficiency programs that are underway. Could you please just give us a bit more detail around this 1.1 percentage point of Core Tier 1 you're hoping to generate on the RWA side? How much of that is, let's say, within your control based on looking at your internal models and internal capital efficiency, and how much of this is based on the advanced IRB approval from the regulator? Any updates please on the time horizon of these changes. Then the second question, please, on expenses. You've highlighted how at a group level, expenses are well under control in constant FX terms.
I just wondered if you could comment a little bit around the split between retail and wholesale. Retail looks to be down 6% half on half. Wholesale costs are up 9% half versus the half last year. Is this a trend that you're comfortable with, or would you be looking to keep a closer control on the wholesale costs? Thank you.
If I take the first one, this rollout and RWA efficiency, this EUR 19 billion, which will give us a number for the target of these actions. More than half of it is coming from expected advanced model approval. We are not very precise in giving this type of estimations because they are estimations, and in the end, they are subject to approvals. We can't control that so well, but that's now our assessment that a bit more than half of this EUR 19 billion is coming from that model approval. The remaining part is then this kind of identified actions we have been doing together with the business areas and various other internal stakeholders.
It's very much still cleaning the house, so to say, taking in more collateral, sourcing in more information, being more precise in terms of our models and parameters, getting more external data to back up our own parameters, being more precise in various type of collateral pools and issues like that. There are, I would say, if I remember correctly, 75 different type of actions in these categories, smaller and bigger ones. When we are talking about the timetable of all these gains, of course, this approval, we can't influence so much. We are progressing well with our dialogue with Swedish FSA and Nordic FSA that we start to be in this kind of content dialogue. We are contemplating our application. We are verifying some issues.
We have started this more official dialogue, which of course a good indication that we start to be at the end of this very long process. Whether this approval comes Q3, Q4, Q1, it's simply impossible to say at this point. At least now we are starting to be in the inside of the pipeline. These, our internal energy gains, they are coming this time period. We are now talking about this roughly two next years, that part of it is coming already this year and part of it is coming in 2013, minor part in 2014.
Yes, Nick, you were asking about the expenses. Actually, we are pleased with the development in both wholesale and retail. It's pretty much exactly along with our plans. If you look at the retail side of down minus six, it has to do with a very significant reduction of FTEs in the quarter as you may have seen. As regards wholesale, if you look in the report, you'll find that most of that increase or all of it actually in the other parts of business areas. This is mainly related to variable salary. The underlying cost growth in both of these areas are very well contained and also in line with our plans.
Okay. Very clear. Thank you.
Thank you, sir. We will now take our next question from Claire Kane of RBC. Please go ahead, madam.
Hi there. Can I first have a follow-up question on slide 27? Did I hear correctly that on the CVA, that is a gross 200 basis points impact, and then there'd be a positive 100 basis offset for that one percentage point overall reduction? Just to clarify there. My second question is on asset quality. Your gross loan losses this quarter were the highest since Q2 2009, and clearly benefited from the reversals of your collective provisions. You now have half your impaired loan book in Denmark. Can you talk us through how we should think about loan losses there? How much do you have left of collective provisions in Denmark, and how will the rule changes increase the amount of provisioning going forward on a new impaired loan in Denmark, please? Thank you.
Okay. First is clarification on page 27. Sorry if I was unclear, but no, that was not right what you heard. This 100 basis points impact is coming from CVA, not 200. It's 100. Coming to your second question about this level of high gross loan losses. Yes, that's right. They were high. They increased, especially these individually assessed new loan losses, and the impact was very much coming from these new Danish rules. It was EUR 8 million impact from that. If you take away this EUR 8 million, then we are still at the high end but not at the highest of the quarters. We have still remaining collective provision in Denmark, roughly at the level of EUR 100 million, a little bit more than EUR 100 million.
Still we have that collective reserve includes some kind of safety cushion that it's a little bit higher amount than our models are giving us as the needed collective provisions in Denmark. Still, I would say that we are a little bit on the safe side in the collective reserves in Denmark. Now this, what happened in the new Danish rules, that was very strict new principles, how to book for the loan losses. Just to give you some kind of example, for example, if you have a commercial real estate client with a negative equity, then actually that triggers already the impairment, and you have to impair this difference in terms of loan losses regardless of the cash flows of that type of customer. Then it's a very strict way of impairing customers and looking for the loan losses.
In normal case, in other countries and the practice, we have used these kind of normal impairment rules, so that when we identify a customer with a clear risk, where we have a clear risk of loan loss, then we make this kind of very transparent impairment calculation, where we calculate for the collateral value and then when we calculate for the future cash flows. If we have a difference, then compared to our exposure, then we book a loan loss. This cash flow impact is more or less taken away in Denmark with these new rules. It means that there are lots of customers who are simply very normally paying back their or servicing their debts. Nevertheless, if there is a negative equity in that type of asset-backed financing, that has to be impaired and for the loan loss.
Of course, this means for the future, as I said, that now because we have gone through our whole lending book in Denmark in light of these new rules, then now we have definitely identified lots of new impaired customers and have put lots of new loan losses for these impaired customers so that it's very likely that this trend is not going to be repeated quarter after quarter. Still, we will have a few new loan loss customers and impaired customers also in Denmark, because, of course, there will always be new ones. This is more or less the situation we have. What does this mean for the level our loan loss is going further?
I would say that we are expecting more or less that the same pattern to continue for the coming quarters. We will still have elevated level of losses in shipping and in Denmark, and we will still have low and stable losses in other parts of our portfolio. Still the fact is that the performing part of our portfolio, especially corporate portfolio, is still improving so that we have more upgraded customers than downgraded customers. This healthy portfolio is improving so that we are dealing with this kind of tail problem in Denmark and this kind of very difficult market situation in shipping.
Thank you. That's extremely helpful. Could I just have one follow-up? Given the provision is based on the real estate or market values, what's your outlook for the Danish real estate prices from here?
The real estate and house market is still weak in Denmark, so that it's difficult to believe in quite a kick-off. Then again, through the first half it has been a little bit down. In the past year it has been down, it's been stable, it has been then a little bit down again. Now it's stabilizing according to our views. Perhaps difficult to say if we have seen the bottom, but at least it should not go down very much from these levels. Now we are starting to have these kind of strong fundamentals so that the disposable income or affordability in the Danish household is strong compared to this level of house prices. That goes also for the commercial real estate, so that the rental cash flows, they are servicing well to the values where we are today.
Difficult to say or have firm opinion, but the downside risk is not so big anymore according to my understanding.
Excellent. Thank you very much.
Thank you. Our next question is from Omar Keenan of Nomura. Please go ahead, sir.
Hi. Good afternoon. Thanks very much for taking the questions. Just two questions if I can. Firstly, there's been a good job done in keeping the group margin stable despite deposit margin pressure. In Denmark, how much repricing do you think we can get in from here, given that the outlook is for further deposit margin pressure? Secondly, just thinking about the Swedish regulator, it seems like on the one hand he's allowing risk weight efficiencies and improving models. On the other hand, he's increasing the Core Tier 1 level requirements. It seems to be just taking with one hand and giving with the other. Now he's delayed the mortgage risk weights for a while. What do you think his strategy and goals are? What do you think he's trying to do? Thanks very much.
Yes. The first question was on the Danish margins. Of course, we rarely give any forecast as to the margin. Of course, as we strive to continue to improve margins should go up on the back of the regulatory implications from more capital and more, of course, funding costs. If you look back a year or two on the margin development, it has off the back of reference rates or repo rates, there's been a significant uptick, but so has funding costs. In real terms, the margins have, of course, improved. Of course, you got to remember that we come from a more or less 10 or 15-year contraction of margins. Hopefully we'll be able to continue to improve the margins, but it's really very difficult to give any sort of forecast.
It is part of course, our strategy to ensure a fair pay for the business that we do. It's difficult to give more comments on that. Relating to the capital requirements and the regulator in Sweden, I think there are two different things. The Swedish regulator is among the toughest, if not the toughest, in terms of requiring high capital levels, specifically on the Core Tier 1 ratio. The suggested levels for Core Tier 1 ratio in 2013 a nd 2015 are very high. Of course, that remains to be seen whether that will be ever implemented, but it is very high. The other hand, I think the model changes that are now being granted are very much in line with the Basel III methodology.
It's not very easy, if you put it that way, for the regulators to sort of prevent those model implications or implementations to actually take place. I think the overall sense from the regulator is that we should be
Implementing sound and good practices as relates to capital calculation in the Basel II and Basel III framework, then having done so, maintain a high and stable Core Tier 1 ratio. I don't think it's inconsistent. You mentioned also the risk weights on household mortgages. That's been a very long discussion. It is not necessarily very easy to find a solution. I think the duration of the process is reflecting that issue, that it's taking some time to figure out a good method, but for sure that will come into the process at some stage.
I think it's fair to say that this, you said give with one hand, they don't give anything, I can assure you. They are super diligent on how they do this. The reason why, for example, as Ari told that our advanced process have now gone on for two years and is still dragging out, is because they are very eager to do the analysis right. We have to prove every single point, and therefore they don't give anything. They don't allow any model changes that do not reflect real risk, I can assure you. I don't think they intend to give out anything. On the other hand, they're also observant that implementing these new models, maybe it's not so much about capital relief.
It's actually more about right behavior, because in the models, in the vast models, they have parameters which gives you a huge incentive to get to work in a risk-aware way. Because it is an advanced model, you can actually behave right in terms of risk. That is a huge benefit because you often use the advanced model for the more advanced product and the more advanced customers. Obviously, to give the banks the incentive to do the right things in terms of both collateral and how we put together and structure the deals is very important. That we will of course do, because having an advanced model gives us possibility to structure deals in a way that simply contains less risk for us in either before an event or after the event. I don't think they give away anything.
I agree with what Fredrik said very much, that they are tougher than the rest, to use a Bruce Springsteen quote, that's for sure.
That's great. Thanks. That's very clear.
Thank you. We will now take our next question from Andreas Håkansson of Exane. Please go ahead, sir.
Yes. Hi. Out of the EUR 106 million release of collective provisions, you say that EUR 80 million is to offset the Danish FSA changes. I wondered, the rest of the other EUR 26 million, does that come in a different division, and where do we see that? Thank you.
Yes. The remaining part comes from our collective provisions or these kind of management judgment provisions we have made in the Baltics portfolio.
Okay. Thank you.
Now the situation in Baltics it has stabilized, and we have not seen for two or three quarters, more or less any new customers coming impaired, and where we haven't needed to book loan losses, and we still have quite a substantial collective provisions remaining for the Baltic portfolio. That's the other explanation.
That's perfect. Thank you.
Thank you, sir. Our next question is from Sophie Peterzens of J.P. Morgan. Please go ahead, madam.
Thanks very much for taking my question. I just had two quick questions. My first question is around the corporate pipeline. How does it look for the second half of this year, and how much growth do you expect on the corporate lending side? My second question is around slide 27. In case there will be a delay in the improvement of the RWA efficiencies. I've heard the definition, the region regulators are, for example, quite slow. How would you reach the 12% capital equity tier 1 minimum set by January 2015? Would you consider maybe lowering dividend or a rights issue? What kind of measures are you planning should the RWA efficiency measures be delayed? Thank you.
The corporate lending growth. You've seen a growth now in the second quarter, but we generally expect fairly, as we also write in or as Christian also writes in his comments, we expect generally demand to be fairly low on the corporate side. We continue to expect that for the remaining part of the year, and for some time, of course. It's our hope that markets eventually will pick up, and we see some growth in the Nordic region as we go forward. We expect general demand to be fairly moderate as we go forward. If I just may make a really quick comment on the bridge and the IRB or the Basel III bridge there, of course, we don't expect the delay to last until 2015. We're talking about quarters here and not years in terms of delay relating to the advanced IRB approval.
It's not an issue.
You wouldn't consider potentially lowering your dividend? You're sticking to your 40% dividend target?
No, we have provided here a bridge. Of course, we have also shown to you that we, since many years, have generated a lot of capital every year. Reaching the required capital level is not an issue. As I said, the advanced IRB approval, it may be late this year or even perhaps early in the next year. You're referring to a potential requirement as of 1st of January 2015, which is basically three years away. Of course, we will have an advanced IRB approval long prior to that date. Of course, as you've seen, we've continued to generate lots of capital, so reaching the requirement is not an issue.
Thank you very much.
Thank you, madam. Our next question is from Riccardo Rovere of Mediobanca. Please go ahead, sir.
Good afternoon to everybody. I have three questions. The first one is on net stable funding ratio. As far I understand, you are not close to 100%. My question is this a set of numbers, especially NII, already impacted by the efforts of getting a better net stable funding ratio over time? This is my first question. The second question is on policy rates. Without entering into details country by country, do you think the time lag effect of policy rates having gone down over the past few months already visible in this set of numbers, or do you think this is going to be much more in the next quarters? Finally, on asset quality. The sovereign debt crisis started a year ago, more or less, or even more than a year ago.
After 12 months or more than 12 months, the asset quality of Nordea Bank looks still pretty solid, pretty okay. Is there any reason why, after 12 or 15 months, the asset quality should suddenly start deteriorating? If I may, a very final curiosity on risk-weighted assets. The loan book is up EUR 10 billion quarter on quarter, while the credit risk-weighted assets are totally flat. There is no difference. Given that you calculate credit risk under standardized and foundations, which should not be too sensitive, I really don't understand how EUR 10 billion growth in the loan book is not reflected in the credit risk-weighted assets. Thank you.
Maybe I should start with the first two. I guess you can come in, Ari. Your question was NSFR. First, let me just say two things. First of all, it's confirmed that we're talking about 2018 here, the final rules remained unclear as to the parameter setting and even perhaps the fundamental way it will be implemented. We are still below 100% we have continuously strengthened our long-term funding and the maturity profile of the group over the last several years, as you've seen. We've also maintained a high funding ratio this year. We don't know the rules as of yet and what they will look like. We are going in the right direction. This is perhaps a little premature to see what we need to do.
We will be able to cope with NSFR in a good manner should that come on stream in 2018. Your second question related to the policy rates and the lowering of various interest rates. In more general terms, it is a very short lag effect. We have typically a fairly fast impact from lower interest rates, particularly so on the transaction accounts and the other savings accounts. There is some lag effect relating to the liquidity buffer, generally, it's not very big. We've now had a couple of policy changes or interest rate declines at the early part of July. They will impact, of course, also the third quarter. The trend you have seen from previous quarters will likely continue in the third quarter. There is no major lag effect from the past, so to speak.
Asset quality in the next 12 months. I see that our asset quality should be relatively stable in the next 12 months. This pattern we have seen a few portfolios with higher risk, as we have discussed a bit earlier in this meeting, that perhaps continues. This bulk of maturity of our loan portfolio is very solid and strong. It has even improved when just simply following up what is happening in our ratings. Strong Nordic companies, they are getting even stronger. That has been the case throughout the crisis, more or less. That is still expected. Of course, there is always provisions. If there is a very severe recession now triggered in Europe, of course, we are not immune what is happening in the macro environment.
If more or less the macro situation is looking as the same as it right now, this now low growth, more or less non-growth, that would not have a major impact on our asset quality or credit quality. That's a little related to your next question, how we have been able to grow in our loan book but still keeping our risk-weighted assets stable. Part of that is due to these risk-weighted asset efficiency measures we have gone through already, so that we have taken a lot of actions just to simply be more efficient in our, let's say, calculations and models and data gathering and sourcing. That's one part of the explanation. The other part is that that's more coming from this kind of customer business, so that we have, of course, done much, much more business.
The growth is coming from the strongly rated customers, so that our exposures to the solid and strong customers, that has grown. Then again, in weaker customers, of course, we have been exiting and reducing our exposures. That there is also dynamics within our portfolio so that's the other part of the explanation. Thereby also creating solutions to our customers with very low amount of capital consuming product.
Okay. Thank you.
Operator, we have room for one more question.
Thank you. Our final question today comes from Christopher Rokos of Barclays. Please go ahead, sir.
Yes, good afternoon. This is Christopher from Barclays. Thanks for taking the question. Just on liquidity and the liquidity buffer, as you're showing on slide 19. Just in the context of some of your peers that reported earlier this week, who have said that they've actually started to build out the liquidity buffer further, and another one who actually said that they stopped building it out. Can you just give us some color around your intentions if this growth that this slide shows, we can expect that to continue? I think you mentioned earlier on the call that you're quite content with your current liquidity position. Thank you.
Yes, I don't expect it to grow much more. We have increased a little bit in the quarter, but as you can see, we are quite high in terms of LCR compliance. I think it's worth mentioning also that we are now measuring according to the existing rules as they look today. I think much would suggest that the LCR regulation is likely to be somewhat loosened up during the fall, or at least could be that. I think we have an extremely strong liquidity position at this time, and I don't expect the liquidity buffer to increase at this stage. We have maintained a strong position for quite some time, and we are LCR compliant in every currency. We are ahead of that timetable, both from the local regulator and from the Basel III in general.
I think we have a very adequate position at this stage.
Thank you.
Okay, this concludes this telephone conference. Thanks very much for attending, and we would also like to welcome you to the morning meeting tomorrow morning at 1:00 Angel