Yes, good day, everybody. This is Rod Neven from Nordea. Welcome to this Telephone Conference where we will present our second quarter 2011 numbers. With me today, we have also Andreas Larsson, our Senior Officer, and also Fredrik Rystedt, Group CFO. Later on, we will also be joined by our Group CEO, Mr. Christian Clausen. I will hand over to you, Fredrik, please.
Thank you, Rod. I will take you through the results, a little bit about the business development in the quarter, and also some details on our plans looking ahead. If I start with slide three on the key messages, to summarize a bit, we are proud to say that we have maintained solid business momentum in our business and very good revenue growth in the customer areas. However, partly due to volatile times and other things, trading results are down from last quarter's very high levels. Having said that, loan losses are at the lowest level since 2008. Looking ahead from here on and also into the following years, as we also elaborated on in the first quarter presentation, our ambition is to be one of those in the top league of the European banks in terms of return on equity.
We estimate that the league, the top league, to be in the approximate range of, or approximate level of 15%. The way primarily to reach these targets over time is to focus more on cost efficiency. Specifically, we are implementing plans to contain cost growth also towards the latter part of this year and thereafter in 2012 and onwards, keep costs largely unchanged for a prolonged period of time. The other primary method to reach to that level is the capital efficiency side, ensuring moderate risk-weighted asset increases despite continued growth. I'll come back to these issues and let me start a little bit with the results. As I said, we had, in comparison to last year's year-to-date figure, we increased income with approximately 8% and, as you can see, declined somewhat with 7% in the first quarter, the main reason being net results at items of fair value.
Profit before loan losses, EUR 1.67 billion up by 9% from last year and minus 14% from the first quarter. Operating profits at 30% up versus last year and minus 5% versus the first quarter of this year. All in all, the income is stable after a very strong quarter one income level. We had a good continued strong growth in the customer areas up by just under 5%. The main reason for the decline, as I said, was lower trading result from the very, very high level we had in Q1 and also a lower net interest income in Group Treasury. This is primarily due to increased and prolonged funding, and I'll come back to that. The growth in customer areas is 5% and 10% in compared to Q2. Of course, the reason primarily for the non-customer area result is volatility in the financial market and a lower trading result.
If I go to the different lines, starting with net interest income on slide seven, we, as expected, continue to see a good development and income increase from deposit margins. We also have a good lending growth in the quarter. Household lending is up by 7% annualized and actually on a quarterly basis, the same is for the same level, approximately also for the corporate sector. Net interest income is affected by lower levels in treasury, and there are primarily three things that have contributed to it. The first part is we have prolonged the long-term funding of the group. We have done approximately EUR 22 billion of funding in the first half year, and redemption for the full year is approximately EUR 18 billion. We have refunded quite significantly in the first and second quarter.
We have done also a prolongation of the funding maturity in the short end of our funding book. In addition, we have reduced the interest rate risk in our funding operation, and we have gone to a more or less neutral position now, not exposed to interest rate increases. Of course, we have done that in anticipation of higher interest rates. The third component is reduced return on liquidity buffer, not in terms of absolute yield. It's more the funding of the liquidity buffer. The net result of the liquidity buffer is lower. Those are the three main components. They have been done in anticipation of higher interest rates, also in anticipation of market volatility and, as a consequence, higher spread on funding. Those positions have been costly but served us well. You can see the impact from them on slide eight.
If I go on the details of the net interest income, you can see that we have a good development from volume, primarily from the corporate end, and we also have a good development from the deposit margins, EUR 30 million in total. Then we have a corresponding negative impact from the Group Treasury operations, as you can see a little bit further down. On slide nine, you can see the interest rate sensitivity, which is largely similar to what it was. That may be a contradictory message to what I just communicated before, having reduced now interest rate sensitivity in treasury. The reason for this being unchanged is that the treasury interest rate risk is largely within the given time frame of one year, which we measure the interest rate sensitivity on.
We have a positive reduction of interest rate sensitivity in the short end and, consequently, an increase in the long end. It equals out to zero. Of course, we are much less exposed to the shorter end of the curve than what we have been before. Turning to net fees and commissions, we reached the highest level of fees and commissions that we've ever had, an increase of 3%. Savings commissions remain on a high level with also a good trend in payment commissions. Assets under management continue to experience an inflow in the quarter. Fair value result was affected by market turmoil. The market was, during the quarter, typically characterized by high volatility but non-directional. It is clear that that affected the interbank operation in the bank. We continue to see a good stable trend in the customer areas.
Going to expenses, you can see that it was largely in line with the level in Q1, that the cost decreased somewhat and other expenses increased correspondingly. The reason for the latter was mainly due to higher IT expenses that we had, as we had planned. Net loan losses are on a low level, significantly lower than pre-disbursed 12 basis points, excluding the impact from the Danish deposit guarantee that we are participating in. The main difference, you will say, perhaps to the last quarter is an improvement in Denmark. Typically, we also see very low losses in all other Nordic markets and continuously so also as we did in the first quarter also for new European markets. The only area having a higher loan loss level than the previous quarter is shipping.
This is due to a very limited handful of exposures that also previously were in trouble, so to speak. There are no signs of new problem areas in shipping. Impaired loans are down, as you can see on slide 15. Impaired loans ratio is now 1.36%, so slightly down. The impaired loss loans were down by 4%. It is important to remember that 59% of our impaired loans are now performing. That is an increase. Provisioning rate ratio is slightly down but still at a high 50%. All in all, total lending is up by 10% versus last year, approximately in local currency without currency impact, approximately 2% for the corporate side and about the same for household side. There is a clear increase in this quarter from larger corporates, which has been fairly slow for several quarters in the past.
Now, if that is a trend or not, I think it's too early to say, but it is clearly present in the second quarter. Generally, we have improved credit quality. We have 72% now of the exposures in high rating levels for four minors or higher. We continue to see a good improvement in rating migrations. You can look at our capital position on slide 18. We have reduced risk-weighted assets, and this is partly a consequence of migration, but also an optimization of risk-weighted assets. As a consequence, we have improved the core tier one ratios and, of course, the large impact that has struck strong profit generation, as you can see on the next slide 19. Clearly, as part of the new normal plan, we have communicated that we will work extensively with risk-weighted asset optimization. What we mean by that is several things.
First of all, ensuring that we, for each customer, have an appropriate ROIC and a minimization, so to speak, of the risk-weighted assets that we consume for every customer. There are also other components, including better collateral sourcing, model optimizations, etc. We have achieved in this quarter, as you can see there, risk-weighted efficiency gains of approximately EUR 2 billion, as you can see on the top left graph on slide 19. We're quite pleased to see that. That also has had an impact on the core tier one ratio of approximately 12 basis points. All in all, we have improved our core tier one from 10.7%- 11%. The main factor, of course, being income on that profit generation, but risk-weighted assets efficiency has clearly contributed, as has also credit quality. We are continuing, as I said, to generate strong capital. We have increased equity continuously since 2006 of 9.1%.
We have high profitability in our capital position. This is very much a key to maintain the flexibility of either increasing capital should we wish to do that or grow or for other purposes. I talked about net migration, but you can see on slide 21 that we have significantly more up ratings now than we have down ratings. As a consequence, we also have improved risk weights. With those words, I will turn over a little bit to the developing customer area. You can see on slide 23 that we have continued to do quite well on the corporate segment. It's up by 6% versus the first quarter and 8% versus the second quarter of 2010. This is largely in the quarter driven by improved relationships in the C&B segment. This is, as we elaborated on quite a lot in the first quarter, a driver for ancillary income.
Also from a profitability standpoint, this is a good development. On the household side, it's up by 2.5%. We continue to generate more customers or to attract more customers to the group, 41,000 in the second quarter. We see generally a good business development, business momentum for the household customers in Nordea. Having said that, we are also seeing a little bit more moderate growth on corporate or household lending, of course, not only on the mortgage side but generally. Household customers tend to be a little bit more cautious now than they were, particularly during 2010. The primary driver of the household income improvements is, of course, the deposit margins as interest rates are coming up.
One particular thing that we wish to highlight and we're quite pleased about the development is, of course, all the new applications we have for both smartphones and iPads and other tablets, which are becoming an increasingly important way for us to do business. We have at the current moment 6.4 million e-banking customers. We have 250,000 mobile banking customers for applications that actually have been launched fairly recently. In just a month or so, we have grown our presence on Facebook. This enables us to do banking in somewhat of a different way. We get better feedback. We access immediately customers and are able to have a very open and good dialogue and, of course, also learn quite a lot from the industry. This is becoming increasingly important for us. The start of our ventures into this part has been very promising.
I'll end this presentation with a few comments on the adaptation to the new normal as we go forward. On slide 27, you can now see that the revised and changed organization that we announced earlier has now been put into force. As of Q3 2011, we will also financially report within that structure. To remind you, we have three business areas: retail banking, wholesale banking, wealth management. These three business areas will contain the full scope of the value chain. The objective of implementing this organization is, of course, to improve efficiency, increase the ROE, deepen the customer relationships, and be able to set very strict and rigid targets for each of these segments. Our ambition is, of course, to be, as I said initially, to be in the top league of performers in terms of ROE.
Our estimate is that European banks will, in the top league, generate returns of approximately 15%. The way we intend to go about reaching levels of that nature is, of course, through cost efficiency and capital efficiency, along, of course, with some income growth. The cost growth, as you can see on 29, will be reduced until the end of 2011. We will focus on reducing cost growth in the latter part of this year. From there on, 2012, we will strive to keep the cost largely unchanged for a prolonged period of time. In terms of asset efficiency, you can see on slide 30 that we have been generating a good improvement in asset efficiency over the last year or so. This is coming both from efficiency measures and, of course, also to some extent from credit quality, so from improved credit quality.
These efforts will continue as we go forward, and we will be more elaborate on the roadmap going forward. It's important to point out that we have been working with productivity and efficiency ratios both on the cost and on the capital side for some time. We will continue these efforts and strengthen them. You see some examples of what we have achieved in the last couple of years on slide 31. These are just one or few examples out of many things and many areas where we've achieved improved efficiency. In summary, the risk-adjusted profit, we are tracking the line of reaching the full target of public risk-adjusted profit in 2013. We still believe that ambition is within range.
The reason why we are below the solid line that you see at the left part, left side of slide 32, is, of course, the low interest rate environment that we're still working in. As interest rates over time normalize, we believe we will be able to reach that target. Total shareholder return, also there we are within the top quartile along with our financial target. To sum up, we have a solid business momentum in the business. We have a good revenue of approximately 5% in the customer areas. Trading result is down from the last quarter's high level. We also have higher interest costs in treasury. Loan losses are, however, at the lowest level since 2008. We have continued to strengthen our capital position since the last quarter. We believe we are standing on a solid platform for implementing the new normal plan.
The ambition, to repeat, is to be one of the top participating banks in the top European league of ROE performers. Approximately 15% is where we believe that would be to be. Cost efficiency implements plans to contain cost growth and, of course, as I have mentioned, keep costs largely unchanged for a prolonged period of time and continue and increase our efforts on capital efficiency. With those words, we are open to questions. We have also been joined now by our CEO, Christian Clausen.
Thank you. If you'd like to ask a question at this time, please press the star or the asterisk key followed by the digit one on your telephone. Just ensure that the mute function on your telephone is switched off to ensure that your signal can reach our equipment. If you find, for whatever reason, you want to remove yourself from the queue, you can press star two. Once again, it's star one to ask a question. I'll pause for just a moment to allow everyone to signal. We will take our first question from Nick Davey of UBS. Please go ahead.
Yes. Good afternoon, everybody. Thank you very much for taking the time on the call. I've got two questions, if I may. The first is related to currency on the balance sheet. In your slide 126 of your fact book, you split out very helpfully dollar assets and dollar liabilities. It's obviously been a hot topic, really, domestically about match funding or the banking system's dollar positions. Could you just talk us through a little bit about how you see your own balance sheet position? I mean, I noticed $24 billion of loans to the public. Could you give us a sense of the vague maturity of that loan book? It looks to me like it's funded relatively short term. The second question, please, is on Swedish margins. It looks like in the quarter you've seen some lending margin expansion alongside some deposit margin expansion.
Could you please elaborate a little bit about the margin progression you're seeing in Sweden? Thank you.
Let me try and perhaps ask you to answer your first question, Nick. There has been a debate in Sweden relating to the currency exposures. That debate has been, so far, you can say, fairly basic in its nature because, of course, we use the dollar funding market for primarily the short-term funding where we swap it into the currency we actually need. We also do that, for instance, to cover bond issues. We've done a couple of them or several of them throughout this year and also before. We are accessing the dollar market both in the short and the long-term end. That is not a problem from a risk exposure side. This is just a way of accessing funding markets and swapping them into the currencies we actually need.
I think the debate is much more, or the concern is much more, actual direct lending on a dollar basis for corporate customers. There again, we believe that we have a very, very solid position. We think that the exposure is actually limited, and the problem is not the nature that it's threatened to trade so far in the national debate. Your question relating to maturity, I wasn't actually sure of it. The way we measure maturity is behaviorally on the asset side and equally also on the liability side. When I say behavior on the liability side, of course, that relates to an estimation of the maturity of deposits without maturity, so basically transaction accounts or savings accounts, etc. There we have maintained asset maturity of approximately 2.7 years on average and about 2.3 on the liability side. We're pretty close on a behavioral sense to be match funded.
Thank you. If I could get some color around the Swedish margins, please.
Swedish margins, yeah. The question, I guess, Nick, is that why it has increased? We have, first of all, generally speaking, we believe firmly that interest rates should actually go up on all markets, reflecting the higher funding costs that most banks have. Of course, as you know, we have, in comparison to pretty much everyone else, very good funding terms. I think it's fair to say that margins should go up. We have strived to do that on both the mortgage and the corporate side. We have been doing that on the household side during the quarter, and that's been an effort to, of course, do that. It should improve. It doesn't mean that it will continue to do so. We would like that to happen. Of course, that's a market-related issue. On the deposit side, the competition is, of course, fierce for deposit.
That goes for all markets, as you've seen from the report. I think in all fairness, it's fair to say that the deposit income impact from a higher interest rate is, in fact, coming through in line with our estimations on interest rate sensitivity.
Excellent. That was very clear. Thank you.
We will take our next question from Jay Jacobs of Macquarie. Please go ahead.
Hi there. Thank you very much for your disclosure on the risk-based asset mitigation measures. I just ask you, in terms of very broadly speaking, what's the, in terms of further efficiency measures, what's the size of the opportunity, do you think, in terms of risk-weighted asset reduction?
Yeah. We haven't quantified the exact extent. Of course, it's always difficult to measure. There are many different sources of this. First of all, as I alluded to before, we have these more regulatory model issues. There, the primary source of efficiency is likely to come from the application we have for advanced IRB in the corporate portfolio. Of course, that's sometime in the future. We expect an approval sometime during the first half of 2012. There are also other model changes, for instance, in counterparty risk in the markets area, etc. That's one source. The other source is more related to the housekeeping, registration of collateral, ensuring that credit commitments that are no longer valid or enforced are actually taken off the books. That's also another source. The third thing in that area is to basically source collateral where possible.
We have, you can say, throughout this quarter, achieved benefits to the tone of approximately EUR 2 billion that I talked about in all of these areas. We did the same in the first quarter. Last year, the total efficiency gain from all of these three were approximately about EUR 5 billion. We have opportunities, and we continue to have opportunities going forward. I think, however, it's fair to say that the biggest opportunity we believe we have is also walking through the entire portfolio of customers and ensuring that we have an attractive or good ROIC and that we utilize capital for all customers that is beneficial to the customer and to the bank and ensuring that we have a good balance of usage of capital. That may entail several different things. It may entail pricing movements for individual customers. It may also entail more ancillary business.
Particularly the latter, we are focusing quite heavily on, as you saw, both in the first quarter and in the second quarter. There are many sources of capital efficiency. Of course, we will continue to work with this in the next several years.
Okay, thank you very much.
We will take our next question from Matti Ahokas of Handelsbanken Capital Markets AB. Please go ahead.
Yes. Good afternoon. Matti Ahokas, Handelsbanken here. A couple of questions, if I may. Firstly, regarding the risk-weighted asset management, as pointed out, you've been really successful in bringing down the risk-weighted assets. Do you believe that there's actually a risk that since you and most of the other banks are doing the same, that the lending margins would actually be under pressure because the capital requirement is falling and so the risk-adjusted margins are actually up quite a lot? The second question is regarding the cost side, your new cost initiatives. You're clearly more stringent on costs. Is this a reflection in any way of a lower revenue outlook, or is it just better housekeeping? The third one is a small detail question. Did you make any collective provisions on the shipping portfolio, or were all of these individual in the second quarter? Thanks.
I think that's the first question. Perhaps first, we have no additional collective provisioning for the shipping sector in the quarter. If I may start with the lending margins and the risk of those decreasing because risk-weighted assets efficiency is improving, I doubt that's a fact. Of course, there's always a risk, so you can never exclude it. I doubt that's a fact. That's not likely because I think we are striving clearly to achieve a higher risk or a higher return on equity, and so are other banks. I think it's not necessarily a very likely thing that the banks would give away, so to speak, the benefit created by capital efficiency when all banks at the same time also need to improve the return on equity. If you do so, you need also to be reminded of the fact that funding costs have gone up quite dramatically.
If anything, profitability on lending on both corporate and household side is generally too low. I don't think one should be so concerned about that risk-weighted assets bringing lower margins. Of course, as I said, it cannot be excluded.
Yes, please.
Sorry, how do you then see the kind of intense competition on the margin side in the region? Is it just irrational behavior, or will this change going forward?
Yeah. I think there are many reasons, and it depends a little bit on the segment of the market. I think particularly in the very high-end or very large corporate, we see deals sometimes being made at rates that are not simply profitable. There, again, to remind you, we have very, very attractive funding rates in comparison to competition. I think that's done for other reasons. One potential explanation is, of course, that lending is bringing also potentially, over time at least, ancillary business and improved profitability. It's not necessarily a rational behavior. I think that also goes for the mortgage side. There could be other factors such as scale, etc., that would trigger aggressiveness on that. As I said, the trend for quite some time has been on higher funding costs and generally higher capital levels, as you've seen from many banks.
Risk-weighted asset efficiency has not in any sort of way compensated or will not compensate fully for the increased capital in the banking sector, not in any of the countries. There are so many other cost increases coming, of course, or that have been coming in from the new normal that risk-weighted assets, of course, is a mitigating factor but not suggesting lower margins. This is more of a speculative argument. We will have to see. The cost side, whether it's a revenue issue that we are focusing on costs to mitigate a weaker outlook for revenues, that's not the case. We haven't anticipated lower income in the future and compensated for the cost efficiency should be seen as a way of, of course, reaching the return on equity side. Of course, that will have some implications for our ability to grow, needless to say.
Largely, we believe that the growth prospects are good in the future. Of course, part of that growth is likely to come from our interest rate sensitivity and higher interest rates. We have also put a lot of initiatives in place in the last two or three or four years that are continuously generating good revenues and will do that also going forward. The estimation we have for income as we go forward is not anything dramatic. We are not seeing dramatic growth levels in terms of lending or other factors such as GDP. We have moderate increases estimated as we go forward, and we haven't changed those estimates for you.
Great. Thanks a lot.
Thank you.
We will take our next question from Jana Walther of Deutsche Bank. Please go ahead.
Yes. Good afternoon, Jan Walter of Deutsche Bank. Just a couple of follow-up questions from the press conference this morning. First, just a clarification there on trading, which fell obviously in the quarter. In your opinion, what was the main driver behind the low $58 million number booked in trading other? Previously, you alluded to widening credit spreads, etc., when that number has been at this low level. Secondly, again, a clarification there. You aim for approximately unchanged costs. Is that the same as saying keeping nominal costs unchanged, or should costs follow largely inflation? Thank you.
Yeah. The trading income, if I start with that end, and I think we elaborated on both on the press conference and in the analyst meeting thereafter, that we have had during the quarter a non-directional high volatility market. Typically, in our hedging of the customer flows that we have, of course, we are exposed to the market condition. This is not a spread issue in the market. This is much more the general sentiment. You have seen exactly this happening a few times before. When markets are very, very good, you see very high results. For the unallocated market result, there is always an element of volatility. I think the other part is treasury that had an extremely high quarter in the first quarter, and a more normalized or low end of the normalized spectrum, if you like, in this quarter.
The reason is largely similar to what we have in the unallocated markets background. We will see, for high volatile non-directional markets, you will see the kind of shift that is expected. Q1 was exceptionally strong, and Q2 was at the weaker end of the spectrum. Your second question.
Thank you.
Yeah. Flat cost is what we have communicated, Jana, not taking into account the inflation. Flat cost means flat cost.
Okay, very true. Thank you.
We will take our next question from Riccardo Ruggeri of Mediabanca. Please go ahead.
Good morning to everybody. I have a question on the funding side. I see the debt securities in issue have gone up additionally. It's almost $21 billion versus last year, in June last year. I'm just wondering why that rapid growth and if this continues, is this going to continue over the next few quarters? Has this anything to do with the net stable funding ratio? The second question I have is on the risk-weighted assets. Has there been any migration from the standardized to IRB in the corporate book? They're currently subject to the standardized. The third question I have is more of a general one.
Do you think that your core Tier 1 ratio will have to be more or less aligned to the one of our CFE institutions, regardless you're not going to be classified as global CFE, to be competitive with them on the wholesale funded market, given your reliance on wholesale funding? Thank you.
Yeah. Yeah. If I start with the issue, debt, it has increased quite a lot. We had an issuance volume of over €30 billion in last year. As I previously alluded to, we had EUR 22.3 billion in the first half of this year. We've done a lot of long-term funding. Of course, that is the nature of new normal requiring more long-term funding costs. I think part of that increase has been impacted by a high level of short-term issuance also in the second quarter. That short-term issuance is more of a technical reason. Our balance sheet will fluctuate depending on settlement dates for payments, etc. We had a fairly high level at the end of the second quarter. We have been driving more funding or long-term funding in particular into our balance sheet. The reason is both, of course, growth, which we've had quite a big share of.
As you've seen, the lending has increased by 10% from last year. The other part is more long-term funding generating increased stability. The second question was risk-weighted assets. Yes, it has been impacted by IRB changes to a very minor detail. You will remember that we purchased the bank or acquired the bank, Fionia Bank, last year. As is required by the FSAs, that was entered into the books of Nordea in a standardized approach. During the quarter, we've had an approval for that part of the portfolio into the normal foundation IRB that we have for the rest of the corporate book and that has had an impact on the risk-weighted assets in the quarter of approximately EUR 620 million, I think, to be exact.
The core Tier 1 ratio, I think this is somewhat premature because I think the communication so far by the Swedish FSA, which is the head supervisor for us, has been that they tend to consider all Swedish banks as CFEs in some sort of respect. What this actually entails for us in terms of required core tier one ratios as we go forward is a little premature to speculate on. I don't think it has been stated other than the fact that they believe that Swedish banks should be running with a core Tier 1 ratio of between 10%- 12%. You've seen our core Tier 1 ratio of 11%, which happens to be in the middle of that range. It's premature to actually speculate on whether we're, in fact, in the end CFE or not in the Swedish community, but I think it's likely.
Okay. Just maybe one little follow-up again on the standardized versus IRB. The corporate loan book that today is still under standardized, is it reasonable to assume that once it migrates progressively onto the IRB models, we'll have more or less the same risk weight that we currently see on the corporate book under IRB today?
First of all, we, and I mentioned it briefly before, we are a foundation IRB for the corporate book. Of course, one impact is becoming advanced as we are planning to be in 2012. The impact of that is, of course, still uncertain, but it should be a good development in terms of capital for us. The other areas that are non-IRB, that's the main part you can say is the NEM countries. Poland in particular, Russia, and the Baltic countries are international branches. We also have the finance companies, I should say, also understand those. It depends. The risk rate will depend a little bit depending on the jurisdiction. Typically, I would expect that risk rates, without actually knowing that, would be somewhat higher in the Baltic area and in NEM than it would be on the corporate area should we be IRB.
We expect to be IRB at some stage for the NEM countries. We've made such an application. We'll simply have to see.
Okay, thank you very much. Very clear.
We will take our next question from Fridtjof Berents of Arctic Securities ASA. Please go ahead.
Thank you. Three questions, if I may. The staff cost is down quarter on quarter. We have, for a certain period, seen a trend down in FDs in the Nordic banking area. Could you please just tell us where we're at in the trend and how we could see this going forward? Also, on the cost side, the IT cost was coming up in this quarter, like you previously mentioned. Could you also please set some color going forward into 2012 here? Thirdly, on corporate deposit margins, they're up, but not in Norway. As you say, there is fierce competition for single deposit volumes, and you're part of that competitive landscape. We see examples of prices well above senior debt funding and where you have the cheapest, of course, from the Nordic banks.
Could you please say how you consider the need for taking large takes of the deposits currently at those prices, which we see in Norway, obviously? Okay. Thank you.
Yeah, I can answer these questions. Maybe the staff cost, yeah. We have taken down FTEs in a number of areas over the last four years, but we have also invested in new areas. Taking out FTEs, we very much continue along the lines we've had, but we've probably not increased at the same speed in other areas. Now, the FTEs, the staff will come out very much in the distribution. I spent some time on that today because our future distribution model with advice branches, service branches supported by the electronic channels, is becoming much more efficient and requires less staff. That, in particular, will mean that we can continue the staff take-up there and maybe even accelerate it.
The other major areas are in the back office area and the trading area, where we have very good experience of moving administrative processes to our offshore center in Poland in Lodz, which is very efficient at a low cost and has good availability of labor. There, we can move more processes to, and we have a pipeline of quite a few. We think that would be a major thing as well, and then a number of other areas. At the same time, we will not invest because we don't think we need to add more advisory capacity. We have done that in previous years in the gold area and private banking and also some parts of the corporate area. We think we are more or less there, and we think efficiency also by the electronic channel means that that is not necessary.
We would also not grow to the same extent in Poland and so on. Net, we will reduce FTEs in this period of time. To some extent, IT is serving Q2. It was seasonally a bit down in Q1. The trend in IT is also that we are holding back, and we're cutting off some of our development projects but also continuing others. IT is an area which will not maybe contribute to an adoption but will more stay stable. Corporate deposit margins, no, we do generally not participate in the competition for high-priced deposits, which is non-stable by nature. The fact is, as you correctly point out, that we have lower costs of funding on international sources than we need to do in the corporate deposit market or, for that matter, the same as deposit market. We tend to stay very disciplined on the pricing there.
However, we also have to serve our customers, so there is sort of a trade-off between giving up the deposit base with customers and the pricing. We are certainly not price leaders, and we also have no target or objective of increasing our deposit share in those areas. What we do want is stable deposits, and we are very successful in getting that. The thing is, if you get stable deposits, it's by attracting the customer relationship and getting the transaction accounts so that you cannot price yourself there because there's no price on it. It's a whole relationship and also certain supply chain management, for instance, to attract these kinds of deposits.
Thank you. Could you give us a follow-up there? The definition by stable, unstable deposits, do you see them related to the NSFR ratio, or is it internal definitions here?
No, it's both, but it's very simple. It's the fact that if you give a quote for a one-month deposit, it will leave one month from now if you do not give a quote again, which is better. It's stable in the very simple sense that it will move away if you don't price it up. That type of deposits, we don't like and we don't need it for funding reasons, but we surely do need to keep the customer relationship intact. We need to be competitive every now and then.
Okay, thank you.
As a reminder, if you wish to ask a question, please press star one on your telephone keypad. We will take the next question from Jacob Kruse of Autonomous Research. Please go ahead.
Hi, Jacob from Autonomous. Just a couple of questions. First, on Denmark, could you just talk a bit about what you're seeing in terms of the improving asset quality? What are the metrics that make you feel more comfortable? Secondly, on competition, I think we've heard from some of your competitors that you have been taking a step back in terms of aggressiveness in pricing and being more focused on margins. It looks like your margins are still overall declining. Is that a strategy that you are pursuing? Lastly, just on the EBA stress test, a small question. It looks like your coverage ratio on commercial real estate is currently just 4.6%. That compares to Swed at 50% and SEB at 37%, Handelsbanken at 16%. Is that correct? Why does that number look so low? Thank you.
Again, maybe to start on Denmark. We see improvements across the board in Denmark. It's mainly among small and medium-sized companies. There's no clear metric we see in our book, simply that we get fewer new cases coming in with problem, and we see improvement in the way the problem cases are being handled, coming better out. In general, it is because the health of that sector is better. Of course, what is not seen in our books is the problem within development and other speculative areas where a number of banks have had problems in Denmark. We are not involved in that area at all, so we don't see that. I would also question whether there's an improvement there. Our improvement is mainly on the small and medium-sized companies. Competition on margins, no matter what competition are saying, we have not been the price leader on margins for sure.
We are trying to get our margins up, and we are taking steps to that. As Fredrik Rystedt also alluded to a few minutes ago, there are banks out there which are super aggressive, and sometimes we have to lose a bidding contest for that reason. We do that. In other cases, we have to step in. I still think the margins are going to go up in the coming future because everybody is hurt by the higher funding costs and extra capital requirements. That will drift them for margins, especially in the top segments. You had a question on EBA, which I'm not sure we actually understood the question, or maybe Fredrik Rystedt said.
No, I don't think so. Could you, Jacob, repeat that question?
Yeah. Just where they disclosed the coverage ratios for your books, there's a line for commercial real estate, and it says here that the coverage ratio is 4.6%. That's the provision stock to NPLs, the definition. That just looks like a very low number compared to any other bank. I just wanted to see if that, first of all, is correct, and secondly, if there's a reason why it's so low.
I don't think we are, to my knowledge at least, lower than anyone else in that area. I suggest, Jacob, that you contact Rodney after this meeting, and we'll try and answer that question. We have to check it out because we don't have the answer straight out right now. Please call Rodney afterwards, and we'll look into that issue.
Okay, thank you.
Thank you.
We currently have no more questions in the queue at this time, gentlemen. My apologies. We do now have a question from Jan Erik Gjerland of DNB. Please go ahead.
Yes. I have three questions. Just some follow-up on the cost side. Firstly, is it so that we should assume you have the three quarters with the flat cost now? Is it so that we should assume this level to stay on and this is really the run rate into 2012? Or are you talking the second half a little bit higher before you have the cost for 2012? Just to clarify that. Secondly, the government of Sweden has said that they will start to sell some shares. Do you know if they will have to announce anything when they start off or communicate with you in any way? Thirdly, just a small one. Were there any performance fees in the mutual funds this quarter? And if not, what is a normal level for your book? Thank you.
If we start with the cost guidance, we have said that we will contain cost growth towards the latter part of this year. We have not stated that this is the sort of cost level going into next year. We have said we will. The flat cost development is from 2012 and onwards, of course. We will gradually, during this year, reduce the cost rates to contain cost growth. The Swedish government, whether they will announce or not, they will announce. They said themselves they will announce when they start to do this selling on the market. They said that in the press release or at the press meeting. They need to abide by the plugging rules needed to say. The final issue, the performance fees are typically in the fourth quarter or in the latter part of the year. It is very limited or nothing in the second quarter.
Okay. What was the reason why it was such a big drop in the quarter? Any particular reasons? Otherwise, did the market fall off this quarter and not last quarter?
You were saying which dropped?
In the mutual funds, the commission income.
I don't have the exact answer to you there, Jan Erik, but generally speaking, we had a good development in the first quarter. Because of the lower, you can say, general trading activity in the quarter on the back of a fairly weak development on the stock market, primarily brokers' fees were considerably lower than they were in the first quarter. I think that was primarily the reason.
Okay, thank you.
We currently have no questions in the queue.
Okay. This concludes this presentation. Thanks very much for showing interest. We will be in London on Thursday. Please feel free to join our lunch presentation. Otherwise, we hope to see you on the 19th of October when we present our third book.