Earnings Call: Q2 2020

Jul 13, 2020

Hello, and welcome to the D and B second quarter call. My name is Jess, and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions. I will now hand you over to your host, Roon Helland, to begin today's call. Thank you. Thank you so much, and hello, everyone, and welcome to DND's analyst call for the second quarter. Here in Oslo, we are the CEO, Sachin Bratton CFO, Uttar Akseid the Group Risk Officer, Head of Group Risk Officer, Ladnik Elian Ladnik, Head of Personal Banking, Inger Blechtiv Sieten, Head of Corporate Banking, Harald Sajkampson. And before we start the Q and A, Uttar will give you a short introduction. Uttar? Thank you, Uttar. In today's presentation, we demonstrated on Slide three that Norway has been quite successful in controlling COVID-nineteen. After the gradual reopening of the society, activity levels have peaked up and growth in economy have picked up as well. It is visible through the revised estimate for economic outlook in Norway. We have received from the Central Bank and also the statistics with Europe in Norway pointing to the positive direction through the second quarter. They now expect a positive GDP growth for the second half of the year. The policy rate in Norway was reduced to zero in May, but only a month later, the Central Bank increased the rate half going forward, projecting rate increases again in the 2022. Unemployment in Norway spiked at 10.4%, but has come down to a level of 4.8% at the end of the quarter. You see that housing prices in Norway have picked up, and a lot of the positive sentiment is positively probably driven by the fact that most Norwegians have adjustable rate mortgages and the rate on those loans has almost been halved through the rate actions of the Central Bank, increasing disposable income for households in Norway. Looking at the numbers for the second quarter, we see that net interest margin has declined and net interest income similarly in line with our previous guiding of SEK1.25 billion effect from the level we saw in the first quarter, meaning that the numbers in NII for the second quarter is fairly representative for what we expect going forward. We reduced rates on loans before we reduced loans on deposits, and that's why the reason that's the reason this is really reflected in the 2Q numbers. Looking at commission and fees, that was an area where the increased activity in Norway is clearly visible. Commission and fees are 5.6% lower than the second quarter last year, but more than 7% up from the first quarter. The pickup in activity is clearly visible in real estate working. It was back to almost the same level as one year before. Activity in Investment Banking at the high level as in the second quarter last year. Asset management fees are up both year over year and compared to the first quarter. Guarantee commissions growing nicely as well. The only area we see a meaningful impact from COVID-nineteen in the numbers is money transfer and international use of cards due to the travel restrictions still limiting activity in that profitable area of banking service. But overall, and commission fees have developed more positively than we expected three months ago. The significant negative mark to market effects we saw in the first quarter due to the weakening of the Norwegian krone currency and widening credit spreads have been largely reversed this quarter with the opposite numbers visible in the second quarter numbers. Looking at impairments, they came in at 2,120,000,000.00, 88% of which is from the Oil, Gas and Offshore segment and mainly within Offshore. In this segment, we saw migration, meaning that Stage one and two impairments decreased, while Stage three impairments totaled more than €2,700,000,000 Offshore constitutes less than 1.7% of the portfolio, but remains the most challenging segment. In the other corporate segments, total impairments totaled €168,000,000 We saw net reversals in Stage three and increased impairments in Stage one and two result of negative migration for certain travel related industries. Overall for shipping, the segment was stable. With regard to personal customers, the impairments were back to a low level of €82,000,000 reflecting the robust portfolio. All in all, I repeat that we still expect losses to be highest in the first half of this year and reiterate that the overall portfolio is robust and well diversified. Taking a look at capital. Common equity Tier one capital increased 50 basis points during the quarter. The headroom above the minimum requirement is now at an all time high. And the headroom is also 100 basis points higher than at the end of the last year. The proposed dividend of SEK9 per share and also 50% of the profit for this year are not included in these numbers. To sum up, the costincome ratio for the quarter was in line with our financial ambitions of 40%. Return on equity and earnings per share are negatively affected by both higher than normal impairment provisions and also the Central Bank's zero policy rate. But however, as I pointed to, the Central Bank indicated that they will start raising the policy rate again in eight quarters from now. Return on equity is also negatively impacted by higher average equity. Dividends are usually paid in the second quarter, while dividends for 2019 will be considered at the Extraordinary General Meeting in the fourth quarter of this year. But nevertheless, return on equity increased to 8.7% for the quarter, reflecting the strong pretax operating profit before impairments of 400,000,000.0 which is actually up more than 3% from the second quarter last year and demonstrates the resilience in earnings over time, which should have been a point we have reverted to several times before. Earnings per share, up 34% from the fourth quarter, coming in at 3.06. Thank you, Utai. Then we'll open up for questions. And we do currently have a couple of questions in the queue. So please stand by while I get the first caller's name. Thank you very much for standing by. The first question comes from the line of Nick Davy. Please go ahead. Good afternoon, everyone. Thanks very much for taking my questions. I'll go with three, please. The first one on asset quality. So I understand the comments about the robust portfolio and the general level of confidence. Just a stupid question about IFRS nine, if you don't mind just helping us to understand better the portion of your loan book that's sitting in Stage two at the moment, I think 9% or so. Could you help us understand the outlook on that chunk of the book? What sort of triggers have been hit for some of the migration into Stage two earlier in the year and your confidence or not that the book could migrate into Stage three later in the year just because that's obviously quite a big swing? Thank you. And the second question would be around capital return. And I know it's early and there's no crystal ball, but I just wonder whether you could talk about priorities for capital distribution in the next couple of years. If we think that the rate impact has taken away two percentage points of ROE, do you think for as long as rates are at this level, you have enough cash generation to pursue growth plus dividends plus buybacks? Or do you think that's a bit too much pressure? And sorry, the third question then would be just quickly on exchange rates. At the current level of the krona, to say, dollar, could you help us with the impact to net interest income or or revenues for the second half of the year? Thank you. Should I start with the IFRS nine then? Because I think it's important to highlight that what we when looking at the impairments in stage one and two, those are completely generated from a model based approach. Well, when you transfer a customer then from stage two into stage three, we go into an individual impairment discussion and look at the actual situation we have in terms of security package as well. When we won't give any guidance in terms of outlook in impairment going forward. But as we stated in Q1 and continue to state now, we expect the majority of the impairments to be taken in the first half of this year. And also bearing in mind that the IFRS nine also stipulates that you should have a forward looking assessment looking into the coming three years. So really what we are taking upfront in stage two should also be a reflection of what we expect going forward transferring also into stage three. I can address the second one and then, Rupe, I can answer the last one. In terms of capital return and strategy priorities, there are no changes as to our previous communication. I mean, firstly, capital generated through earnings contributes to a robust and resilient capital level in line with the requirements. That would be priority number one. Priority number two is to invest back into the business in terms of organic growth where we have said that we target both in the short term and medium longer term growth in the area of 3% to 4% per year. And then excess capital under normal circumstances will be distributed to shareholders. Firstly, through cash dividend where minimum 50% of the results should be distributed in cash dividend and any excess capital, we look to distribute that through share buybacks. So that remains consistent. But as you all know, I mean, this year is different where the decision on 2019 dividend has been postponed until the fourth quarter. So we won't have full clarity until then, but we can also then remind you the statements that have been reiterated by the Minister of Finance where they also after the statement that came from the risk European Systemic Risk Board. The Systemic Risk Board in Europe encouraging institutions to hold back on dividends. The Minister of Finance referred back to their statement in March where they encouraged institutions to hold back until the uncertainty is reduced. And of course level of there is still a level of uncertainty but I think we can clearly say that it's been reduced compared to what it was three months ago. But again, the decision won't be made until fourth quarter this year. The last question I didn't The last question was on the FX effects on net interest income. On Slide 10 in the deck today, we show that the exchange rate effects on NII was SEK 118,000,000 in the second quarter. And in that quarter, we had a 5.5% average depreciation of the Norwegian kroner. So what's to expect going forward if the FX rates were to stay at today's level, is is actually 6%, even lower, it will have a similar similar further effects going going forward on on NII. That's very much. Thank you. It's it's a negative. Is that right? It's an offset. Yeah. Yeah. It's a reverse. Strongly It means a lower loan book used dollar loan book measured in in NOx and thus lower NOx revenues. Very clear. Yes. Thank you. The next question comes from the line of Antonio Reale. Please go ahead. Hi, this is Antonio here from Morgan Stanley. Thanks for the presentation. Good afternoon, everyone. Just two or three questions and follow ups, if I may, please. The first one is on fees, which, of course, have been an area of strength pre COVID. And you were guiding to a 45% annual growth, I think, in your plan. Now obviously, the outlook has changed, of course, and the quarter, however, has shown some signs of recovery. Could you perhaps walk us through what you expect from the second half of the year? And beyond some of the activities are, of course, affected by some more structural drivers. So I wonder how we should think about your ambitions here also medium term? That's the first question. The second question is on the cost side. You've reiterated your costincome ratio target of below 40%. Could you perhaps walk us through the levers you plan to use? And how front end loaded do you expect this to be? If I remember right, think you had a cost reduction of 1,520,000,000.00 from 2020, 2022. Could we have an update there on basically where you see profitability? And then the last point is on risk weighted assets. They've been lower quarter over quarter mainly as a result of lower credit and FX, if I understand correctly. However, on the credit side, you're guiding for a 34% loan growth and started to see some credit migration. So I'm just wondering how we should think about risk weighted assets inflation in the second half of the year. Thank you, Antonio. I'll start, and I'll hand it over to Ulfar. Just some comments on the fee side. Yes, indeed, I mean, quarter has been a tremendously strong recovery in many areas that are matching the results of second quarter twenty nineteen and that's in a quarter where two of the months we were substantially impacted by lockdown. So what does this mean going forward for the remainder of the year? I think just measuring by the current temperature, we can say that on the housing market, it continues to be very active into the month of July. And given the economic outlook, the level of confidence among consumers and the activity, we believe that that market should continue to normalize throughout the year. In Investment Banking, there is seasonality, third quarter in general being a slower quarter than the second quarter. But given also a world that develops in accordance with the current outlook beyond the quarterly seasonality, what we see and read today very much supports a return to normal. The category that is impacted and that will continue to be impacted is banking service as a money transfer related to less traveling activity abroad and that is usually an important source of income both in the second quarter and in the third quarter. Spending patterns in Norway are back to normal. The people travel less and even though we are opening up in the July, we expect less travel activity than normal. So that will be impacted also in the third quarter. Asset Management, a very promising development. Net inflow in all of the three months represented in the quarter, a very strong underlying trend. And of course, the uncertainty there lies around the performance and potential success fees on the products that are managed, which is a bit too soon to say. Insurance, on the life side, I would say not so much impacted. Non life insurance, it's been a turbulent start to the year, much better results this quarter than the previous quarter. In terms of sales, it's at the same level as last year and we expect to build that up over time. So all in all, a big chunk of it is really showing promising development back to normal with a strong trend, but I don't think we can say that we're back to square one in terms of guiding for the year. I mean, first and second quarter are impacted, but it does look much better in terms of the outlook. Yes. With regard to costs, we launched a program at the Capital Markets Day in November indicating accumulated cost reductions of billion to NOK2 billion this year and the coming two years. And pointing to areas like automation, distribution with due to digitalization and also new ways of working. And I think the COVID nineteen experience has just confirmed the high relevance of all these initiatives, and we are working on these initiatives and will continue towards during the the coming through next year as as promised on the Capital Markets Day. So, really, nothing new on top of that, I would say, other than other than confirming what we already planned from and and that that those plans were highly relevant. Okay. With regards to risk weighted assets, I think there's there there was some negative migration in in the quarter reducing capital by 20 basis points. Underlying ROA are negatively impacted, but the higher provisions have the opposite effect or actually reducing risk weighted assets in Stage three. But it's fair to say that with the negative migration in the portfolio, there will be some negative migration in RWAs. On the other hand, the numbers also demonstrate the contribution from the profit generation we have each quarter, adding to capital this quarter as well. Thank you very clear. The next question comes from the line of Sophie Petersen. Please go ahead. Yeah. Hi. Here is Sophie from JPMorgan. So I I just wanted to ask on loan growth. You reiterate your 3% to 4% loan growth. The loans were relatively weak this quarter partly because of FX. But how should we think about loan growth going forward? The personal customer growth was relatively flat quarter on quarter, but we saw a decline in the corporate loan book. What are the trends that you're seeing here on the corporate side? And then my second question would be on consumer lending. How should we think about consumer loan growth outlook and also asset quality, especially in Sweden where you have been growing on consumer or leasing side? And then my final question would be on the offshore book. We saw almost a 30% increase in NPLs, and the NPL ratio is now over 20% in the offshore book, but coverage is only around 37%. Should we expect more provision for the offshore book, or are you happy with the the book as it is covered now? And if so, what are the the main reasons? Thank you. Okay. Thank you for your questions, Sophie. Loan growth, yes, we reiterate 3% to 4% without guiding specifically on the mix of the growth, but we can share some comments on each of the segments. Personal customers, this was a relatively flat development in the second quarter, but it's important to highlight that the activity and growth picked up towards the end of the quarter quite substantially. So we also have a high pace coming into the month of July. So we do expect attractive and profitable growth in the sector for the year, however, probably somewhat lower than we saw last year. SMEs is a bit better concealed now with Corporate Banking being as one, but SMEs saw a growth for the quarter of 1.8 and have attractive prospects for the year given the activity that we do see. With regards to larger corporates, it's an area where we both shed some regard to currency fluctuations as well as wanting to deliver on the strategy to originate and distribute where we do sell off exposure after underwriting. So is this an area that is more lumpy where we've managed capital relatively tightly both in view of currency effects that leads to the growth year to date for the group being 2.7% and also in view of the uncertainty and lack of transparency with regards to RWA migration, which has expected which has developed better maybe than we fared during the quarter when it started. So overall, loan growth, we reiterate 3% to 4%. We do see profitable opportunity in all three segments. In terms of consumer loan growth in Sweden, I think you're referring to car leasing activities. There has been some growth in the quarter, but we're comfortable with that book, low risk across that we view together with our exposure across that sector across geographies. Of course, we're following very tightly any exposure related to cars and the trends that we see in the market and have on several occasions in recent years adjusted on our appetite to take residual value to just mention an example. Offshore coverage ratio 37%, yes, I think what we can say is that the reserves that we currently have on the book reflect fully our view of the sector and incorporate considerations for an outlook where a positive move in that market is expected to be somewhat down the road. Saying that, we continue also to highlight that the situation in the market is challenging and that there could be development in individual and specific situations. But we have fully reserved in accordance with our market view for the sector in our books as they are today. Okay. And and and just on the offshore book, there have been some Bloomberg articles that you had quite significant exposure to Chesapeake that filed for bankruptcy. Have you fully researched for that exposure as well? I'm sorry, Sophie. We can't comment on specific names. Okay. That's fine. Thank you. The next question comes from the line of Ulrik Stoixer. Please go ahead. Hi, Ulrik Stoixer. Two quick questions on the net interest margin. Because you said there would be roughly €5,000,000,000 hit on the 0% key policy rate. But you open it just for the Polish deposit legacy in Q1, it seems like your interest income is down €1,000,000,000 So should we expect net interest margin like somewhat of a compression in Q3 again? And then secondly, how stationary do you consider your new deposit level? If you like, if Norway now, we don't get a second COVID wave and so forth, will the deposit level decline again? Or how do you view the future mix between your wholesale funding and deposits going forward or maybe two years? With regard to NII, we showed on Slide 10 in today's presentation that interest on equity and margins were down $1,297,000,000 euros compared to the first quarter, which is in line with approximately onefour of the €5,000,000,000 you referred to, which had the first quarter as a starting point. So the approximately €5,000,000,000 was the effect of the customer repricing. And there are also, of course, other NII effects like volume growth on deposits and loans, could be other margin developments, FX effects, etcetera. So 5,000,000,000 was the effects of the customer repricing, the lower interest rates we we have seen in Norway over the last few months. On deposits, I think there are several trends to keep in mind when considering the increased deposit base. One is pure reaction to COVID. People and businesses want to stack up on their liquidity to be robust in meeting the challenges. The fact that we are getting so much of it, I think we should take some credit for in being very robust and having had a confirmation from both Moody's and S and P on our ratings. And we also see that we are competitive and attractive for our international clients when it comes to attracting deposits. Second quarter is usually seasonally relatively high on deposits. I would expect some of the impact of the immediate need to save if we continue in a positive direction that that may level off to a certain degree. But part of it may remain as we continue to compete for deposits and as long as we're profitable and that is an attractive source both for funding and to make sure that we have a good deposit base to support our lending activity. So for now at least we are attractive, I think, beyond just the immediate trend of saving as we see it. Okay. That's clear. Thank you. The next question comes from the line of Ricardo Rovere. Please go ahead. Yes. Yes. Good afternoon to everybody, and thanks for taking my question. Three sorry. Three or three or four from my side. First of all, I wanted to better understand on again, on NII. When you mentioned the 5,000,000,000, does this number refer only to the downward repricing of the loan book or does it include also any mitigation action on the deposit side? Just to be a 100% sure I get it correctly. This is my first question. The second question I have is on risk migration. If I understood it correctly, we stated that there was some negative risk migration in the quarter in risk weighted assets. If I understood it correctly, should we expect anything more in the coming quarters? Or what we have seen so far, that's all? Third question I have is on the shortfall perspective losses in in the capital as constantly going down. It was 6,500,000,000.0 at the end of the year, then 1.2, then now it's at 660. So, implicitly, this this number going down, to me, is telling that you are charging more than what your internal modem would indicate. Is it right assessment? Or am I completely wrong? And then on the on if I may, on the dividend, if the situation improves, let's say, particularly in Norway without improving too much in the rest of the continent in Europe, do you see Norway going solo in allowing a dividend payment? Or do you think that would be just impossible if no one else does it? Thanks. I can start with NII. The higher dividend effect on net interest income is the net effect of both loan and deposit repricing. In the second quarter, we reduced deposit rates seven to eight weeks later than on deposits. So that's why the the the we say that the pool effect of customer repricing is really reflected in the second quarter numbers, and we can actually use the second quarter numbers as a basis going forward. In terms of risk migration, we are not specifically guiding on risk migration, but I think the learning and the experience we've had through the second quarter is an important point of reference where you see some risk migration and the capital cost, if you will, of 20 basis points as a result of this. That's alongside future economic outlooks being revised to the positive. The uncertainty is substantially reduced compared to when we entered the second quarter. However, there can be customer specific situation or changes to this picture that triggers migration for certain customers from Stage two to Stage three, and this would, as a consequence, lead to risk migration. But that needs to be combined with the general macroeconomic outlook. In relation to the dividend question, I think the important reference is to go back to the statement from the Ministry of Finance early July, where they responded to, as I think I mentioned earlier, to the advice from the systemic risk board in Europe that encouraged a full restraining from dividend for all banks. The Ministry of Finance in Norway referred to their previous statements where they were not that restrictive but encouraged institutions to wait until the uncertainty until the level of uncertainty was reduced. Again, today, I feel we can say that the level of uncertainty is reduced and we do expect and believe that the level of robustness and solidity will weigh heavily on the regard of any dividend payment. But I must stress that this decision will only be discussed in the fourth quarter and then it will be up to the Board. I'm not sure we grasped your question on short term perspective losses and the numbers you've No, no, no. Shortfall when you look at the capital, you have the shortfall to expected loss deduction, which is which was, at the end of the quarter, $106.06 655,000,000, and it was two negative so a deduction of 600. But that is negative by 2,500,000,000.0 at the beginning of at the beginning at the end of last year, 2020. So the deduction you are having from the capital of the amount of provisions that you have not charged through the, let's say, through the P and L, with respect to what your models would suggest, is has constantly gone down in the first six months of this year, meaning that if I understand it correctly, what has gone through the P and L in terms of credit losses has actually is actually larger than what your models would indicate. So that deduction has gone smaller and smaller. Is that fair assessment? And should we expect risk to go to zero? I think in this year, we have taken increased loan loan loss provisions, and those provisions have reduced the difference to to the capital calculations. So we actually had a lower capital deduction as a consequence of the higher provisions we have taken over P and L. And that has reduced the difference and reduced the capital reduction, And that is part of the 10 basis points we show in today's presentation explaining the 50 basis points improvement. We have 10 basis points lower deduction in capital, and that's partly coming from exactly the item we are pointing to. That's reflecting that they are taking huge provisions this year. Okay. Alright. Thanks a lot. Thanks very much. The next question comes from the line of Phil Jeweller. Please go ahead. Good afternoon, and thanks for hosting the call. My question would be on bond issuance plans. Could you maybe give an update on which bonds you plan to issue this year, especially across the capital structure and also across currencies? Yes. The Ministry of Finance this month granted our approval to merge the bank and the holding company, making bank the ultimate current company in the bank. That means that it will be the bank issuing Emerald Capital or seasoned on preferred capital going forward. I think it's fair to say that we are considering starting issuing senior non preferred from the banks towards the end of this year, but only in a smaller amount this year. We have until the 01/01/2024 to comply with the annual requirement of having NOK 157,000,000,000 in annual capital. We also plan to issue some collar bonds in the second half of this year. The currency, we also will depend on which market is most favorable at the time we will make it easier. And on subordinated bonds like T2s, AT1s, any plans there? No. Nothing for AT1s and nothing on subject. We raised we refinanced the €4,000,000,000 and not subject in May, but no there'll be no further issuance this year of subject or AT1. Thank you. The next question comes from the line of Jan Erik Gjerland. Please go ahead. Good afternoon. Jan Erik Gjerland from ABG. I just wanted to confirm or check your volume side. You had a very strong volume growth in future and tech in the corporate sector together with the Ocean Industries. How much of that is really underlying growth and how much is FX? And if it's not truly FX, how much of that will then be sort of a final take? Is the average a little bit higher than you normally would have done? Or is this your final take in these kind of syndicated loans? That's my first question. It's it's not currency driven, to put it that way, as the Norwegian kroner has strengthened through the quarter. But I think it's fair to say that we have done some more business in the future and tech area than we've done in oceans. There may be selected deals that there that are early phase in terms of underwriting and that we will syndicate throughout, but nothing to the extent it's relevant to comment on that, I think, in terms of the exposure overall for the bank. Can maybe just add a little bit, Jan Erik. It's Harald. If you look at what we show in the fact book on Page twenty seven and twenty nine, we show the EAD development within the different subsectors. Obviously, if you compare with the end of first quarter, there's a lot of currency distortions in those numbers. But I think the important point to make on the large corporate side is that we do have a lot of flexibility in terms of how we manage the overall portfolio, both in terms of the size of the underwritings we take, the proportion we syndicate. We also do other types of risk sharing now with life insurance companies and so on. So that gives us the flexibility to manage and calibrate the exposure and numbers on the large corporate side to take into account the currency migration, the RWA migration as well as the growth potential we have on the SMEs and the personal banking side. So a little bit back to what I think it was Nick, you've talked about the currency effect on the lending volumes in your first question. And the thing is we would have been able to grow faster on the large corporate side in the second quarter than we did. So we just had to manage the use of capital in a conservative way in order to to build in sufficient buffer for currency and and and RWA migration. So so we have the the platform in terms geography and industries to grow faster than we have done in the first half, if that should be desired. Okay. On the deposit side, in the personal customers, that was coming off very, very much. So how much of repricing did you do in deposit side in the quarter? Did you do anything? Or is everything now coming in Q3 gaining your NII from here, if I understood if I correct it? Deposits were repriced in late May and then again at the July, and that is seven to eight weeks later and non sale repriced. But on the other hand, we didn't but the full effect the effect of all deposit and loan repricing is equal to approximately 250,000,000.00 which is in line with the guiding we have provided. So there should be no net negative drag from the repricing going into the third quarter. I think that's the most important thing to remember. On the funding side, you prefunded a lot last fall, I think, and that has sort of dragged the net interest income a little bit down or 30,000,000 to €50,000,000 the last couple of quarters. Is that still the case for the third quarter? Or is then back to zero, so to speak, because you are then coming into the third quarter of last year, which you did the prefunding? Would you then gain on something because you can then actually take away some prefunded or earlier funded levels. Is that the case? The funding is the senior funding we did in the fourth quarter last year comes at Emerald Capital and will be gradually replaced replaced by by the new senior non preferred capital. But overall, we do not expect any nominal increase in long term funding costs as a consequence of this. So it's not another quarter of a drag in Q3 from this Q4 last year prefunding? No. There might be some currency effects on that as well, but there is no new senior funding this year, so there will be no additional effects from new funding impacting the third quarter number. Okay. Just on two small finals then. Could you give us the split of the associate income, the export finance, Vipps, 17 and the minimum. Is that possible, or is that something you don't even you don't disclose at all? I haven't found it at least. We don't disclose the details of that, Yandex. We give them as a group. But what we can say is that this is moving in the right direction. They've been able to more than compensate for the loss of revenue they had from less traveling. Since it's been a turbulent start to the year given the nature of this the crisis that the world is in, the strong expectation for improved results in the second quarter. And the exotic lungs, I think there are some reversals of negative M2Ms in the first quarter that are impacting the second quarter numbers. Just some comments on the direction, but we don't give the full details. The company will numbers in a bit later. They have to report the numbers before we can provide more detail. Okay. Thank you. Finally, then on the last part, is 80% solvency ratio for without transition rules a problem for D and B Life or not? No. The life insurance company has a solvency rates with transitional rules of 176, and the transitional rules apply until 02/1932. So that's not a problem for the life insurance company. Okay. Thank you. That's all for me. The next question comes from the line of Martin Lipstick. Please go ahead. Yes, good afternoon. It's Martin Lipsyk here from Goldman Sachs. Could I just have a couple of follow-up questions on the various comments on capital and capital distribution from here? And then firstly, you mentioned in your earlier remarks that the headroom to capital requirement is now the near time high. Could you just tell us at what kind of capital level you would be comfortable running the bank card? Is it 18%? Or could it be in the current environment, given the requirement is 15.7%, that you would be comfortable running the bank card at 17%? And given the number of comments made on a couple of P and L items going forward. I was just wondering how do you expect the core Tier one ratio from today's perspective to evolve for the rest of the year? And then finally, the third question, just in terms of the function of capital distribution and the potential AGM in the fourth quarter this year, could you just tell us, firstly, do you still need any regulatory approvals for such a potential distribution? Is there a potential gap in general approval you would need? And how does the process look from here to distribution? Thank you. With regard to the 15.7%, that reflects the reduction in the countercyclical buffer we have seen in Norway this year. And then at the same time, it's really keep in mind that, that requirement can be increased again in the 2022 by the earliest. But of course, keep in mind that we probably, at some stage, need to be back at 110 basis points more than the 15.7% or back to at least 16.8%. On top of that, we need some headroom for RWA fluctuations and business opportunities, but we haven't specified how close to that limit we should operate. So not not precise amount or headroom about that. And it's important just to remind everyone that 15.7 includes a 100 basis points In terms of capital generation ability through the P and A during second half, I believe that was your question. I think it's difficult to It's time to get at the reps and should It's be difficult, but I think we'd like to go back to one of the key points we've made earlier and that we repeated today and that's resilience in earnings before impairments where we now thought it showed the twelve month earnings before impairments. And even six months into this year, given the changes we've seen, you can see that earnings have been holding up. Yes, there is the rolling fact, but that's on NII, but that is fully reflected into this quarter's NII. So given the outlook we see today and even that we in both first and second quarter this year have generated an aggregate of 80 basis points to capital, which 40% been reserved for dividends for 2020. I think that should be a good reference point also for you to think about the second half and our ability to generate capital from earnings. Capital distribution, we don't need any approval as long as we satisfy the requirements on the capital side that we do amply. There have been the statements and the signals that are out there that confirms the authority of the board to make the decision on making a recommendation to the general assembly in the fourth quarter. There's no outstanding approvals that are needed in order to pay out if that's the thing of it. Perfect. Lovely. Thank you. Thank you very much. The next question comes from the line of Jacob Kruse. Please go ahead. Thank you. Jacob from Autonomous. Could I just ask, I guess, three questions? The first one was you talked about the Q2 NII level as a sort of representative run rate. So do I take that to mean that the deposit lag repricing that you did that you had in Q2 will not rebound with a positive effect in Q3? So basically, there is not an additional headwind that we have to compensate for in Q3 on that one. And the second one on NII was just could you comment at all on what margins you're seeing relative to your back book on new corporate loans on the large corporate and on the domestic SME side? And then finally, if you could say anything about the size of your U. S. And Canadian shale book. I can start with NII. There reduced deposit rates late than loan rates, meaning that, that was an extra negative drag in the second quarter. On the other hand, it did not reduce loan rates from the first day of the quarter. So we didn't have the full effect of the loan repricing in the second quarter. And these two elements, they can switch other out, meaning that the net effect of both loan and deposit repricing is similar to what we expect to see in the third quarter as a result of repricing of loans and deposits. But that's why we are saying that we can use the the to to as a starting point. In our oil and gas portfolio, we have a geographical split of two thirds related to the North Sea and one third related to The US. Of that, we only have a very limited exposure towards the shale. Sorry. When you say limited, that's less than a third or something like that? Well, the overall, in terms if you look at the oil and gas, a third is related to The US, and a limited part of that third is related to shale. Yes. Exactly. So if I take that third, when you say limited, that's less than half or less than onethree of the onethree book that you mentioned? We have a few producers that have a part of their production related to shale. So it's difficult for me to quantify that more specifically. But if you say that one producer, for instance, has 70% based on another, say, say that they have roughly 30% to shale, it's that kind of we don't have a very few or no customer that has purely shale, but they have a proportion of the production related to shale. Okay. Thank you. We have taken it's Harold, Head of Corporate Banking. We have taken a very careful approach to to shale both for environmental reasons and because we know that that they are much more vulnerable to to the short term fluctuations in the oil price. And as we've stated, the oil and gas side, it's really the North Sea Basin. That's our home market where we concentrate most of our resources. So yes. You also had the question with regard to the potential repricing on corporate banking. I think it's fair to say that we've seen a certain repricing in particular in The U. S. Market and in Europe. Obviously, there's been a stronger repricing in sectors such as oil related and shipping where there are few banks competing. In the Nordic market, the repricing has been somewhat lower driven by the, I would call it, the relationship banking approach of the Nordic banks. And also there's been a flight to quality, which means that there has been less repricing potential. But we do see in average on similar risk, we do see a higher average margin on the front book than the back book. And just could you quantify that at all, the sort of blended benefit that you're taking on the front of the credit risk? No, I can't really give any concrete evidence because it's also been a very fast moving target, to be honest. You know that we did deals maybe in April, May, we did deals that maybe 50 to 75 basis points higher than what we would have seen before the corona crisis, but then margins came down again moving into June. And as I said, there's there's a wide discrepancy between difficulties and the different industries. So it it's hard to give you any more exact figures on that. Okay. Thank you. The next question comes from the line of Nick Davy. Please go ahead. Hi, again. Just a couple of quick questions to follow-up, please. The first one, Harald, just listening to one of your answers earlier, you were suggesting you have you're operating with some sort of capital cap maybe within the Corporate Customer business. So I just wondered if you could talk a bit more about that just so we can understand the extent which might hold you back from growth if you sit with slightly higher levels of risk weighted assets. Just want to make sure I understand that one. And the second question, just to understand rate sensitivity in both directions, just in case your central bank has another change of heart and starts to bring forward the date of potential hike. Could you just help us understand the NII that you get off your allocated capital? Is it sensitive to? Does it need an actual base rate hike for the interest to come in higher there? Or is it sensitive to NIBOL or some other market rates? Just any more clarification on that would be helpful. Thank you. I can start with the latter question. Have very little direct interest rate exposure. So any rate changes from the Central Bank or in Naimo will have very limited P and L effect on the bank. Where almost all of the effect comes from changing the customer prices on loans and deposits. And when the Central Bank when they move these loans and deposit rates, yes, historically, we've seen an effect of approximately 1,000,000,000 NOK for each quarter percentage point rate changes. But, again, it it only materialized when we when we change the customer rates on loans and deposits. And when it comes to the to to the growth volumes, I mean, the starting point is that both for strategic considerations as well as due to historical return on equity, we've decided to give priority to the personal customer segment and the SME segment in terms of capital allocation. So that basically means that we have no restrictions on as long as it's profitable growth, allocate capital there. And then in order to reach the bank's overall growth targets, we can use the large corporate segment as the as the as a way to calibrate our overall volumes. And we can do that by how you know, both based on how much new business we take in and how much we distribute. And, obviously, in an ideal world, we would have a distribution capacity. That meant we could take in as much new business as we could generate. But when the when the situation circumstances are changing as rapidly as they've done in the first and second quarter, we've had to be somewhat careful in our use of capital on the large corporate side to to to to make sure that, that we have kept a buffer, even if there were wide fluctuations in in in the currency rate as well as the uncertainty with regard to risk weighted assets. And as our group CEO said initially, the reduction or the migration on the risk weighted asset side has been somewhat lower than we had said going into the second quarter. I think it's fair to remember that in March, we saw a significant depreciation of the Norwegian krone currency, boosting lending volumes in Norwegian krone terms quite significantly as reported in the first quarter account. On top of that, there was uncertainty with regard to the utilization of revolving credit facilities and overdraft facilities, which were also increasing at the same time. Both of these have now been reversed during the second quarter. The Norwegian kroner has reverted to a lower to a stronger level the reasoning for for our earlier comments. Okay. Thank you. Alright. Please? We have one more question in the queue. You're happy to take it. Yes. We'll take one more question, please. Thank you very much. So the final question comes from the line of Ricardo Rovere. Please go ahead. Thanks. Thanks for taking my follow-up. On continued finance, in Q1, you charged more than NOK 700,000,000. And the explanation, if I remember correctly, was that the unemployment in in Norway was going through the roof. 300,000 people registered for unemployment as a Norwegian welfare administration. But most of them were on temporary layoff, if I remember correctly, the so called. Now the registered unemployed people have halved. The last number I have on the back of my mind for June is a 130, maybe 35,000. If the trend goes on like that, should we expect VNB to start having reversal out of the NOK 700,000,000 you charged in Q1? This is the first question. Then the second question is on the AT1, if the level of AT1s you have today is fair, if you're okay with that? And if the cost of VAT1 impacting your overall profitability is what you have seen in Q2 and we can assume that to remain more or less unchanged for the next Q4? Thank you. I can start with the 81,000,000 We raised in March, we had the maturity of 80,000,000 We refinanced that in late November at very attractive prices. And that's why the AT1 interest rate cost is lower in the second quarter than in the first quarter. In the first quarter, we have sort of a double set of costs. Going forward, the first quarter numbers is representative, and we have no plans for additional 81 charter ratings this year. When it comes to the consumer finance part of the portfolio, I would like to just highlight that we haven't seen any negative development in credit quality in that portfolio during the quarter, rather the opposite actually. So the reason why we still have those impairments related to consumer finance is also that, of course, we need to take an active approach in what seasonality and what we expect in terms of usage going forward in the coming so that's related to IFRS nine Stage one and two. But it's important to highlight that we do not see any negative development at all in that part of the discussion. Very clear. All right, guys. We have to stop there. We will just like to thank you for your good questions and your participation, and we would like to wish you all a very good time. Thank you. Thank you for joining today's call. You may now disconnect your lines.