Good morning everyone. Welcome to this conference call for the second quarter of 2019. Joining me today, I have Peter Grabe, Head of Investor Relations, and Annika Engler, Head of Group Accounting. To start off with some general summarizing remarks, please go to slide two. As you know, there have been some major items affecting the reported earnings in the past year. Namely, a large capital gain last year from the sale of the shares in UC and the reversal in Q1 this year of the Oktogonen provisions for 2018. When assessing the underlying development of the bank, it is relevant to adjust for these. The capital situation is strong and the CET1 ratio of 17.1% is in the middle of the target range. The net interest income is growing steadily and reached a new all-time high level, both in Q2 and for the first half of 2019.
The fee and commission income also developed strongly and also recorded all-time high numbers. On the cost development, however, we are far from satisfied. Intensive management efforts and internal work is being conducted to change the trend we have seen over the past two years. While we are investing in business development and increasing operating efficiency, there are several things we can do to become more profitable. During Q2, a comprehensive review has been initiated to focus on core areas. This includes the review of business and offerings that add a lot of complexity and cost, but low profitability, areas where the bank has limited market potential, low earnings, and where risks can be reduced. As a part of this review has been initiated about our geographical presence in Europe outside of the home markets.
In conjunction with this, the bank has decided to close its branches in Estonia, Latvia, Lithuania, as well as our branch in Poland. In addition, representative offices in Jakarta and Sydney have been closed. A number of related actions have also been taken. The bank will cease to offer export finance and the execution of trade finance in the various home markets will be moved to Sweden. These actions will not only reduce complexity and cost, it will also free up capacity to develop in our core areas. On to slide five and the quarterly development. Net interest income is up by 2% and for the first time exceeding SEK 8 billion. In the quarter, there was tailwinds from both volumes, FX and day count effect. While the net effect from margins and funding costs was negative.
Fee and commissions increased by 7% on the back of strong equity markets, strong net inflow, and reversal of the negative mix effect seen in Q1. Costs were up 4% adjusted for Oktogonen and currency effects. I'll get back to costs later, but we are of course not satisfied with the development. The bank has not made a provision to Oktogonen in Q2. When we look at the bank's overall development, our assessment is that the prerequisites for our provisions are still not there. Credit losses amounted to 7 basis points compared to 5 in Q1. Adjusted for Oktogonen, currency effects and dividends from Visa Sweden, which are of one-off nature, the operating profit decreased by 1%. Please go to slide six. This picture shows our operations in the U.K. over the past 10 years. As all of you know, a lot of things have happened during this period.
The financial crisis, the Euro crisis, Brexit, significant tightening of regulations, et cetera. We know that if you want to build a stable, sound and profitable operation in our industry, it is required that you every day strive at finding the best customers and develop long-term relationships. When we look at our U.K. business development, it is strong, not least given the uncertainty currently in the U.K. economy, but also given all the hard work our colleagues in U.K. do and have done with the creation of the subsidiary. This has meant that we have front-loaded investments that will benefit our daily operations at an earlier stage than otherwise would have been the case. In addition to this, significantly more resources are today spent on financial crime prevention. All in all, this has been demanding, but it has also provided us with a strong platform for future growth.
Having said this, the underlying business trend is very solid and we remain very optimistic about our operation in the U.K. With a great reputation and very satisfied customers, we have a large potential to continue to grow for a long time. On to slide seven. Here you can see that our capital situation is good with our CET1 ratio of 17.1% being in the middle of the target range. That is 2 percentage points above the SREP requirement. As you might recall, we had a sharp pickup in risk exposure amount in Q1. This was reversed in Q2 since there were some temporary increases in the last quarter. We know that the capital requirements are on an increasing path. First, the countercyclical requirements will increase in the second half of this year.
Secondly, the regulators in both Sweden and Norway have flagged for higher capital requirements on commercial property lending. It is still too early to have a view on the effects from this, but of course it feels good that we are where we are ahead of these forthcoming increased requirements. Please go to slide eight where we'll look at the costs excluding Oktogonen and the development of the underlying costs. Here we'll look closer at the cost development in the first half of the year. The underlying cost growth in the bank was 6%, a level with which we are not satisfied. We have increased the pace and front-loaded some actions in the area of financial crime prevention. The AML area accounts for almost half of the cost increase. A significant part of the increase is attributable to U.K. We have an increase in other costs.
I'll get back to that. IT development costs declined moderately, but we still assess these to increase somewhat for the full year compared to 2018. The previous guidance of SEK 2.1 billion-SEK 2.2 billion remains. To conclude, we have now started a journey to establish another type of cost development in the bank. To the previously- communicated actions, we have now added a more distinct focus on our core business and also structural changes. It will take some time to completely change the cost trend, but we now see that costs do increase at a lower pace than in 2018. On to slide nine, please. The cost growth in Q2 showed a similar pattern as for the first half year. The increase in other costs includes the SEK 30 million reserved for the closure of our operations in the Baltics.
As said, we have increased the costs related to financial crime prevention. Please go to slide 19. When looking at Q2 and the first half of the year, we see a business development with several strong components. At the same time, the bank has a higher growth rate in costs than income. This we are committed to change. We have therefore initiated an extensive review with three different aspects. The first one is about our offering and resources spent to support that. Going forward, we will opt out or transform services with low profitability and that do not contribute to our core business. So far we have decided ceasing our offer in export finance. The management of trade finance on the various home markets will also be moved to Sweden. Secondly, we have initiated a review of our European presence outside our home markets.
So far, we have decided to terminate our operations in the Baltics and in Poland. Earlier this year, we also closed our operations in Jakarta and Sydney. All these actions in different geographies save money, reduce complexity, reduce the need for future investments, and reduce the efforts needed to adapt to new regulations. A part of these saved resources can instead be allocated to other areas, which leads me to the third point, which is to focus development resources to our core areas to develop our digital customer relationships and offering. Please go to slide 10. This picture shows how our spending on IT development is allocated. It is great to see the shift in the mix over the past quarters. We are now investing a significantly larger share on business development, while at the same time the share of mandatory regulatory compliance development has declined.
This is of course also something that means that we get a greater degree of flexibility in deciding the level of total development investments we should have and it becomes easier for us to fund income development with the level of these investments when a lower share is due to regulatory compliance. Please go to slide 13. A very important market and product for the bank is of course mortgages in Sweden. It is a market where the competition always is very strong, but one can probably say that it has become even stronger lately. We are the second biggest player with a market share of just above 22%. Lately, we have not kept that market share in terms of net lending. We are of course not happy with that, and therefore it was joyful to see that we in May was the biggest bank in terms of net lending.
At the same time, our margin in this business continued to be stable also in Q2. Naturally, mortgages is one of the highly prioritized areas and you can be assured that we will work hard to become even more relevant, competitive, and efficient in this field going forward. We'll not only defend but also strive to further strengthen our position in this very important market. Please go to slide 14 and some more detailed comments on the net interest income development in the quarter. NII increased by SEK 130 million, or 2%. Like we have seen consistently for a long time, volume growth was a key driver, adding SEK 117 million to NII. One additional day in the quarter and positive FX effects contributed with SEK 101 million. Some comments on the net effect from margins and funding costs which in total shaved off SEK 40 million in the quarter.
In Sweden, the effect was positive by SEK 24 million, which was a result of a reversal of the mismatch effect in Q1 due to the Riksbank hike in Sweden, which we spoke about last quarter. Outside Sweden, however, the effect was SEK -76 million. Apart from general margin pressure on the private side in most markets, a main reason for this decline comes from the mismatch effect in Norway following the rate hike by the central bank in March. This is because a number of weeks' notice period before customer rates can be raised. That means that our funding costs increased earlier than the customer rates did.
Normally this negative effect would be reversed in the following quarter. Since the Norwegian central bank once again raised rates towards the end of the quarter, a new mismatch effect is likely to offset the reversal impacts on NII in Q3. Going into Q4, the reversal effect on the NII should materialize all else equal. In terms of the effects in the liquidity portfolio, these should be seen in the light of a usually similar offsetting effect on the liquidity portfolio in the NFT. Over time, the net impact from the liquidity portfolio on NII and NFT has been minor. Moving on to fee and commissions on slide 15. As mentioned earlier, we saw an all-time high in Q2, and the development is especially positive in the savings business as you can see.
The fact is that it is especially the savings business that has been driving the fee and commissions. In Q2 the income generation was back at a high level following the negative mix effect we saw in Q1. Strong net inflows and strong equity market of course, helped significantly in Q2. Please go to slide 17. The strong inflow into our Swedish mutual funds continue. The first half of 2019, our market share of net inflows was 21%. While we have consistently been at this level, about 20% in the past decade, our market share on the total volume of mutual fund savings in Sweden is still only some 11%. It goes without saying that this is an area where we see very good potential for continued growth.
Also outside Sweden, our savings business continues to perform well with net inflows and almost SEK 7 billion in the 12 months. Please go to slide 18. An area within the savings business where we see strong growth potential is occupational pensions in Sweden. Today, occupational pensions for us means money managed in our mutual funds. Our market share is today at 7% while in mutual funds we take around 20% of net inflows as you saw. The assets under management increased 17% during the first half of 2019 in our life company. The paid-in occupational pension premiums increased by 14%. Seen over the past four years, the average growth has been 20%. Occupational pension, in its current form, is an area that fits well with our business model.
Regarding the corporate customers, often SMEs, our close relations are central, and today we have both tools that are easy to use and good solutions at hand both in the Internet bank and in the corporate app. For the private customers, it is also today much easier to get good overview and good pension advice either locally, remote, or digitally on the web or in the app. Back to slide two and to conclude. In the quarter, as well as for the first half year, the bank delivered all-time high net interest income and fee and commissions. Business volumes and the savings operations were again the key drivers for the positive development. Loan losses increased somewhat but remain at a low level of six basis points, and we assess the underlying credit quality in the bank to remain stable.
The capital position of the bank is strong with the CET1 ratio of 17.1% being in the middle of our target range. In terms of cost development, however, we are not satisfied. During Q2, a comprehensive review was initiated to further address this, and a number of actions have already been taken. At the same time, additional resources have been channeled towards the creation of entirely digital customer relationships from the identification of potential new customers to fully develop business relationships. Thanks for listening. With that, I open up for questions.
If you haven't already and you wish to ask a question, please can you press zero and then one on your phone keypad now, and you'll enter the queue. After you're announced, just ask that question. If you find that question has been answered before it's your turn to speak, please press zero and then two to cancel. There'll be a brief pause while the questions are being registered. We go to the line of Matti Ahokas at Danske Bank. Please go ahead. Your line is now open.
Yes. Matti Ahokas here from Danske Bank. A question on the strategic review. Firstly, if you could elaborate a bit on the decision to stop the export finance business and the trade finance move. Were these businesses that were so clearly unprofitable that you decided to already, at this time, terminate those? How big businesses are these actually? The second question is also on the same theme. Carina Åkerström mentioned today earlier that you're looking into the areas of low profitability and low potential. If you look at the ROEs of the different whole markets, they're actually pretty similar at the moment. Which are the areas which you consider low profitability and low potential? Thanks.
Hi, Matti, and thank you. Question number one regarding export finance and trade finance. Regarding export finance, no, that is not a very big operation for us. We have seen over the years that it hasn't really fit into our offering, and we do not stand out competitive-wise. That's why we have decided to take a step back. Secondly, when it comes to trade finance, yes, we are active in that area, but we have decided now to concentrate the execution and the management of that business in the European context to be handled in Sweden. That's a way to streamline and improve the efficiency in that process. We are not talking about major cost impact from that, but it is two examples of changes we are making, and more should be expected to come.
You should keep in mind that we have just started to do this. Just to reflect slightly more broadly, a year ago we declared the two strategic initiatives to increase business development and also to increase operating efficiency. That is up and running according to plan. Now we add to that initiatives and the review that aims at also making some more structural changes. More should be expected to come. That is the light in which you should also see the changes we are making in the European context outside the home markets. Then when it comes to low profitability units or business areas, that review has started. We will look at everything in the bank to find ways to, first of all, improve efficiency and reduce cost, because we are not satisfied with the cost development.
Also to find areas where we will take a step back or close things. Everything will be object of that kind of review. Now we have decided to firstly focus on the presence we have in Europe outside our home markets. Of course, we also look at our home markets and try to find out how we can improve efficiency and reduce cost in those as well. At the moment, we are focusing primarily on the countries outside the home markets when it comes to making decisions about where we should have a presence or not.
Thanks. When could we expect some further news on the further actions that you're going to take?
That will feed through gradually. We'll come back as soon as we have news to tell. We'll come back already in Q3 to tell about where we are. We don't make any forecast now about exactly when we are going to tell about what we will do. That is something you have to wait for until Q3 and going forward. Now we have made a decision to close the operations in the Baltic countries and Poland and also a few representative offices in Sydney and Jakarta.
Great. Thanks a lot.
We are now over to the line of Geoff Dawes at Societe Generale. Please go ahead. Your line is now open.
Hi, it's Geoff Dawes from Soc Gen here. A couple of questions. I've got a bit of a follow-up actually on what we've just had in terms of the restructuring opportunities. In terms of materiality, you've given us something on t iming, but in terms of materiality, is this three-quarters of what you're expecting to announce to the market? Is it 25%? Can you give us an idea of how much is left to come and how much you've already disclosed today? Second of all, in terms of the definition of your home markets, could there be any change around that? Any of the current home markets could be, I guess, considered to be outside of the home market scope, could be moved into a separate categorization. Those would be the two questions. Thank you.
Hi, Geoff. Thank you. About the materiality. The countries where we now cease to run operations, those are in terms of cost numbers are really not big. It does contribute to complexity. I think when you think about this, we will do more and review that and then come back when we have decided exactly what to do. That you have to wait until next quarter to get the answer to. What I think is also important to underscore is that there is a cost level now for these countries. It also means adds complexity for the bank in total. We have been forced over the years to continuously adapt to several different regulations, which has been very costly. Every single country, every single kind of counterparty, every single product does add a complexity and workload in many parts of the bank.
That is something we now want to address and go through. In the long run, this has a cost impact, which is important to us. Now we focus on doing something about that. Regarding the definition of our home markets, no, we have not changed that. We will certainly review and try to find ways to improve operating efficiency in each one of those countries. That's really important, of course, but we haven't changed the definition of that, and we have no plans at this point to do that.
There's no question of you effectively exiting one of the current home markets. They're set in stone.
That is not on the table, and we have not made any decisions in that direction. Having said that, of course, we are not satisfied with the cost development that we see generally and home markets also outside Sweden do contribute to that cost development, and that is something we are going to do something about.
Yeah. Understood. Thank you.
We are now over to the line of Sofie Peterzens at JP Morgan. Please go ahead. Your line is now open.
Yeah. Hi, here is Sofie from JP Morgan. I wanted to ask about the Swedish mortgage market. You mentioned that you are not really that happy with your front book market shares and you expect to take more market share going forward, hopefully. How will this be done? Will it be by lowering your margins or just having, I don't know, more active dialogues with the clients? How do you plan to actually gain more from the market share of the mortgage market? How do you see margins developing?
My second question would be on the Baltic business. You have now closed that, you really think that the Baltics are that complex and what was the rationale for fully closing the Baltic operations? My last question would be on the Common Equity Tier 1. If your Common Equity Tier 1, hypothetically speaking, would go above the 18.1% minimum, how should we view that? Would you increase the payout or would you consider buybacks or how should we think about that? Thank you.
Hi, Sofie, and thank you. Regarding the Swedish mortgage market, yes, we have the ambition to not only keep our market share, and the inflow that we have seen lately of new lending, but to improve that position. What we do in order to achieve that is, of course, through the branch network and to become even more active using all the tools we have, which is, of course, the branch network, but also digital tools we have and so on. We have the capability, and it is an important market for us. When it comes to what that could mean to margin development, we have seen, of course, intense competition and maybe increased competition during the last years. Of course, you can't exclude that we have a margin pressure in this market going forward, and that potentially could impact us to a certain degree.
So far, when you look at the margin development we have, it has been stable for us in total. I know that the communication between different banks has differed a bit in this area, but it depends to a certain degree to how you cut the cake. What we mean by stable margins is that then we take into account both the margin we have against our customers and also the increased funding costs. The total impact has been stable or even actually slightly positive during the quarter. I would say stable. When it comes to the closing of the Baltic countries and why that was done. We have been struggling with the performance in those markets. We have had and do have a very limited operation there. We do service home market customers and their operations in the Baltic countries.
I think this is an interesting example of what happens to a bank if you don't have a big operation with a big source of income these days. Even though we have a very small operation, we have been forced, of course, to adapt to increasing regulatory requirements regarding financial crime and AML. Even though we only have a small number of customers, we have to upgrade the systems. We have to GDPR adapt that business as well. We have to adapt it to PSD2. Each one of those exercise is something that adds both cost locally and complexity to the group as a whole. That is exactly the reason why it's important for us to review this and why it makes sense, not only regarding the cost that we do have locally, but it has a greater impact to the bank.
That's why we see opportunities to reduce cost in the total for the bank when we go through this. Finally, the question about the CET1 ratio and what potentially would happen if we pass the 18.1% level. That is something I don't want to speculate or give any guidance. As long as we are within our target range and we find ourselves in the middle of that range at the moment, we do not communicate. We come back and communicate about the plans when we reach that point, then we do it based on the circumstances.
Okay, thank you very much. Just a quick follow-up. On the Baltics, you mentioned that you had been struggling with the performance. What kind of ROEs were you printing in the Baltics?
Negative ones.
Okay. Thank you.
Hello? Okay, who is next in line? Is that Christoffer Adams? Jacob.
Am I next in line?
I think so, because it seems like somebody dropped off, so.
Okay. Thank you. I just wanted to firstly follow up on the last question. When it comes to the scaling back of the operations you're doing now, would you be able to say anything about the magnitude of revenues and the cost that those operations accounted for? Not in any precise numbers, but are we talking hundreds of millions of SEK or tens of millions of SEK? Just to give us an idea of what we are looking at here. Secondly, just on the cost development in this quarter and looking at your full year cost. You were doing SEK 10.7 billion of cost X Oktogonen for the first six months, s hould we expect to see further growth from that in the second half?
Do you think the initiatives you're taking now this quarter and what you're planning for the next six months means that you should realistically be able to run this at a lower level of underlying cost for the second half? Just a quick one on the capital. I think part of the increase to your CET1 ratio was some temporary RWAs falling off from Q1. Just in terms of that fluctuation, are we at a normal level now, or should we expect a similar kind of upwards or downwards move for Q3? Thank you.
Thank you. Regarding the magnitude of the cost base of the different markets where we take a step back and close the business, I would say the cost base in those countries is in the range of SEK 100 million approximately. They are not hugely big, but they do impact other parts of the bank. That is part of it. We continue with the review of our presence in the other European countries outside of the home markets. We will come back once we have finalized that review and with the impact of that part. We have just started, and we will continue. When it comes to the cost development for the second half of the year.
I think the best way to understand that, and without giving precise guidance, I think it is a good point to go back to slide number eight in the pack. When you look at that you can see that, first of all, we have a cost increase for the first half of the year of SEK 252 million related to financial crime prevention. That is a number that is higher than we expected half a year ago and a year ago. Last year, we had cost increases for the full year of 2018 of SEK 347 million, and now we already have an increase of SEK 252. We assessed at that time, by the end of 2018, that we should not have increases exceeding the SEK 347, but now we do expect that to exceed. We spend more on financial crime.
I think that is the difference compared to the expectations we had before. I think it is also fair to assume and expect that the cost increase should stay at that level approximately for the rest of this year. It is not an exact forecast, but it gives you a range or a flavor of where we are heading. When it comes to the buildup of U.K. operations and the Netherlands, you can see that we had an increase the first two quarters compared to the first two ones last year. We actually late 2018, that buildup actually took place to a large extent. When you now look at the numbers for the second quarter, you can see that the buildup is not happening as fast as it did, and we are reaching the level we should be at quite soon.
When it comes to cost development related to development, you can see that we were slightly down. We have assessed the cost level for that to be an expectation for 2019 to be SEK 2.1 billion-SEK 2.2 billion. That we still assess will happen. That remains. That is a quite stable cost line these days. We have other costs. There are a few items in that I would like to comment about. First of all, we have increased pension costs of SEK 198 million. Those costs are normally very stable during the year. We have also made a provision regarding the Baltic. We took a reserve for the Baltic countries of SEK 30 million. That is of temporary nature, that will not come back. We have some other temporary parts of that bar as well. I think that gives you a foundation to manage your expectations going forward.
Okay. Thank you.
Okay, the next question is-
Sorry, I had another question also too and that was regarding the capital requirements and the development since Q1. Yes, I think as you stated in your question, we are now more back to where we normally find ourselves. If you look at the risk exposure amount, that decreased by SEK 14 billion this quarter. Behind that we have reduced banking exposures to a level where we normally are. We have reduced market risk exposure amount at a level where we normally find ourselves. We also had a pickup in Q1 related to a number of larger transactions that happened close to and over quarter end. I think we are in a more normal situation regarding that now. Okay.
Okay. We now go to the line of Christoffer Adams at Kepler Cheuvreux. Please go ahead. Your line is open.
Thank you.
I'm sure you saw SEB saying that they will launch an account aggregation service this fall. How do you expect that to impact the competitive environment? Do you have plans to launch a similar service?
I can't really tell. Do you know, Peter? I can't answer that question. I don't have the information right now. I'm sorry. I have to come back on that.
Okay. Thank you.
We now go to the line of Andreas Håkansson at Danske Bank. Please go ahead. Your line is now open.
Yes. Hi, thanks. Just a follow-up from the meeting before. You said that most of the AML spending is going into the U.K. Could you tell us when you're going through that work, have you seen any signs that there's been money transfers from the Baltic discussions that we see in other banks over to you in the U.K.?
Thank you, Andreas. We have gone through the transactions where we have been by our customers in the Baltic countries and everything that is related to the Eastern countries. We have gone back for many years to review all the transactions our customers have made, and we have found nothing. That also includes customers that we have in the U.K. In the Baltic countries, but also in the U.K. We haven't found any suspicious activities that are of any worrying character. We have also reviewed transactions that our customer receives from other banks. We haven't found anything that is systematic or suspicious. We have no reasons to worry, but you can never exclude that you find something one day. This is a very tricky area. We are really humble about what we are facing. So far, no worrying signs.
Okay. Thank you.
Okay, we are now over to the line of Adrian Cighi at RBC. Please go ahead. Your line is open.
Hi there. This is Adrian Cighi from RBC. Two follow-up questions from me on the strategic review, please. How do you think through the upfront or the potential upfront P&L and capital impacts of these exits? Could we expect some of these exits to result in restructuring costs? You mentioned earlier the SEK 30 million provision you took in the Baltics. Is this something that's related to upfront cost? Would you expect some capital release from such exits? Would you aim for a capital-neutral development?
Then also in terms of restructuring, we talked mainly in terms of leaving the marginal geographies you're present in. Could we expect maybe a more ambitious restructuring, not by leaving one of your home markets, but by leaving some of the customer groups you're currently serving, say large corporates in Sweden? Do you see yourself as an ambition to remain more or less a universal bank in Sweden? Thank you.
Thank you. Regarding restructuring cost, when we go forward and make decisions about additional actions, that is something we have to come back to when we are at that point. We'll come back on that. Regarding the potential capital impact, it depends on what we do. I can't give you any forecast about that. So far the capital impact from the actions we have taken has been quite limited and will be quite limited. Regarding potential areas we could potentially leave. What will happen is that we will cease to offer some products in some areas. We are just in the process of looking deeper into that. It could potentially mean or will potentially mean that some customer groups we will not serve to the same extent as we have done or completely stop serving.
I'd like to start it in the other end. We want to focus on our core areas which we have been communicating about and that's the focus, and then we stop serving others. That could potentially mean that we take a step back when it comes to more complicated, really multinational companies, for instance if we reduce some of the services we have in those areas. The way it works in Handelsbanken is that we deal with the supporting tools and the services we offer. It's up to the branch offices to find out what business they can do and cannot do. We are clearly moving in a more focused direction. The more details about that is something you have to wait for because we'll come back on that.
Thank you very much. Very helpful.
We are now over to the line of Riccardo Rovere at Mediobanca. Please go ahead. Your line is open.
Thanks for taking my question. Sorry, I had to connect with some delay, so I apologize if some of these questions have already been answered. Three questions, if I may. One is from your statement on Oktogonen, should we now, I can see there that at least in 2019, the provision for Oktogonen is certainly out of discussion. The second thing is not that clear to me is the reason of the volatility in credit risk credit assets, because they went up quite significantly in Q1, now they're down. What's going on, and what do you think is the right level here that we should look at as a kind of average of the last past quarters?
The very final question I have is on risk provisions and asset quality. You state that asset quality looks fairly stable, but an example is if I look at Sweden, the amount of credit impairments that you've charged in the semester is almost 5x larger than the one of last year, which were maybe overly low. I don't really square how credit loss has been almost five times larger in absolute terms versus last year. I don't really see that to be stable. If you can comment anything on that.
Thank you, Riccardo. Yes, I will. Firstly, Oktogonen and 2019. We have decided not to make a provision for Oktogonen during Q2, and we did not during Q1. That is based on the performance of the bank that we have seen so far this year. The way we think about this is that it is about creating value in a sustainable way over time. When you have a situation where the costs do increase faster than income, we do not do that.
We want to have a sustainable value creation in a way. That is about cost efficiency. When we have been looking at the first and the second quarter, although the trend has been slightly improved and not as much as we'd like to see, we haven't found the prerequisites for making that allocation. That's where we are. That's the basis. We'll come back for the full year. That's the assessment we make at this point.
We now go to the line-
Okay. Sorry. To the second question regarding the RWA volatility. The reason behind that is that we had quite unusual high exposures in a few areas during Q1. That was banking exposures were larger than normal. We had higher levels of market risk when it comes to the way you calculate that in capital adequacy terms. Finally, we also had unusually many exposures, bridge financing deals and so on over the quarter related to large corporate customers. I think we are now back to a level where we normally find ourselves, where we grow steadily in tandem with the underlying core business growth.
The third question, and that is about asset quality and the credit loss we have made in Sweden this quarter. We also have recorded a credit loss in Q1 that's related to one exposure in Sweden. Besides that, the credit quality in the portfolio is stable and very good, and that's something you can see from the numbers. That is related to one single exposure. That is, of course, very unfortunate, but that's where we are. Okay?
Okay. We now go to the line of Jacob Kruse at Autonomous. Please go ahead.
Sorry. Thank you. Just to follow up again on the review of your business units. Would you be able to give us any kind of guidance on the metrics or cutoff points you look at when it comes to either how much revenues you're willing to forego here or the level of ROEs where you would say that below, I don't know, 5% or 3%, this needs to have an extraordinary reason to continue to exist? Any other sort of metrics that you're considering here. Thank you.
Well, first of all, I think that's important. First of all, we look at the whole banks. We try to reduce cost everywhere. That's one part of the exercise. Secondly, we look at business units and geographies where we have low profitability. We do not have a specific cutoff level. One reason why we don't have that is because there is a relation between the different units. If we have customers in one country, many of those could also potentially do business in other countries. There are ties between the different countries, which you have to take into account when you go about this. Of course, we will review and especially look at units that have a low profitability and where we assess the possibilities to change that to be weak. That will be in focus.
That goes for all those areas, and that goes for some of the geographies, but also some product lines we have. No fixed cutoff level. A good way to do this, of course, is to ask yourself as a business unit if you contribute to the return on equity of the bank as a whole, of course. If you don't, then you have a problem to deal with. We will definitely look at all units and especially those that do have a poor performance in terms of both cost development and cost-income ratio, but also return on equity. Then the actions we take will depend on which unit and what kind of business we are talking about. Okay?
Okay. Before we go to the next line, which is Richard Smith at KBW, if anyone else has any further questions at this stage, please could you press zero and then one on your keypad now. Richard, over to you.
Yeah. Thank you, guys. Yeah, just two questions from me, please. Thanks for the very clear comments in terms of cost, the breakdown, particularly on the development and the AML cost. I was just wondering if you could help us think a little bit about maybe how that looks going out into next year and whether there are any particular programs, I'm thinking more the AML side now, which maybe are coming to an end, and therefore you would get a bit of a benefit from those dropping away. The second question was just on intangible assets, I noticed that they are up about SEK 500 million in the half against SEK 600 million increase last year. I wondered how we should be thinking about that progressing over the remainder of the year, please.
Regarding next year, of course, you know that we don't make any forecasts. I think when it comes to the development of the AML cost, I think it is fair to assume that we need to continue to spend on AML and financial crime-related issues. Some of the cost increases you have seen this first half year, the SEK 252 million, are of temporary nature, especially those in the U.K. We use a lot of consultants to do things now, we have increased the pace and front-loaded some of that work, it comes with a cost. Some of that will go away, that will start to happen next year. Having said that, I think that you should expect that we need to continue to have costs in this area and continue to improve in this area and spend.
I think that's the expectation you should have. That is as far as I'd like to go regarding that way of reasoning. When it comes to intangible assets, the reason why they have been increasing lately is because of the nature of some of the changes we are making. We have two projects that are more of a structural character. We are changing our systems in Finland, that is a long-term investment, we are also working on our central solutions to handle large amounts of data and so on. That's also very much an infrastructural development that is going on. The level of intangible assets and the development of those is related to the kind of progress we are running. I don't want to give any precise forecasts going forward how that is going to develop.
Okay, great. Thanks.
It looks like we've got a final question from the line of Johan Ekblom at UBS. Please go ahead, Johan, your line is now open.
Thank you. Just looking at the geographical information in your annual report. If we take the geographies outside of your home markets and exclude the ones that you're already exiting, they account for 20% of your assets and 0.7% of your operating profit. Are we missing anything if we say all of these are likely to be shut or at least dramatically scaled down, or is the accounting essentially under-reporting the earnings there? I guess the one that stands out would be the U.S., which is about 15% of your group assets and made SEK 60 million last year.
I don't want to go ahead of the decided actions. Of course, we look at our different geographies. The way they contribute to the group also differ in different countries, both in terms of performance, but also in terms of contribution in other ways. For instance, our U.S. operation is an operation which is important both for many of the customer relationships we have, both with home market customers and U.S. customers doing business in our home markets. It's also an important operation when it comes to funding activities. That is also the reason for the performance. We also feel that we need to have a footprint in Asia and so on. Everything will be reviewed, and then we'll come back with the impact from that. We'll come back when we have decided what to do.
Thank you.
Yeah. Okay. That answered all your questions, right?
I'll just unmute his line. Johan, your line is unmuted.
That answered all your questions, right?
Yeah. No, that's all good. Thank you.
Good. Thank you.
Okay. As that was the final question in today's call, can I please pass it back to you for any closing comments at this stage?
I think I have covered already. Many thanks for attending the conference call. Bye-bye.