Nordea Bank AB (OTCPK:NRDEF) Q2 2022 Earnings Conference Call July 18, 2022 4:00 AM ET
Company Participants
Matti Ahokas – Head of Investor Relations
Frank Vang-Jensen – Chief Executive Officer
Ian Smith – Chief Financial Officer
Conference Call Participants
Magnus Andersson – ABG
Andreas Hakansson – Danske Bank
Maria Semikhatova – Citibank
Omar Keenan – Credit Suisse
Namita Samtani – Barclays
Sofie Peterzéns – JPMorgan
Maths Liljedahl – SEB
Riccardo Rovere – Mediobanca
Robin Rane – Kepler Cheuvreux
Martin Leitgeb – Goldman Sachs
Matti Ahokas
Good morning, and welcome to Nordea’s Second Quarter 2022 Results Presentation. Here in sunny Helsinki, we have our CEO, Frank Vang-Jensen; our CFO, Ian Smith; and my name is Matti Ahokas from Investor Relations. As usual, we’ll start with the presentation by Frank and after that, you will have a chance to ask questions. In order to ask a question, please remember to dial into the teleconference.
With that, I leave the word to Frank.
Frank Vang-Jensen
Good morning. Today, we have published our second quarter results. We continue to witness turbulent times and the economic environment has clearly changed. The war in Ukraine and higher inflation has led to rising interest rates, lower expectations for economic growth, lower consumer confidence and weaker financial markets. Actually, in the first half of the year, the stock market saw its worse performance in 50 years.
Following the higher interest rates and with more rate increases to come, we can expect continued volatility and lower economic growth in the coming quarter as well. But higher interest rates should also be seen as a healthy adjustment that gradually returns us to more normalized market conditions.
Positive interest rates are important, as they increase healthy risk awareness among customers and also set the foundation for sustainable growth in the banking industry. Even in a more challenging economic environment, Nordea’s fundamentals remain very, very strong. Our business model has been tested and proven many times and it has consistently shown its strength.
In the second quarter, we maintained our strong business momentum, improved customer satisfaction and continued to make further progress in line with our business plan and key priorities. In Q2, we grew our lending volumes, led by strong performance in the corporate sector.
Mortgage volumes were up 6%, SME lending was up 7% and large corporate lending was up 16% year-on-year. Operating profit increased by 2% to €1.361 billion compared with the record levels of the second quarter of 2021.
Total income grew by 1%. Net interest income increased by 6%, supported by strong growth in lending. Net commission income decreased by 5%. It was driven by lower assets under management, which were down by a-third or 9% quarter-on-quarter due to the financial market downturn. Net fair value result was up 1%, and our return on equity increased to 13.3% from 11.4% last year.
Our cost-to-income ratio, excluding regulatory fees improved to 46% from 47% a year ago, and including the fees, it was stable at 49%. Our credit quality remained very strong, with net loan losses and similar net result amounting to reversals of €56 million or 6 basis points during the quarter.
Our capital position continues to be among the best in Europe. We have distributed €4.5 billion to our shareholders during the first six months of the year, and are now launching a new share buyback program of €1.5 billion. So all a strong set of results in a more challenging economic environment.
We are very well positioned for the future, even in uncertain times. We continue to deliver on our 2025 business plan and key priorities. The full year outlook for 2022 is unchanged: a return on equity above 11% and a cost-to-income ratio of 49% to 50%.
Let’s now look at the numbers starting with the income lines. In the second quarter, our proactive approach and high customer focus paid off and led to strong growth in business volumes across the board. This demonstrates our ability to capture profitable growth.
Net interest income grew by 6% year-on-year. The increase was mainly driven by strong volume growth in all business areas. Large corporate lending grew by 16% and SME lending by 7%.
Demand for corporate loans, especially among larger corporates has steadily increased, and we are well positioned to meet this demand. Corporate customers are turning to us, to meet their financing needs, and we expect this trend to continue. We’ll also be able to maintain high activity – or we were also able to maintain high activity in our mortgage business. Our mortgage lending volumes grew by 6% and we once again increased our market shares across the Nordics.
Activity in the Nordic housing market has slowed down somewhat due to increased economic uncertainty. However, customer demand remained at a historically good level. We have seen some pressure on lending margins during the quarter. Funding costs have increased following rate hikes and intense competition.
On a positive note, rate hikes also starting to contribute positively to our results. Deposit margins improved in all business areas and deposit volumes increased by 9% year-on-year. Higher interest rates will likely reduce economic growth in the short and midterm. But as I said earlier, this should also be seen as a healthy adjustment that gradually returns us to more normalized market conditions.
For us, this will mean a more balanced mix of income, as we will once again be generating income from our large deposit base. Economic uncertainty and weaker financial markets impacted net fee and commission income. Net fee and commission income was down by 5% year-on-year. Market volatility led to lower brokerage and advisory fee income than the record level of a year ago.
Naturally, we expect this area to recover when there will be more visibility and confidence in the market. It was also natural that savings fees were down due to the market turbulence. Asset under management were down by 7% compared with last year, although net flows was positive during the quarter, driven by strong customer activity and the performance of our private banking business.
Payment, and especially card fee income, picked up strongly and increased by 23%. This was due to higher customer activity and especially in our consumer cards. Our customer activity was very high during the quarter, and the net fair value result in customer areas improved by 28%. There was continued high demand for FX and interest rate hedging products. We also saw gains related to the restructuring of our offshore portfolio.
Trading results and treasury income were subdued due to the challenging market conditions. The overall net fair value result was up 1% year-on-year. Our cost development was stable during the second quarter. Total costs were up 1%, due to the higher regulatory fees, particularly driven by the Swedish bank tax. Excluding regulatory fees, costs were down by 1%.
All in all, we remain focused on maintaining strict cost control and growing revenues faster than costs in line with our business plan. Our strong credit quality remains in this quarter. We have the most diversified portfolio among the banks in the Nordic region, both in terms of countries and sectors.
In the second quarter, net loan losses amounted to reversals of €56 million or six basis points. Individual losses remained very low across all sectors. The impact of the worsened macroeconomic outlook was mostly offset by the continued improvements in overall credit portfolio quality, and naturally, we continue to monitor the situation closely.
We’ve released €45 million of the COVID-19 management judgment buffer. This follows an updated assessment of the credit risks in the sector significantly affected by the pandemic. This is in line with our statement at the Capital Markets Day in February, where we said that if conditions permit, we can expect to start releasing the buffer in 2022.
We have a remaining buffer of €565 million, and we are well protected against credit losses. Our capital position continues to be among the best in Europe. Our CET1 ratio was 16.6%, which is 6.3 percentage points above the requirement.
As promised, we are implementing an efficient capital structure supporting our customers and continuing to distribute excess capital to our shareholders. In addition to the dividend payout in April, we completed our €1 billion follow-on buyback program in June, which led to a total capital distribution of €4.5 billion in just the first half of the year. This is a significant boost to our shareholders and Nordic economies. In addition, we recently received approval for further buybacks of up to €1.5 billion and today, our Board announced its decision to launch the program.
Let me now move on to our business area results. Our business areas continue to drive strong performance. In Personal Banking, we engaged extensively with our customers through our omnichannel model and especially through our highly ranked digital channels to drive increased activity and market shares. In the second quarter, we continued to drive strong mortgage lending growth, up 5% year-on-year, although we are now seeing a somewhat slower housing market than in the recent years.
However, cost of demand remained at good levels historically. We once again grew our market share across the Nordics and particularly in Sweden, where our mortgage volumes grew by 8%. Total lending volumes increased by 5% in local currencies, driven by the mortgage growth. Also lending volumes, including consumer loans, increased by 2% and deposit volumes increased by 5%. Mortgage margins decreased slightly due to higher funding costs, mainly in Sweden and in Norway.
As expected, the current market uncertainty is impacting savings activity, but we continue to provide proactive support to our customers. We also continue to work to create a seamless omnichannel customer experience, where our customers can move between human advisory and digital channels with the same great experience whatever suits our customers best.
In Denmark, Norway and Sweden, we launched a new version of our mobile bank app, delivering a smoother banking experience and providing customers with enhanced functionality and improved tools to manage their finances. The new app will be launched in Finland later this year.
Digital engagement remained high, actually very high with log-ins to the private mobile banking app now approaching 100 million log-ins per month, up 8% from a year ago. The total income was down 3% in total, but remained stable, excluding one-offs. Return on capital at risk was at 18% and the cost-to-income ratio was 51%.
Business Banking has had, yet another strong quarter. Especially in our growth markets, Sweden and Norway, we were able to drive high customer activity and business momentum. Lending and deposit volumes were up 7% and 9%, respectively, in local currencies. Total income was up 10%. Deposit margins improved and we saw a strong cost of demand for FX and interest rate products.
In Sweden, we were ranked first in Prospera’s customer satisfaction survey on small corporate banking, and our mobile app received its highest-ever ratings in Finland and Sweden. The result reflects our efforts to increase responsiveness and productivity towards our customers and I’m very pleased to see this progress, and the work continues.
In order to provide SME customers with easier access to our products and services, we continue to expand our Nordea business online store by adding more products to the selection. During the first half of the year, the online store attracted over 150,000 visits across the Nordics with growing sales volumes. Our focus on sustainability continues. We have extended our green deposit pilot in Norway and are preparing for a full-scale launch first in Norway and then in the other countries.
We also extended our sustainable offering by launching several new products, such as financing electric vehicle chargers and solar panels. Return on capital at risk, investors banking improved to 20% compared with 17% a year ago and the cost-to-income ratio improved to 42% from 45%.
In large corporates and institutions, we have continued our proactive approach with our customers. The demand for financing has clearly increased. With our strong balance sheet, capacity and our service and product mix, we have responded to this high demand. Lending volumes grew by 16%. Net fair value result increased, driven by our very high customer activity. On the other hand, volatility and uncertainty in the market impacted both trading results and commission income due to the weaker capital markets activity.
We have kept our leading role in climate transition finance and were once again ranked first for Nordic Sustainable Bonds. I’m also pleased to see that we are well on track with our target to increase our facilitation of sustainable financing. During the first six months of the year, we facilitated approximately €29.5 billion in new sustainable financing, exceeding our expectations.
Economic capital was up 5% year-on-year due to the increased lending and higher requirement for market risk capital in a more volatile business environment. Return on capital at risk improved to 18% compared with 17% a year ago, and the cost-to-income ratio was 38%.
In Asset and Wealth Management, total income was up 5%, despite the challenging market conditions. This positive development was driven by better asset management margins and higher net interest income.
Financial market turbulence had a negative impact on assets under management, which were down 7%, to €356 billion in the quarter. However, our net inflow remained positive.
In Private Banking, net flows were at record high levels across the Nordics and particular in Sweden. Thanks to our proactive approach, close customer relationships, extensive expertise and digital services, we have been able to maintain high business momentum.
In the second quarter, we also expanded the ESG product range and won several large mandates with international institutional clients. In Asset Management, approximately 65% in of total AUM were in ESG products at the end of the quarter. Return on capital at risk improved to 34% compared with 31% a year ago, and the cost-to-income ratio was 42%.
To sum up, Nordea performed very well in the second quarter, and we progressed as planned in executing our 2025 business plan. We continued to deliver on our three key priorities; creating the best omnichannel customer experience, driving forced and profitable growth and increasing operational and capital efficiency. However, I’m sure that the increased economic uncertainty, rising inflation, lower GDP forecast will challenge our customers and broader societies during the coming quarters.
We expect to benefit from the strength and breadth of our business as well as from the higher interest rates. And we are committed to reach our financial target for 2025 of a return on equity above 13%, meaning better than 13%. And most importantly, we are well-positioned to weather more difficult economic conditions to support our customers and be the preferred partner for customers in the need of a broad range of financial services, in both good and challenging times.
Thank you. And now we are happy to take your questions.
Matti Ahokas
Thank you, operator. And now we’re ready for the questions. And if I may ask, please limit yourself to two questions at a time. You are of course welcomed to join the queue later on. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Magnus Andersson of ABG. Please go ahead. Your line is open.
Magnus Andersson
Yes. Good morning. First on rates and rate sensitivity. A lot has happened since we discussed this in conjunction with the Q1 report. And among other things, it now seems like the ECB is going to raise rates in all the remaining meetings of 2022. So I was just wondering, since we previously discussed this 50 basis point rate sensitivity, if you could share with us now your estimated sensitivity to potentially 100 basis points, primarily the sensitivity to the ECB rates? That’s the first question.
Ian Smith
Good morning. Magnus, it’s Ian here. Thank you for the question. Yes, so previously, we talked in broad terms about 50 basis points being worth around €300 million to us in NII. I think given our strong deposit position, I’d say that we’re probably benefiting a little more than that with the initial increase. And then, of course, particularly in relation to the Eurozone, when we move from negative into positive, we will see, I think, even stronger benefits, if you like, for the second 50 basis points.
So we said on the call in Q1 that we were optimistic about NII progression. We remain optimistic, particularly given some of the expectations in relation to Eurozone rates. And it will also help us to deal with what is expectations for rate increases from ECB have fed through into Euribor. We’ve seen some headwind from the erosion of floor benefits and other things. And I think as those rates materialize, we’ll start to see a real benefit come through NII.
So I would say that, first of all, the first 50 basis points is probably around €350 million. The second tranche of 50 basis points is worth more than that. And so I think looking at, for example, consensus estimates for 2023 and 2024, they feel a little bit light at the moment. So we feel very constructive on NII progression.
Magnus Andersson
Thank you. And if you break out the ECB part on the €350 million and from zero – I mean, from minus 50 to zero and then from zero to plus 50, if we assume 100 basis points, 25 bps in every meeting?
Ian Smith
We’ve never really wanted to segment the different rate impacts. But safe to say that, that positive move in euro interest rates will be very strong for us.
Magnus Andersson
Yes, yes. Okay. Thank you. And secondly then, just also a follow-up from Q1 thereon volumes, where we discussed the strong progression in LC&I, primarily, but also corporate lending growth in general, and you thought that part of the volumes in Q1 could level off towards the end of the year, I think you said around 50% was probably a temporary nature. Now it sounds quite different, i.e., you expect this trend to continue. Could you please just share with us what the drivers are for you now expecting continuous strong corporate lending growth?
Frank Vang-Jensen
Magnus, this is Frank. It’s hard to say, of course, but the activity level has been very high. And what we see is like, across the board, I should say, our customers on the corporate side from small to very large are very active, driven by different reasons. So it is, of course, the buildup of working capital since or – on back of like the opening – reopening of societies, it is investments within the ESG areas, it is energy-focused investments and its supply chain investments. And actually, the activity level has been very, very high.
And then what also fuels it is the ineffective bond market, I should say. That calls for bank lending, and we just captured a nice part of that. So of course, some is temporary, something is abridges and so, but it actually looks quite strong. So let’s see, let’s see.
Magnus Andersson
Okay. Thank you very much.
Operator
Thank you. And our next question comes from the line of Andreas Hakansson of Danske Bank. Please go ahead. Your line is open.
Andreas Hakansson
Thank you and good morning, everyone. Well, I think we’ve covered NII even though that’s most interesting. But Frank, just talk to you about the targets. Obviously, I didn’t expect you to change any of your 2025 targets already today, but when I listen to you about the impact of rising rates, which are now going to be much bigger than I think you called it small impact when you gave us the targets a little while back. The interest rates are going to support equity markets normalizing.
The equity base is falling on your big buybacks and the resolution fees is going to be falling in 2024, aren’t we looking at a meaningful beat? I know you say above 13, which could be almost anything, of course. But how the reason around all those changes that have happened since you actually gave us the targets?
Frank Vang-Jensen
Yes. It’s there are many moving targets. And I agree if you added it all up and have the positive glasses on, you can come to a quite high figure. But again, it’s 3.5 years from now. But we are – first of all, we are confident that we can deliver – with the information we have now, we can deliver above 13, and that’s why we stick to it and reconfirm it.
Secondly, you should see the 13 as a floor with — and there’s no ceiling. And with the uncertainty, we see in front of us as of now, we find that as the right target. But you are right, there is a fine upside, but we have 3.5 years to that due date. So let’s see.
Andreas Hakansson
Yes. And just a bit more on your LC&I volumes that were very strong. And I assume that most of that is commercial real estate. But we hear a lot of noise in the market about the risks related to that. But if you flip it around, could you tell us, what’s the revenue benefit do you see from these changes that we see on the commercial real estate side?
Ian Smith
So Andreas, actually, it might surprise you, our LC&I growth was in other sectors than commercial real estate. Q-on-Q, particularly in Sweden, our exposure to commercial real estate reduced by, I think, around 3%, something like that. So, it was very broad-based and broad-based also in terms of countries. So we’ve seen some good performance in Denmark, alongside Sweden and Norway. So — and I think in terms of revenue, it’s helpful. Some of the lending has been to highly rated corporates, and I think that we can expect to see good — decent margins on that, given the broader conditions, particularly in bond markets. So, I think it’s net helpful subject, of course, as Frank said, understanding how sustained the additional demand might be is difficult to call at the moment. But it feels good. And importantly, it hasn’t been focused on commercial real estate.
Andreas Hakansson
Thanks very much.
Operator
Thank you. And our next question comes from the line of Maria Semikhatova of Citibank. Please go ahead. Your line is open.
Maria Semikhatova
Yes, hello, thank you for the presentation. Two questions. First of all, on your real estate management exposure. Thank you so much for additional disclosure. You mentioned on the slides that you’ve stressed after the portfolio, and you see very low additional provisions. Can you provide a little bit more details on your stressed assumptions on prices, interest rates swaps [ph], what are the variables you considered? And also, if you can disclose average LTV for your real estate management exposure? That’s first.
And second on just more generally on provisioning outlook. You still capped COVID-related buffer of €565 million. Do you still see COVID-related risk in your book, or do you see they need to keep certain buffer, let’s say, related to the geopolitical situation, given quite low sensitivity of your models to macroeconomic assumptions? Thank you.
Frank Vang-Jensen
Okay. Hi. Ian, would you take the first one and then I could take the COVID-related one?
Ian Smith
Of course. Good morning, Maria. So on commercial real estate, I mean, we look at a bunch of things here. First of all, your question on average LTV, it’s below 55% across the portfolio. We’ve got — so clearly, strong levels of collateralization, real focus on cash flow. We insist that our customers undertake appropriate interest rate hedging and so that is what underpins our view of low levels of losses under stress. When you add to that also, just a well-diversified portfolio, both across the book, but also within commercial real estate, that also helps us feel sanguine about it. We’re not disclosing particular stress test assumptions or things like that, but there are a number of things that contribute to a strong well-constructed real estate book.
Matti Ahokas
Yes. And I just would like to add, Maria, that if you look at the commercial real estate portfolio, it is a 50% risk-weight floor. So that, of course, is also from a rating migration perspective, doesn’t — it would require quite significant changes in order to even to have a negative REA impact.
Ian Smith
Good point. Good point. On the second question, Maria, the COVID-related buffer. So, as I understood your question, then it was about, whether we see a need to hold a buffer due to COVID-19 related issues? And of course, it’s needless to say that situation is much more stable, and we have more predictability than we had previously. So, while we start release to release some of the buffer now, €45 million out of the €610 million, that is in line — that’s why it’s we’re basically doing, what we said we would do at the Capital Markets Day, where if we start to feel that risks are coming down, predictability is better, then we would start this year to release the buffer. And that is what we are doing. Then we will carefully follow it. We are not out of the woods yet. You still see things happening in China and whatnot. But clearly, the situation is most better. So, let’s see what will happen. But we have taking the first steps now and then let’s see how we will continue down that path during the coming quarters and next year, probably also.
Maria Semikhatova
That’s very clear. Just to follow-up quickly on the buffer because we saw some of your peers actually reclassifying COVID-related to, let’s say, geopolitical-related buffers. If you have any plans to, let’s say, review your exposures across portfolios and reclassify the risk?
Frank Vang-Jensen
As of now, we don’t have such plans. With what we see now, we feel that we are well covered. But of course, we are following it very carefully, and we cannot exclude anything. But as of now, no such plans.
Ian Smith
I think particularly, Frank, in view of just the strength of the portfolio. I mean you’ve seen the improvement in impaired loans, PDs are down, all of those different things contribute to a strong assessment of the portfolio. The update of our collective provision models with a worsened macro outlook have also performed strongly. So, the question of respraying COVID as a general geopolitical buffer isn’t something we think is needed.
Maria Semikhatova
Okay. Thank you very much.
Operator
Thank you. Our next question comes from the line of Omar Keenan at Credit Suisse. Please go ahead, your line is open.
Omar Keenan
Good morning everybody. Thank you for taking the questions. I had a question on net interest income and capital planning. So, firstly, on NII, I appreciate your comments that consensus NII looks a bit light given the forward curve.
I just wanted to ask you, when do you think we’ll see the benefit from deposit margins offset the various headwinds? From what I understood, it sounds like EURIBOR three months moving into positive territory is a key point. So, that sort of feels like from Q4, we should really start to see NII growth sequentially.
And I guess against that, could you just perhaps talk about some of the other dynamics that are going on in the book related to higher funding costs and lower lending margins so we can try and size up what the upside is?
And just related to that, I was wondering whether a rising interest rate environment changes your views on some of the relative attractiveness of deposits versus wholesale funding because they can — kind of, in some of your markets, the loan-to-deposit ratio is quite high and perhaps a bigger deposit base would be more attractive?
And finally, just on capital planning. One of your peers said that the book could take up to a 25% decline in real estate prices before risk-weight floors are reached, given current PD levels. Is there a similar number that you can share? Thank you.
Frank Vang-Jensen
Good. Thank you for the question. So, Ian, why don’t you take the NII-related parts? And also explain the dynamics and what we see with the — like the period from now and up to at least when we are in positive territory?
Ian Smith
Sure. Morning Omar. So, there’s no question that it gets better from here. I think we have had some headwinds, for example, in relation to the floors in our euro-denominated lending, for example, that have held us back a little bit in Q2. We’ve also seen price increases, for example, in the Swedish mortgage market struggle to keep up with the increase in funding costs that we’ve seen there. But that will, I think, iron out in due course.
So, we saw, for example, we’ve seen six or seven price rises in Sweden since we last talked to you. So, I think all of that will start to flow through a little bit. And as we move closer to positive territory and actually into positive territory, some real benefits on the deposit margin coming through. Because remember, two of our countries, were still waiting for interest rates to move. So, I would expect to see a small improvement in Q3. All other things being equal, stronger in Q4. And as we are in — as we expect to be in positive territory thereafter, some real benefits coming through 2023.
The other thing, the dynamic, I think, in terms of looking backwards is we obviously had a substantial benefit from the TLTRO bonus which was in Q1, which was smaller in Q2. So, those are some of the sort of historical dynamics and also where some of the upside might come through.
Yes, there’s no question that I think all banks will look at deposits again. And we’ve seen some decent deposit growth in all of our businesses over the last quarter. I’d highlight Norway, in particular, where we’ve captured market share in deposits, and I think that shows our ability to focus on these. And we expect to deliver the margin benefits that come with that later this year and into 2023. So, I think deposits will receive a new focus across the board, and we’re already making progress there.
Frank Vang-Jensen
And on more tactical/strategic activities, we are — how should I put it. We are reshaping our focus on deposits, ensuring that we capture more than the market growth. And that is helpful for our customers, and it’s also beneficial for Nordea. Then to capital planning, Ian, please.
Ian Smith
Yes. So, the question on how much capacity we have before we reach risk-weight floors. Broadly speaking, our risk weights are around about sort of 35% in commercial real estate model-driven, but our floor is at 50%. There is obviously then a substantial way to go before we start pushing against those floors. So, it isn’t something that we’re concerned about at this stage.
Omar Keenan
Thank you very much.
Operator
Thank you. Our next question comes from the line of Namita Samtani at Barclays. Please go ahead. Your line is open.
Namita Samtani
Hi. Thanks for the question. I’ve got two, please. Firstly, do you believe the pricing in the Swedish mortgage market is rational at the moment and in the past couple of months or so?
And secondly, just a question on the macroeconomic scenarios for calculating the expected credit losses. So, when I look at the downside case for Sweden, it’s only an 8% decline in house prices in 2023 and an even small decline to the other Nordic countries. I just find these assumptions a bit optimistic for a downside case, and it’s not just for Nordea, but for other Nordic banks also. So, I was just wondering what the methodology is behind these assumptions and why they aren’t a bit more harsh? Thanks.
Frank Vang-Jensen
Let’s start with the pricing in the mortgage market. Let me just a clarification or a clarifying question. When you say irrational or if they are rational, do you think about any particular market? And when you say so, what is like your reflection?
Namita Samtani
No, I’m just talking about the Swedish mortgage market in general, do you think like competitors are behaving rationally, like your peers, for example, just general market color basically.
Frank Vang-Jensen
Yeah, okay. Because it differs quite a lot between the markets, as you know. So, margins in the Danish market, if we start there are, very stable, nothing particular to say there. The Finnish market, stable. And the Norwegian market, a bit squeezed, competition is high, funding cost has gone up and we have this notification period that push pressure or put a pressure on the margins until we have catched up with the Central Bank rate hikes.
In the Swedish market, I should say that the margins are high, quite high. The competition is tough, but that has been the case the last like 20 years, so nothing particular there. So, I would say that we are following our price strategy and gain market shares and growth. And I don’t see any big change there.
There will probably be somewhat pressure on the market prices due to like — due to growth will come down somewhat, competition will probably be high, deposit interest rates will increase. We will start to have a margin on deposits. So, some leveling out probably or likely, but no big issue, I should say. So all in all, no surprises, I should say, in the market.
Ian Smith
So your second question, Namita, just on macro scenarios. I mean are those assumptions on house prices in the adverse or consistent with what Central Banks are predicting? So, we kind of think that makes sense. Of course, you could push it a little bit further. It doesn’t, in and of itself, drive further credit losses. You’d have to see a big jump on employment for that to happen.
So, I don’t think we would necessarily, of itself, see a bigger sensitivity on loan losses just from house prices. It will certainly, I think, have an effect on demand and just make demand a little more subdued. That’s not necessarily a bad thing in terms of just growth in indebtedness. But — so — we’re in line with what Central Banks are saying, and we’ll continue to keep that under review.
Frank Vang-Jensen
Yes, and just to clarify here. So, from a Nordic perspective and with like looking back for many, many years then there has never been any structural done, never. That’s a very long time, right? But the last 20 years at least, there has been no big structural losses on the mortgage book. Even during the global financial crisis where we had decreasing house prices by like 35% in the larger cities in some of the countries, it didn’t lead to any significant losses.
It, of course, hit on an individual level where there is a story behind it, you lose your job, you get ill, divorce, these sort of events, sad events, but that is no — it cannot create an structural issue. That is not what we have seen, and we don’t expect it to happen even during this period.
But of course, it will decrease in prices will do people feel not as wealthy on the paper, which is correct. And that will then need to — likely to a decreased confidence, consumer confidence, which will potentially decrease the spending. And then it might hit the — on the corporate side. But I would say that, let’s see, we are quite confident that the resilience of our book in Nordea is very strong. So, no worries until now, but of course, we are following it closely.
Namita Samtani
Thank you.
Operator
Thank you. Our next question comes from the line of Sofie Peterzéns of JPMorgan. Please go ahead. Your line is open.
Sofie Peterzéns
Yes. Hi, there. Sofie from JPMorgan. Just going back to LC&I, the volume growth was very strong, 16% year-on-year and even pretty strong on a quarter level, up 2%, but your NII was down quarter-on-quarter in LC&I and also your fees were down quarter-on-quarter in LC&I. So if you could maybe just talk about the margin pressure and also kind of lending fees because some of your competitors saw very, very strong lending fee increase. So, yes, how do you think about those going forward?
And then my second question would be on capital outlook is very strong Core Equity one in this quarter. Could you just remind us where we are on the IRB model approvals, if you expect any regulatory capital headwinds or tailwinds going forward? Kind of if we should expect more credit quality improvement driving lower risk credit assets going forward? And anything else we should take into consideration on the capital side? Thank you.
Ian Smith
Thanks, Sofie. So a couple of dynamics in our business in LC&I that may be different from our more Swedish-concentrated peers, I guess. What we saw in Q2 was lower benefit from TLTRO. We saw lower benefit from the risk weight — sorry, the interest rate floors. So a couple of if you like, technical headwinds to deal with alongside that growth. So I would expect to see LC&I continue to go from strength to strength in terms of NII development, and it’s had a — we’ve had a very good run in that business over the last few quarters. So I think Q2 just had a couple of things that held us back a bit.
In terms of fees, I think the most notable has been just the absence of capital markets activity, and so that adverse impact quarter-on-quarter in terms of the brokerage and corporate finance line. Lending fees are doing okay, and that isn’t a cause for concern. So I think we feel good about LC&I’s prospects going forward.
On capital outlook, First of all, in terms of just all of the different moving parts and developments on capital, in line with what we set out in Capital Markets Day, nothing untoward there so far in terms of regulatory developments, et cetera.
On the IRB models, it’s taken a little longer with the ECB, than we had thought, and I think it’s going to be early 2023 before we introduce those models. And again, expectations, as we’ve outlined before, in terms of what that will do to capital requirements.
So broadly speaking, no, we haven’t identified any new headwinds on our — the trajectory of capital requirements, so consistent with Capital Markets Day. And credit quality, we saw some very helpful movements, obviously, in Q2, given the improvement in the portfolio, and that has helped to offset the real intensity from growth, not expecting any particular moves on that going forward. We’ll need to obviously watch carefully for the impact of worsening given what we see in macro, but as Matti and I have said before, we still have some capacity to go from our modeled rear output versus floors and things like that. So, not expecting anything — any particular movements there.
Sofie Peterzéns
Thank you. That’s very helpful.
Operator
Thank you. Our next question comes from the line of Maths Liljedahl of SEB. Please go ahead. Your line is open.
Maths Liljedahl
Yes. Thank you and good morning. And thanks for the comments on NII and sensitivity, et cetera. Perhaps, a little bit more color from my side. So, what do you hear now? First of all, on the retail market from clients, how do they behave with the higher interest rate environment and also the higher margins and on deposits, what do you hear when you talk to clients? Do you still believe there will be a good momentum, when we go into the second half of the year?
And also related on the corporates, what do you hear now? Is it — I mean, tilting over from working capital financing and bridge financing to more sustainable long-term financing, or how should we see this going forward as obviously, the bond market is almost closed, at least if you’re below investment grade. So do you see more long-term demand on the corporate side? Thanks.
Frank Vang-Jensen
All right, Maths. On the retail side, it’s — during the quarter, the activity was very high. And we do saw some — we saw some signs of the housing market slowing down, in some of the countries. In Sweden, it was very active. In Denmark, it’s down somewhat, just to mention two. But the activity level was very high. And we kept our position as taking a higher share on the front book than compared to our back book. And we have no intention to changing that position. I think it’s very likely to — it’s almost impossible if the activity level shouldn’t come down somewhat during the coming quarters.
Then the question would be how much? So I’ll not speculate in that, but there will be a dip in the housing activity for a shorter period or a little bit longer period, very hard to say. But we are very well-positioned to capture our part of the growth. And there, of course, will be some growth. It’s just a question of how much.
Then on the savings side, the activity level is actually quite high. The market downturn has led to a decrease, quite significant decrease, on the assets under management, which hits our fee and commission income. But the flow into our funds and discretionary portfolios and so, the flow was net positive during the quarter. And that is due to high activity and a lot of interest for especially the more professional of our customers: private banking, institutions and these sort of clients.
So let’s see, we have no signs as of now, but usually, the retail sector would be cautious, wait and see until they feel safe before they reenter the market, while private banking customers — bit more professional customers, will see that the market has actually had a correction now of being — and that has led to the largest, or the weaker start of the year in 50 years. So how that will play out in Q3, is difficult to say. But remember, positive inflow — or positive net flow for the first — for the second quarter.
On the corporate side, the activity level is very high actually in all sectors: SME, large corporates, midsized and so. So — and as we mentioned, and you also pointed to, it’s different reasons, right? But there’s nothing that points as of now, when we talk about the sentiment with our units, that the activity level will come down immediately. So we don’t have any expectations for a quick slowdown in this quarter. But then, of course, it would be wrong to start to forecast too much from Q4 and onwards as the uncertainty, of course, is very high at the moment. But Q3, activity level looks very good.
Maths Liljedahl
Okay. Thank you. very helpful. Thanks.
Operator
Thank you. Our next question comes from the line of Riccardo Rovere of Mediobanca. Please go ahead. Your line is open.
Riccardo Rovere
Thank you. Thank you very much. Two questions, if I may. The first one is on the liquidity of the bank. I’m looking at your report, and I see that over the past six months, so June versus December, the loan book is up €3 billion, was €3.45 billion, now it’s €3.48 billion. Deposits from the public now 223 was 206 six months ago. And the question is, if deposits are still growing more than loans, why should you have — and liquidity in the system remains so high, is it fair to assume that the deposit EBITDA will stay extremely low, so that you will not need it to pass much of a rate hike on the deposits base because those remain more and more — will become more and more broader [ph]. This is the first question.
The second question I have is on credit quality. It’s a bit, at least to me, counterintuitive to see you releasing some COVID overlays when, I don’t know, maybe in a few days, we might have issues with gas if gas is not flow to Germany anymore from Nord Stream 1 that could be a problem for Germany, it’s the first — the largest manufacturing country in Europe. Two hours later, it’s going to be a problem for the second largest manufacturing country in Europe and Italy and then it’s going to ramificate all over the continent. So how do you consider — when you calculate your expected losses, how do you take this hopefully extreme scenario into account? Thank you.
Ian Smith
Good morning, Riccardo. Yeah, look, I think you pointed out that deposit inflow has been extremely strong. I mean, there are a bunch of different things we have to take into account in relation to pass-through is, first of all, what’s right for customers. So there will be some careful considerations. For example, in Denmark as we start to see rates move from negative to positive because remember, we’ve been charging for deposits in Denmark. We also need to bear in remind what the — or take into account what our competitors will do, what the market environment has been on the retail side.
I think on the corporate side, which is where quite a lot of the strong inflow has been, there’s a little less sensitivity, for example. So look, we think that deposits will be a really strong story for us. But it’s a — there are a bunch of different things to manage in terms of determining pass-through rates. And certainly, as we’ve seen the initial hikes in Norway and Sweden have seen only limited amounts of pass-through so far. So let’s wait and see. But I think certainly, early increases, deposit beta being low is a reasonable assumption.
On the releases, we’ve taken a very first small step to recognize that COVID losses are not coming through in the manner that may have been predicted a while ago. And that’s entirely consistent with what we said we would do.
Turning instead to thinking of then the sort of broader macro environment prompted by what we’re seeing with war and other things. Primarily, we look to stress testing on that and have undertaken substantial stress tests on our capital position for those extreme movements. It’s, I think, different from thinking about whether or not we will see credit losses move through the book in the normal course of business.
So I think you should see the small release of management buffer is that sort of first step, if you like, of recognizing that COVID losses aren’t coming through. And we will just watch very closely in terms of other developments. But we have a strong portfolio and we have good levels of provisioning in place already. So we go into whatever the world may throw at us from a very resilient position.
Riccardo Rovere
Okay. Thank you. Thank you, Ian. Thank you very much.
Operator
Thank you. Our next question comes from the line of Robin Rane of Kepler Cheuvreux. Please go ahead. Your line is open.
Robin Rane
Yes, hi. Good morning. So a follow-up on Riccardo’s question there on deposits. You mentioned that you have negative interest rates on deposits in Denmark. How do you think this will play out as interest rates go beyond here? Will it be challenging for, I guess, not only Nordea, but in general, for banks in Denmark, to keep the deposit rates in Denmark low given that you actually charged at least partly for negative deposits when rates were negative?
Frank Vang-Jensen
I think there will be — I think everybody like we would really like to get into a positive territory. Everybody — customers, and we dislike the negative interest rates in Denmark. And so hope for a fast track from ECB’s side. And we can’t discuss any potential moves that we would take in the country, that’s up to the local management. But also, of course, it’s too early to say how it will play out.
But of course, we will move forward to zero and then into positive territory. And we want to come back to a situation where we have a margin on the products that we are offering our clients. That’s a base of banking. That’s a foundation of banking, that’s a foundation of running any business.
And with the negative interest rates, in general, that engine. And the bank has three engines; we have deposits, we have lending and then we have the middle engine that is like the fee and commission advisory part. And we lost the third engine, the left engine deposit, and it actually starts not only to stop supporting, but also reverse directional-wise. So it will come back to positive margins. The question is how fast that will happen?
And that is super hard to say. It’s about the market, it’s about customer behavior, it’s about staying relevant. But we cannot see a scenario where we would not have positive margins on deposits even in Denmark in the future.
Robin Rane
All right. Thank you. And then my second question. So we have seen credit spreads increase over the spring in the recent months. How do you see the dynamic of this being mirrored into your corporate lending? Will that happen and if so when?
Frank Vang-Jensen
Yeah. Would you take that, Ian?
Ian Smith
Yeah. So I guess the first, we deal with the sort of funding side for us because we think about all angles. We haven’t done a lot of issuance in the last quarter, while we’ve seen cost of funds broadly increase across the board.
We have seen, though, the sort of IBOR-related funding, so the increase over that period. So we’re seeing some pressure on funding costs that we are — will always sort of seek to pass through in margins. I think seeing more credit demand at these levels of increased spreads should also be constructive for asset pricing and therefore, for margin.
A difficult sort of piece to manage in the short-term, I think, as we adjust to the new sort of cost of money, but I think net-net, and certainly as we move into next year and the corporate lending book continues to develop, we would expect to see an improvement in asset pricing on that.
Robin Rane
All right. Thank you very much.
Matti Ahokas
Last question, next, please.
Operator
Thank you. That comes from Martin Leitgeb of Goldman Sachs. Please go ahead. Your line is open.
Matti Ahokas
Martin, can you [indiscernible]?
Martin Leitgeb
Yeah. Sure. Good morning. Could I have one on capital return and one follow-up on asset quality? On capital return, I mean, congratulations for the pace of capital return throughout the year.
And I was just wondering with the €1.5 billion buyback announced today, pro forma core Tier 1 ratio one could argue that’s close to 15%. I was just wondering if you could comment on the outlook for potentially further buybacks or company distributions from here.
Should we think the bulk of it is done, or I think previously, you comment that when you announced the buyback that you’re in discussion for follow-up buyback with the regulators, I was just wondering if that is the case as well at this point in time?
And the second question is just one on asset quality. If you look at your loan book across the four core markets, I was just wondering which particular markets in terms of either geography or product or both are you particularly concerned or focused on as the economy slows down? Thank you.
Frank Vang-Jensen
All right, Ian, should I start then you take over. So when it comes to capital distribution, I would just say that our — or state that our policy is unchanged. And it has been since we kicked off in 2019 a capital and dividend policy where we intend to distribute 60% to 70% by dividend and any excess capital to be distributed through buybacks.
So it is an integral part of our capital management toolbox. And now we get the third approval of buybacks. And I think you should see it as a as a sign of strength of our capital base, but also the capital generation that we are having. And now we take the capital base down to a more, how should I put it, more normalized level, but we continue to generate capital, excess capital as well.
So now from the €1.5 billion and onwards, it’s an integrated part of the way we manage and distribute our capital to our shareholders. So don’t see it as like — now it’s like that this was it. It has just begun. But of course, the speed has been quite high here the last, what is it, nine months, right, Ian, any comments from your side here?
Ian Smith
I guess what I’d add, Martin, is two things. One is that the buyback we announced today will keep us busy through till the start of next year. And I think we’ll be talking to you again about the capital trajectory, I think, from there. So — and as Frank said, we’ve made good progress in tackling our excess capital, and this is a big part of it.
It takes us to pro forma about 15.6%, so much closer to our target level of 15% and that means that it’s, as Frank says, more of a sort of business-as-usual deployment going forward after that. So I think it’s a good sign of strength and confidence from the ECB and buybacks will continue to be a part of what we’re doing, but we have enough to be going on with for now.
Frank Vang-Jensen
And then on the asset quality, I would say, and don’t misunderstand me, but we don’t have — we have the same credit approach and a credit-granting approach; we have the same credit policy; we have to a very large extent, built the similar portfolios across the four Nordic countries. And the portfolio of Nordea now is a Nordic portfolio basically only. And the Nordic region is a very, very safe and strong place to do business. So we don’t see any particular country where we have like more risk than others. There, of course, — and half of our book is mortgages basically or consumer mortgages.
I think it’s 57% to be exactly that is household-related. You don’t see any big risks and especially not in — within the mortgage book. Then we have a small consumer finance book, but the majority of that one, clearly majority is connected to the relationship customers that we are having, that is our model. So you have your salary account, you have your mortgage, you have your savings, you have your payments. And then you need a consumer loan to do something with the kitchen or you need €5,000 for wedding, you have €5,000 or €10,000 yourself, your cash flow is strong, these sort of things. And usually, we don’t — they don’t bring any significant losses. So that is like more than half.
The rest is corporate. And I should say it’s a very, very well-diversified portfolio across four countries and many, many different industries. The much — the most like, how should I put it, noise or sound or discussion in market, if you should point to something now, that is in regards to the Swedish commercial real estate market. And I think the main reason for that is that there are some that are quite leveraged. And then the bond market has been very active, very busy. And now the discussion, of course, is coming about what happens then with the refinancing needs? And if the market is not active, what happens then?
First of all, I should say that compared to our peers, we are quite small within commercial real estate. It’s not now a number that we shouldn’t pay attention to, for sure. But we are just quite much smaller than the others. And looking at Swedish commercial real estate and compare that to our total group lending that accounts for roughly 3% of the group lending. And looking then again on the customers we have in the Swedish commercial real estate market, it looks quite strong. And as of now, we are, of course, following it very carefully. And of course, are ready to support the clients that meet the requirements when it comes to repayment capacity and strength if they get an issue or a challenge with the bond market. But until now, it has been quite stable. So, we stay alert, we sleep with our boots on, but we have a very strong start point in Nordea.
Martin Leitgeb
Thank you very much.
Frank Vang-Jensen
All right, guys. Thank you so much for excellent questions. I hope that we gave you some guidance on it and call us any day, any time, when you have follow-on questions, as usual. Thank you for good dialogs, and we’ll close the meeting now. So thank you so much and enjoy the summer. Thanks.
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