Nordea Bank AB (NRDEF) Q2 2019 Earnings Conference Call July 18, 2019 2:00 AM ET
Company Participants
Rod Alfvén – Head-Investor Relations
Casper von Koskull – Chief Executive Officer
Christopher Rees – Chief Financial Officer
Conference Call Participants
Pete Kessiakoff – SEB
Andreas Hakansson – Danske Bank Markets
Magnus Andersson – ABG
Jacob Kruse – Autonomous
Paulina Sokolova – Barclays
Adrian Cighi – RBC
Rod Alfvén
Good morning, everyone, and welcome to this presentation where Nordea Bank will present its second quarter results for 2019. My name is Rod Alfvén, I'm Head of Investor Relations. We will start this event with a presentation of our Group CEO and President, Mr. Casper von Koskull, then we will open up for questions for him. Then after this, it will be followed by a Q&A session with me and Christopher Rees, our Group CFO.
So Casper, welcome on stage.
Casper von Koskull
Thank you, Rodney. Greetings from a sunny Helsinki, and welcome to this Q2 presentation. I'm happy to say that the improved business momentum that we've had in the first quarter has continued and even accelerated in the second quarter despite a rather tough environment.
We are recovering our market share in mortgages, we have even stronger inflow in our Asset & Wealth Management business, and the customer satisfaction is improving in all segments. The volume growth is however not offsetting the margin pressure that we see.
Costs are little bit higher in the quarter mainly due to depreciations and seasonal effects, but we are still on track to meet our guidance. So I can reiterate our cost targets for both 2019 and 2021.
Credit quality remains solid with 10 basis points of loan losses in the quarter. We expect credit quality to remain largely unchanged in the coming quarters. On capital, our CET1 ratio improved by 20 basis points to 14.8%. We have in recent years derisked the bank, invested heavily into digital and compliance platforms, concentrated our operations into the Nordic markets and have now entered a new phase of customer focus.
The financial environment has also changed with expected lower rates for longer, and we will soon have more clarity on our capital requirements within the banking union. Due to this, Nordea will review its financial targets, including also capital and dividend policy with an expectation to present these later in the fall after the third quarter. Further information on timing will be disclosed when available.
Let's start with an overview of the numbers. Our income lines are growing with single-digit compared to the previous quarter. However, compared to the second quarter last year, both net interest income and fee and commission income is down.
This feeds into a similar trend on total income, up by 2% from the last quarter but down 4% compared to the last year on a like-for-like basis. With slightly higher cost, this gives us an adjusted operating profit of EUR900 million, down 2% compared to the previous quarter.
If we look at our income trend in a little longer perspective, we have now had two consecutive quarters of income growth however, from a lower level. The large de-risking that we have undertaken, combined with the overall transformation of the bank's structure, has reduced our income.
The last couple of quarters, we have talked a lot about strong focus on increasing business momentum and we can now start showing the results of these efforts. We had a trough in income in the fourth quarter of last year and have since been growing the business. The underlying revenues are up 5% since the fourth quarter last year.
When looking at income on a year-on-year basis, income is still down by 2% compared to last year. Costs are 3% higher mainly due to higher depreciation and amortizations, which actually are according to plan.
Q-on-Q we are 2% up with dynamic similar to the first quarter, i.e., with increasing volumes, however, muted by margin pressure. Gjensidige added EUR18 million of income in the second quarter.
We also have a currency headwind in the quarter and somewhat higher cost. So even though we are seeing business momentum pick-up, it takes time before we see the increased activity levels fully reflected in our results.
On net interest income. Net interest income in this quarter increased due to the accelerating income growth. The momentum in mortgage lending is good in all four countries, especially in Sweden where we had the highest monthly market share growth since 2016 and with record high new sales volume in Finland.
The increased volumes are however not making up for the pressure on margins and the net effect is still negative on net interest income, which is a similar trend that we also saw in Q1. The margin pressure is mainly on mortgage lending, but we also see some of that on the corporate side. Deposit margins, however, are largely unchanged.
As mentioned earlier, lending volumes had been growing steadily and at an accelerated pace lately. Corporate volumes are now growing at a rate of 4.6% and household volumes growth is now at almost 3% growth, which is positive, and including Gjensidige that would be 6.4%.
Net fee commission income increased by 1% in the quarter and has been growing steadily since the third quarter of 2018. Here, the key elements are: Asset management commissions were supported by high asset under management for; corporate advisory fees had a positive development mainly due to few large deals in the quarter; payments and cards declined but from a strong first quarter; and in custody we have some semiannual fees, which increased the results in the quarter.
Asset under management had a strong second quarter with the highest inflow since the third quarter of 2016. All areas are contributing to this development. Asset under management are now at EUR307 billion. Private Banking was also exceptionally strong, new products in institutional sales and increased sales activity adds additional support to that momentum.
On net fair value, the underlying customer business is stable and the customer activity remains strong. Strong improvement in treasury is driven by performance in fixed income and a positive swing in FX positions. Our market-making activities had a continued weak result due to even lower rates, low volatility and low margins.
Looking at the individual business areas, we'll start first with Personal Banking. The good trend in customer activity continued in the quarter in Personal Banking. Increased volumes and market share of new mortgages lending in all countries, especially in Sweden where we increased our total market share for the first time in three years. However, as mentioned before, margin pressure is consuming the income from the increased volumes for now.
Lending volume in Personal Banking has increased to EUR153 billion. After challenging period, we are showing a positive trend across all countries. Customer satisfaction has risen to the highest level in six quarters, especially in Sweden, customer satisfaction has improved – an improving trend but coming from a lower level. So even though satisfaction of our customers is improving, we are still not satisfied and we will work to improve this further.
One driver of customer satisfaction is improved availability of advisory services. A key enabler for this has been the continued increase in online meetings. This brings convenience and value to our customers as well as to Nordea as we can leverage our full pool of advisers in each of our markets. Our customers want to meet us anywhere, anytime and the banking platform which we have, have been built in the past few years is designed to accommodate this. So we will see more of this going forward.
We then go to Commercial & Business Banking where we cater for all our small- and medium-sized corporate customers. Also, here, the underlying income momentum continues. In the second quarter, we had high customer activity and particularly in the Norwegian and Swedish markets, although even here, we see increased pressures on margins. Lending volumes are increasing also in Commercial & Business Banking and customer satisfaction is going in the right direction, already from a higher and healthier level, and improving customer intensity is really our continued focus.
In Wholesale Banking, customer activity is strong and customer satisfaction is high. We have a very strong position here in the Nordics. Lending volumes are growing at 3% on an annual basis, however, flat Q-on-Q mainly due to the planned further reduction in Russia. A competitive market and higher share of low-risk customers resulted in slightly lower lending margins. Market-making activities continued to be challenged in this low rate environment. Here, we will accelerate our efforts to increase capital efficiency and capital velocity.
The first half of 2019 marks one of the most active primary market periods on record for Nordea. It supports our leading position, making us the number one credit franchise in the Nordics. Primary activity continued to be high across corporate and institutional clients with several landmark transactions in the first half of this year. The equity markets also continued to be supportive of new issuance and we participated in several primary transactions both on the corporate and shipping side. Activity in merger and acquisitions has also been high and we currently see strong interest from corporates in pursuing acquisitive growth.
Lastly, our Asset & Wealth Management division is performing very well with net inflows of EUR4 billion in the quarter, which shows that it's really coming back to a growth path with 5% annualized growth in the quarter. The strong inflow in Private Banking continues and is supported by all countries. The persistent work on service excellence is starting to show results. We have initiatives to free up time for advisers to have more time with customers, so that we can capitalize on these trends even further.
Wholesale distribution, which is indirect sales through international partners, had a very strong performance in the second quarter. Also the Life business in Sweden and Norway delivered solid and strong inflows.
96% of our composites are outperforming their benchmarks year-to-date and if we look at this over the last three years, 81% are outperforming. So investment performance is actually stronger than I have ever seen. Customer satisfaction across the markets at a very high level and further improving and I'm pleased to see that the growth plan in private banking is really now delivering. That's something that we put in motion here earlier.
Going back to the other line items. Let us look at cost. Cost in the second quarter increased by 3% from the previous quarter. This is mainly due, as I said, for seasonal effects and higher depreciations and amortizations. Depreciation, amortizations are 7% higher compared to the previous quarter due to the start of new amortization on developed IT projects. This is according to plan and as we have said previously, depreciations and amortizations will be peaking next year.
Our adjusted cost-to-income ratio increased from 57% to 58%, which is not satisfactory and we want to see this decline going forward. We are reiterating our cost targets that cost in 2021, I expect it to be 3% below 2018 levels and lower this year than last year. Also looking at cash cost. Cash cost continues to decline by another 2% in the second quarter compared to the first. Also here, we reiterate on our guidance that cash cost is expected to be down by up to 10% by 2021 compared to 2018 and lower this year than last year.
Asset quality remains solid, net loan losses amounted to EUR61 million in this quarter, which is up from last quarter. This means our loan loss ratio is at 10 basis points in the second quarter compared to 7 basis points in the previous quarter. The increase is mainly due to the fact that we did not have the same level of write-backs in this quarter. Our expectation is that net losses will remain largely unchanged in the coming quarters.
Continuing on capital, our common equity Tier 1 ratio increased by 20 basis points in the quarter to 14.8%. Meanwhile, REA decreased somewhat to EUR160 billion from EUR163 billion in the previous quarter. The capital commitment which we made in the fourth quarter, i.e., to maintain capital at an unchanged nominal level of EUR21.7 billion translates to a core Tier 1 ratio of 13.6%, which gives us a comfortable 120 basis point management buffer.
Looking at some of the cost initiatives that we have launched. During the second quarter, focus has further increased on automation and robotics as levers to increase efficiency. In the second quarter, 18 more processes were robotized, taking the total number of robotized processes to more than 300 year-to-date. Considering the growth in the robotics pipeline, we expect the favorable development to continue also in the coming months and quarters. In addition, it's important to note that the majority of these processes that are deployed brought noncost-related benefits. We have continued to simplify products and services and we continued to consolidate the organization into common units.
Then on the income side. As I've already mentioned, we have clear improvements in private banking following strong sales actions. Q-on-Q, private bank new inflows are up to EUR1.4 billion, which is actually double that we had in the first quarter and this positive flow is from all four countries.
Retail fund flow is expected to continue to be improving also in the second half of this year. And on assets under management, we have a new all-time high following strong net inflows in this quarter. All-time high is like-for-like basis after having sold Luxembourg and the Danish Life business. We have in the second quarter signed an important distribution agreement with John Hancock in the U.S. The stable return product will now be distributed by John Hancock, one of the most well-known brands in the U.S. retail market for savings.
A great achievement for and testament of our quality of our products. Mortgage volume's growth pace is picking up, as I have mentioned, in all countries. Month-to-month growth rates are clearly picking up, especially in Sweden and Finland but actually also in Norway and Denmark. And very importantly, we have seen a meaningful increase in employee satisfaction and engagement now for two consecutive quarters. This is very pleasing to me as it, of course, our people that are the key to achieving our ambitions.
I thank you for listening and we are taking some questions now. So Rodney, please.
Question-and-Answer Session
A - Rod Alfvén
Thank you, Casper. Yes, we will have room for a few high-level questions. And I guess the first question comes from Mr. Pete Kessiakoff. Please, go ahead.
Pete Kessiakoff
Yes. Hi, good morning. Thank you for that. Just a question or two on the new financial targets that you are commenting on that you would present in the autumn. First of all, is it – I mean, are there any specific characteristics that you’re looking for in terms of where you could do additional cost savings?
You are mentioning, for instance, that the lower interest environment is making it tougher, for instance, on the trading side within FICC end markets. Should – looking at the railcar within Wholesale Banking, making some 6% year-to-date. Is that, for instance, one area that we should be looking at? And secondly, are there any kind of big areas where you see that you have been underperforming compared to expectations that could be useful to highlight?
Casper von Koskull
I think when I look at cost, actually I look at cost across the bank and I think we can improve and should improve across the bank, and it is actually also the structure going from four to one as we are doing. In Wholesale Banking I think – of course, we look at cost in Wholesale Banking but I think – the Wholesale Banking I think is more of a capital question, and that’s why I say that it’s about capital velocity and increasing capital efficiency. But across the bank, we will look at, I mean, of course, look at cost and should look at cost, that’s we need to take structural cost down and I’ve said that really year-by-year we need to go down. That is the nature of this industry, and we will deliver on that.
Pete Kessiakoff
Okay. And then just secondly, on the capital side, on the dialogue that you’re having with the regulators. Is the time plan been following the previous – your previous communication around that? And what clarity would you have by autumn that enables you to come up with a new financial target on the capital?
Casper von Koskull
It will roughly, I think, follow what we have said, and we will have more visibility and clarity on the SREP in the fall, now exactly that’s why we say – we cannot say exactly the timing of when that is but that is the reason why we now feel that we can review more broadly our business targets and including, of course, capital and dividend. Cannot say precisely the timing of that, but it is in the fall and I think we will have more visibility from the regulator as well.
Pete Kessiakoff
Okay, thank you.
Rod Alfvén
I guess, the next question comes from Mr. Andreas Hakansson, please.
Operator
Andreas Hakansson, yes, please go ahead. Your line is open.
Andreas Hakansson
If we look at return on equity of 9.1% and you say that you’re not happy with the development at the moment. Do you…
Casper von Koskull
So you’ve got cutoff now.
Rod Alfvén
Yes. So Andreas, it seems to be some technical problems. We’ll see if we can get you back. We don’t hear you.
Andreas Hakansson
Can you hear me now?
Casper von Koskull
Yes.
Rod Alfvén
Yes. Loud and clear.
Andreas Hakansson
Yes. I’m sorry for that. Yes, so now I was asking, Casper, do you think, when you look at the return of equity of 9.1% and you say that you’re not satisfied with the financial performance at the moment? Do you overall believe that you have a revenue problem or a cost problem?
Casper von Koskull
I think that our focus is on both. I mean, I think to drive down cost income, it is about revenues and income. And I think we’ve been very clear on our priorities this year and that will continue, drive business momentum, which drives income and at the same time, reducing cost and structural cost.
And then you have the third element, which is capital, of course not driving cost income but driving the return, and I think it’s an important element also going forward, to make sure that we are rightly capitalized. We have a kind of level playing field vis-à-vis our peers and actually drive a very efficient bank also as it comes to capital. So when improving bank’s profitability, I believe it is really all three components that we need to focus on. And of course, the fourth component is risk. So make sure that risk is at the appropriate level.
Andreas Hakansson
So when you talk about revisiting your capital targets and your dividend policy, if you’re going to improve your profitability from capital, should we then expect that you believe you can reduce your capital base?
Casper von Koskull
No. No. Again, I said that will have more visibility in the fall. And I think to discuss either the financial targets and capital and dividend policy, the right moment will be in the fall when we are ready with that.
Andreas Hakansson
Okay. Thank you.
Casper von Koskull
Thank you.
Rod Alfvén
Thanks, Andreas. The next question, I guess, will come from Magnus Andersson [ABG Sundal Collier]. Please go ahead.
Magnus Andersson
Yes. Good morning. Just along the same lines, a follow up. When I look at the last couple of years, the problem has obviously been that income is down significantly more than your cost base and in your guidance, your previous targets, you focused on absolute cost. Is it fair to assume that you will focus more on the cost income relation going forward?
Casper von Koskull
I think it’s probably fair. I think we will, of course, look at absolute because that gives also tough targets internally. But I think you’re right. I think the cost income. I’m not a big believer to be too kind of dogmatic on cost income because it’s not always the right measure. It depends on which business you are looking at. But I think on sort of – on the broad terms, yes, I think we need to look at – and each business have different dynamics. Some business are more capital-driven and some are more income, some more cost. But overall, yes, I would say that I think it’s well put, we need to look at cost income going forward.
Magnus Andersson
Okay. Thank you.
Rod Alfvén
Thank you, Magnus. Do we have further questions online?
Operator
Yes. Next question is from Jacob Kruse from Autonomous. Please go ahead. Your line is open.
Jacob Kruse
Thank you. I just want to ask you, you made some comments earlier about the ECB review of your capital or as you call the stress test. Could you just clarify a little bit what the discussion with the ECB so far has been with respect to your capital position? And also, do you have some sense of their attitude towards potential buybacks if that will be something you would pursue for the capital policy? And then my other question was just quickly on the sensitivity to rates. If we do get interest rate cuts in Denmark, Eurozone and then Sweden, do you have a guidance for how much that would impact your P&L? Thank you.
Casper von Koskull
On regulatory dialogue, of course, I can’t comment but I think we’re going through the normal steps here. The AQR has been announced, we had the stress test announced, and we move into the SREP in the fall. And once we have a better picture, as I said, in the autumn, then we can comment on that. I think it would be premature to say anything now, otherwise those dialogues have been constructive and normal as everybody would have. But I think we need to come back to specifically those questions in the fall. And then on the rate environment, I think if – yes, Rodney, do you want to comment?
Rod Alfvén
Yes. Please. Thanks. Yes. It’s always very difficult to give an exact number because it requires sort of how much can you pass on to customers and how much will you keep and so forth. But our assessment is that 50 basis point rate cut will lead to approximately EUR400 million loss of NII annualized. Then, we are most exposed to Finland, so that’s our biggest market. As long as we are below zero, we are not that dependent on Denmark. So the second one is Sweden. So that’s how it works.
Jacob Kruse
Okay. Great. Thank you very much.
Rod Alfvén
Thank you.
Casper von Koskull
But it’s not an exact science. I think it’s going to...
Rod Alfvén
No. So it’s more of a sign. Do we have any more questions on line?
Operator
Yes. Next question is from Paulina Sokolova from Barclays. Please go ahead. Your line is open.
Paulina Sokolova
Hi. Thank you for taking my question. Just coming back to the capital and dividend policy. Could you elaborate a little bit more on the rationale for changing these? So kind of more specifically, does it have to do solely with your new capital requirements that you’re expecting? Or is it fair to say that it’s also linked to the disappointing operating trends, which mean it’s more difficult for you to deliver on a progressive dividend policy? So that’s the first question. And the second one is on expenses. Some of your peers are making increasing investments into ANR-related capabilities. Could you comment on whether there is additional pressure for you to invest as well? And how comfortable are you with your guidance to reduce underlying cost this year versus last year? Thank you.
Casper von Koskull
On the first one, I think, one, I said we will review our financial targets, including capital policy and dividends. We haven’t drawn any conclusion yet where we are. And I think the starting point, and I think I said that it is the fact that we have derisked the bank. We are now operating in a different environment. We are closer to understanding what the ECB actually wants. And actually, it is the right time, we’ve actually operated with this capital dividend policy and our financial targets for the last three, four years, and we are very much a different bank today given the kind of the shift that has taken place in the environment. That’s why it’s right to kind of review it and then come, and that’s why I’m not going to yet speculate where that leads, but I think it is that combination that I mentioned in the beginning that kind of really drives the fact that we need to review. And it is really something that our shareholders and investors have actually are welcoming that we do this and it’s the right time to do. The second question was related to...
Rodney Alfvén
Can you please repeat the second question?
Casper von Koskull
Yes. Cost. Yes, I would say, if – of course, I think the pressure is on financial crime and compliance, additional kind of activity, I think it’s across the whole industry. Here, I have to say that we started this process three, four years ago, took it very seriously, was my number one priority when I took over as a CEO, so we have actually built a very much – a robust platform. Yes, it will need more things, but I think we have also ramped it up in a way that I’m quite comfortable that we can manage and we’ll be able to deliver on our cost targets given the fact that we were ahead of the game, I would say. We were behind the game in the beginning four, five years ago but now I think we are partly ahead of the game, at least compared to some. But this will need further kind of efforts. But I think in terms of cost, I think we can manage it with the levels we have but we need to do more efficiency, more kind of automation, et cetera, in that. But we’ll manage with what we have.
Paulina Sokolova
Okay. Thank you.
Rodney Alfvén
Thank you, Casper. Thank you all for asking questions and listening in. We will now continue this session with a question-and-answer session with me and Christopher Rees, our group CFO. Casper, thank you very much. And you’re all welcome to continue. Thank you.
Casper von Koskull
Thank you. Thank you for listening.
Operator
[Operator Instructions] Please go ahead.
Unidentified Analyst
Yes, good morning. First, we can take your questions on mortgages. We see that you take your market share for a moment in Sweden and you say that you have good performance in most of the Nordic countries. What’s your strategy going forward here? Would you focus on continued volume growth or will you try to sort of defend margins because you also see the margin pressure? Then more on costs, we previously got staff cost from different countries in the different business areas. Is that something you could disclose again and share with us?
And also if you could just enlighten me, how do you measure customer satisfaction because you show an improvement in all the independents service I see and get when talking to people in the different regions showed the opposite. So how do you measure it and is this something we could monitor from the outside? Thanks.
Christopher Rees
Thank you, and good morning. So the first question was on mortgages. As you point out, we have – or we’re regaining market shares in most of the countries. I mean, Sweden, in the latest month here, we’re actually above our back book. So we are actually taking some market share and we need to continue to get back to what our back book is, and that requires – and that’s the same in Finland and in Denmark as well. We have come from behind a little bit the last few years as Casper alluded to and now it’s a matter of regaining that market share. So our strategy is to get back to that natural growth that we have, which we are well on track on doing. In terms of margin, I think there’s an overall margin pressure, it is different dynamics in the different countries. For example, in Denmark, it’s more the lending mix rather than the mortgage margins per se. And in Sweden, there’s, of course, continues a – pressure on the lending side that we see going forward as well.
Unidentified Analyst
But I should read it that you’re more focused on volumes than the funding margins then?
Christopher Rees
No. I think if you look at our pricing, we are comfortable that in terms of pricing we need to be competitive. If you’re going to win the customers and the volumes, you need to be competitive. That doesn’t necessarily mean you always need to be the best and – but you need to be competitive. So we’re actually pretty much well in the middle of the corridor there. But we are focused on getting the volumes in because of improving our processes, having more availability and more client intensity and that is actually supporting the growth.
Unidentified Analyst
Okay.
Christopher Rees
In terms of staff cost and the reporting, we will review that and consider it and come back to you on that. And please, there was a third question you had as well, would you mind repeating?
Unidentified Analyst
Yes. That’s how you measure customer satisfaction because I don’t see you show an improvement in all the service I see and read and also when talking to different people and companies in the different geographic regions showed opposite. So just how you measure it and if it’s something I could monitor from the outside?
Christopher Rees
So I think we measure customer satisfaction slightly differently depending on which business areas you are in. For example, in Wholesale Banking, we have Prospera rankings and so on and so forth that are external, and I’m sure you can follow those. As well as lead tables and so on and so forth and there you can see we have strong positions. Then, we do surveys directly with the clients that we have and where – there we look at the trends and they are done both in Personal Banking as well as in CBB as well as in Private Banking. And that’s why we’re disclosing them so you can actually see the same trends that we see. But this is a clear question there that goes all – out to all clients that we have as customers. What you might see externally are surveys and so on and so forth, generally speaking, that may or may not be Nordea clients. But we measure it through service to our clients directly is the answer.
Unidentified Analyst
Okay, okay. Yeah. Thank you.
Operator
[Operator Instructions] Next question is from Adrian Cighi from RBC. Please go ahead. Your line is now open.
Adrian Cighi
Hi there. Thank you very much for taking my question. I have a follow-up question on capital. So the ECB has done a stress test using the same methodology as the EBA 2018. The AQR was done using a separate sort of more updated methodology, but the stress test is using the same, and you had a meaningfully higher impact than the EBA average last year. Do you expect that to feed into potentially higher capital requirement, or do you not see the link between the two as direct as that? Any thoughts on that would be helpful. Thank you.
Christopher Rees
Yes. I think they refer to the EBA methodology, but of course, they’ve got their own interpretation and their own assumptions in terms of what the stresses are on the economy as part of that. And clearly, given the production requirement they have, they have taken some very conservative assumptions in that, and that is really one of the differences in the impact. In terms of the impact it will have on capital, that is one of the inputs as we go forward in our dialogue with them in the second half of this year which is – and we will also have the SREP dialogue, so it’s very early days to say. And we will have to come back as stated when we have a bit more clarity as we go forward. But let’s be clear, the stress – and you can look at some other banks back in 2014 and 2015, the stress tests was – showed, again, our resilient capital position and was above all the thresholds that they had both in the normal scenario as well as the adverse scenarios. So we have significant margin to those thresholds.
Adrian Cighi
Okay. Thank you very much.
Operator
Next question is from Magnus Andersson from ABG. Please go ahead. Your line is now open.
Magnus Andersson
Yes. Just if I may follow-up on costs there. When I look at your, and you mentioned it – was mentioned by Casper, amortizations on IP intangibles, when I look at your capital-light investments per year, i.e., the new production, it peaked in 2017 at just about EUR600 million. It was a similar amount in 2016, down to a little more than EUR580 million. How do you see this trajectory going forward over the coming, let’s say, three years?
Christopher Rees
Thank you, Magnus. I mean, as you say, we have invested a lot in IT over the last few years. We will continue to invest in IT, but those investments are likely to come down over time. And that is also related to – our cash cost would also come down over time. And hence, I suspect that the capitalization will also therefore come down over time.
Magnus Andersson
But what do you see what kind of level will you be at? What will be a normal level of annual capitalizations, just so that I get a feeling for how your amortization of intangible IT assets will develop until 2021, 2022? Will it drop significantly from here in 2020, 2021 or...
Christopher Rees
I think a good guide is to look at where we are now and where we were roughly before the investments in 2015. So, it will drop steadily, but not drastically.
Magnus Andersson
So around EUR200 million per year is what you would consider normal?
Christopher Rees
I think it’s a bit higher than that and the fact that the bank is also becoming a – technology is a lot more important for banking going forward. So, I think the overall level should be slightly higher than that. Yes.
Magnus Andersson
Higher than that. Yes. Okay. Thank you. And then on – just on headcount. If you can say anything about the outlook, it was up again – or again, it was up quarter-on-quarter. When will we see headcount coming down?
Christopher Rees
The driver of the headcount up is mainly driven with our near-shoring and our workforce planning. So, the headcount in Poland has gone up significantly, and that is really the main change in this as well as Baltics. So, I think as we go – and there’s always a little bit when you’re transferring processes and activities, there is some overlap between the Nordics and the near shoring here. So over time, you will see these headcounts come down particularly more in the Nordic countries.
Magnus Andersson
Okay. So, net headcount should be down in the coming, let’s say, two years?
Christopher Rees
Yes. Correct.
Magnus Andersson
Yes, okay. Thank you.
Operator
Next question is from Jacob Kruse from Autonomous. Please go ahead, your line is now open.
Jacob Kruse
Hi, just wanted to follow up a little bit on the costs and your target setting. So, I guess it’s fair to say that you’re starting to see some momentum in some of your business units after quite a few years of weakness there. So, how do you think about that kind of startup of growth in relation to coming out with more comprehensive cost-reduction initiatives, which, I guess, to some extent, would recreate some of the turmoil that you saw a couple of years ago with the layoffs? And then maybe – so I guess my question is, should we think about this as new initiatives of how you – what you will do for the next three years of more setting targets in light of what you’re doing and the environment you’re operating in? And then my second question was just, when you look at your projected headcount reductions, I guess you can track the headcount, but you also have quite a number of consultants that were meant to leave the bank. Where are you there, because I would imagine you added consultants over time with respect to the whole AML or financial client focus that has come about? Those are my three questions.
Christopher Rees
Thank you. I said we will revert to the new targets. But to make a point, I mean, our key ratios, quite frankly, are not good enough. And as I said to all business leaders, business is making profits and returns for the relevant risk. So it’s – we need to focus on all the item cost, income, capital and risk. And those are – and we are reviewing all our activities and in terms of looking at the actions that can improve all those four metrics in balance. Cost is therefore a part of that equation, and we need to make the bank and continue to making the bank a stronger bank. We have clear priority of driving income, and we are now structured in the group in a way that is going to be easier to drive income as well as cost. We need to do those two things at the same time and they need to be sequenced also with our automization initiatives. So that is on the targets. And then the question on consultants. Consultants, we have a lot, and a lot of that is actually related to IT. It’s also related to our offshore in India as well as in Poland and overall consultants have come down quite dramatically, particularly in Nordic consultants over the last two years, and that will be continuing to coming down, of course.
Jacob Kruse
Okay. Thank you.
Operator
Next question is from Andreas Hakansson from Danske Bank. Please go ahead. Your line is now open.
Andreas Hakansson
First one, little bit higher-level question. You said that your ratios are not satisfactory, 9.1% return on equity could look bad, but when I look at your peer group in the different countries, I mean, in Finland, you have OP, and in Denmark, you have Danske liquidate, and when I look out in Europe, 9.1% isn’t so bad in this environment. What is it really that you’re comparing yourselves to?
Christopher Rees
Well, thank you for that. And you’re right, if you look at Europe, given where the European banking industry now is, it’s a very challenging industry and the environment is tough. But we believe we can do more. And if you look at our competitors across Nordics and the balance of our business, we have opportunity to do more, and that’s what we need to do.
Rod Alfvén
Andreas, I think also what you should look at is in our Annual Report we published our ROE versus mix of our peers. So we have created our own ROE index depending on how big competition we meet from each country. And there you can see that till 2017, we were largely in line with this peer group. But since then, our key ratios have performed less favorably. So now we are some 200, 220 basis points below in ROE.
Christopher Rees
But I think it’s important to note here over the next few years, we have moved to the Banking Union and therefore we are under a different regulatory regime. And as we go through that we need to have clarity on our capital requirements as well as the model development program that we are delivering to the ECB over time because ROE is always driven by capital. So we need to focus very heavily on capital velocity as we go forward.
Andreas Hakansson
Thanks. And then on NII, you talked about NII and the margin pressure basically across-the-board. If we start with retail, we’ve seeing sharp remortgaging activities, particularly in Denmark and Finland and people are moving over to longer-duration mortgages. Could you tell us, should we see a meaningful margin pressure from that also spilling into Q3 or what’s your outlook on that?
Christopher Rees
Yes. I think if you look at the margins, yes, the lending margin has actually followed a similar trend to what we had in Q1. But in Q1, we also had a improving deposit margin of around EUR20 million that quarter. This quarter, it’s about EUR4 million. Therefore, if you look at what’s actually impacting this is not that we’re losing the tailwind of the deposit margin in Q2. And then if you look at the volumes, volumes contributed EUR8 million this quarter, while last quarter was EUR4 million. So we are slowly also seeing a better impact of our volume growth coming through in NII. As we look forward, I expect these pressures and margin pressures to continue. I still expect volumes to improve, but I think the margin pressure will outweigh the volumes also in Q3.
Andreas Hakansson
Yes. And I don’t know if that was only retail, but where do you see your margin pressure on the corporate side that you mentioned as well?
Christopher Rees
Yes, we see a little bit of pressure, I think it’s pretty much in all countries. I think there’s also lending mix in Wholesale Banking as some of the higher spreads loans, both on – in the Norway are rolling off or being replaced with lower spread loans. And also we are making some business selections to improve the returns where the credit quality is going up and REA is going down but that also impacts the spreads at which we are doing those. If you look at, for example, CBB as well, there are certain areas where we are not participating as much, which is in tenant-owned associations in Finland and agriculture in Denmark, for example, where from a risk-based approach we are deselecting. That is also having an impact on the margins. But overall, we’ve seen a pick up in the corporate margin pressure.
Andreas Hakansson
Thanks. And then last question related to NII. We've seen again that the group function had a quite large negative item. Could you tell us have you heard some sort of what we used to talk about hedge in that division or big derivatives position that are now being rolling off and therefore you don't have the same tailwind as before or what's happening here?
Christopher Rees
I think this is – we have – the treasury item is going to be volatile as we go forward. We are trying to – the various businesses have very different accounting rules. Some NII is actually accounted for as mark-to-market and some are accounted for accrual, and that's a mismatch and therefore we need to do eliminations. And eliminations between net fair value, NII this quarter was EUR17 million, which explains a lot of that EUR20 million. We are – we do obviously manage the risk for the group in treasury but most of the NII revenues, we actually give back to the business as that is where the actual risk comes from. And we do have some hedges in place, and they remain in place so it's not related to that. It's more the NII traffic. Then of course, spreads have actually come down somewhat, so the liquidity buffer NII is slightly lower this quarter as well.
Andreas Hakansson
So if there is movement between the divisions, so if you see an improvement in treasury, you could see a decline in the divisions rather?
Christopher Rees
No. It's more of a mix between the lines, i.e., net fair value, NII.
Andreas Hakansson
Okay. Thank you.
Operator
Next question is from Peter Kessiakoff from SEB. Please go ahead. Your line is open.
Pete Kessiakoff
Yes. Hi. Just two follow-up questions from my side. One is on the new financial targets that you aim to present late during the autumn. Is – do you think that – will the ambition be to meet the ROE target of being above peers? Is that something that you think you could possibly reach in a three-year period given the levers that you can pull?
Christopher Rees
I said we are reviewing that and we will revert back in the second half of this year or towards – after Q3 as stated.
Pete Kessiakoff
Okay. Then just secondly, on trading income where you have your guidance of EUR300 million per quarter then plus, minus EUR25 million and you've mentioned that you expect to be below that level during 2019. Do you still expect that and do you have any comments to make into 2020?
Christopher Rees
We still reiterate that. You can see there's very challenging market environments, in particular, for the market-making activities. And if you think about the last three quarters, we've had negative valuation as well, and in total adding up to over EUR90 million in valuation adjustments, negative that is. So that is quite challenging. So this is – if you look out, this is a short to midterm view that it is unlikely we'll beat the bottom end of that range. But I do want to stress though that the customer business over the last quarter has been pretty good. So that business is very stable and at good levels. It is more the market-making activities that are the challenge here and that will remain so in the foreseeable – you also saw it in May when there was a big flattening of the yield curve and reduction of rates that has had an impact this quarter.
Pete Kessiakoff
Okay. But for – does that comment also relates to 2020, or is it mainly...
Christopher Rees
That comment relates to the coming quarters, going into 2020.
Pete Kessiakoff
Okay. Thank you.
Christopher Rees
As long as we have this trading environment you can say.
Rod Alfvén
So you tell us when our environment changes and then we can talk about future.
Operator
[Operator Instructions] And there are currently no further questions registered, so I'll hand the call back to the speakers. Please, go ahead.
Rod Alfvén
Okay. Well, in that case, thank you very much. We are in the middle of July, so I wish everybody a very nice summer break and see you when we come back to what will be a very exciting autumn. Thank you very much.
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