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Edited Transcript of NDASE.ST earnings conference call or presentation 29-Apr-20 6:00am GMT

Q1 2020 Nordea Bank Abp Earnings Call

Jun 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Nordea Bank Abp earnings conference call or presentation Wednesday, April 29, 2020 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Rees;Group CFO

* Frank Vang-Jensen

Nordea Bank Abp - President & Group CEO

* Matthew Elderfield

Nordea Bank Abp - Chief Risk Officer and Head of Group Risk & Compliance

* Rodney Alfvén

Nordea Bank Abp - Head of IR

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Conference Call Participants

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* Andreas Hakansson

Danske Bank A/S, Research Division - Research Analyst

* Johan Ekblom

UBS Investment Bank, Research Division - Equity Research Analyst of Benelux and Nordic Banks

* Magnus Andersson

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Matti Ahokas

Danske Bank A/S, Research Division - Head of Equity Research of Finland

* Peter Kessiakoff

SEB, Research Division - Research Analyst

* Sofie Caroline Elisabet Peterzens

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Nordea's First Quarter 2020 Results Audio Cast.

I will now hand over to Mr. Rodney Alfvén, Nordea's Head of Investor Relations. Please go ahead.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [2]

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Yes, good morning to everyone, and welcome to this quarterly call, where Nordea will then present our first quarter result for 2020. We're actually sitting in 3 different locations, but we will try to do this as good as possible. We will start this event with the presentation of our President and Group CEO, Mr. Frank Vang-Jensen. Then this will be followed by a Q&A session for investors and analysts.

So I hand over the word to you, please.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [3]

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Thank you, Rodney. So good morning, everybody. Today, we have published our first quarter results for 2020. Before going deeper into the results, let me take you back to our last result announcement. In early February, I mentioned that the macroeconomic outlook, our environment looked somewhat weaker. A few political risks and trade tensions were increasing, and that we were facing new unpredictable health risks. None of those risks have gone, but who will have anticipated the magnitude of the COVID-19 outbreak.

In recent months, we have witnessed an exceptional time in our history, the pandemic has affected all of us. What started as a health crisis has now escalated into a crisis for the economy and for societies worldwide.

At Nordea, we have accessed the effects of the COVID-19 in all the Nordics. One example is our assessment on -- of changed behavior by analyzing data from our card business. The sectors that have been hit the hardest by the COVID-19 related downturn include travel, accommodation, entertainment, restaurants and leisure activities, whereas the impact on groceries is very limited or even slightly positive. Our data shows a drop in consumers' credit card volumes by approximately 30%. The drop for debit cards has been more limited because those are used for everyday shopping. On the commercial card side, we see volumes dropping by more than 60%. And these cards are primarily used to pay for travel and business expenses, which now is close to 0.

On the other hand, we see that e-commerce is picking up and that many smaller merchants are quickly adjusting to more digital business models. Should this continue for longer, the effects for various industries and the largest companies will naturally be even wider and more severe.

Under these extraordinary circumstances, we have been standing firm in our vision and our purpose to be a strong and personal financial partner for our customers. We have also taken measures beyond what we could have imagined only a couple of months ago. We have supported our customers in multiple ways. We have kept the bank fully operational, even with most of our employees working remotely, and we have kept our employees safe.

We're now seeing some early signs of societies opening up again gradually and cautiously. We work on this development, but it is important to remember that the duration and extent of the economic impact of COVID-19 remains highly uncertain. It is early -- it is too early to predict the shape of the recovery.

Despite the economic challenges, we have delivered solid first quarter results. Compared to the first quarter of '19, our net interest income was up 5%. Net commission income was up 4%. Increased customer activity was the driver for both. However, due to net fair value being highly affected by the turbulence in financial markets, our overall revenues decreased 5%.

We continue to deliver on our cost targets, and our overall cost decreased 8%, compared to the Q1 in '19. All this led to an unchanged cost-to-income ratio of 57%. We are entering this crisis with robust capital ratios, a solid liquidity position and a strong and a highly diversified growth portfolio across Nordic countries and segments.

At the end of the first quarter, we had a strong CET1 ratio at 16%, which is 5.8 percentage points above the regulatory requirement and corresponds to EUR 8.8 billion. Our liquidity position remains robust with a buffer of over EUR 100 billion and a liquidity coverage ratio of 182%, which means that we have almost twice as much liquidity as required. During past years, we have significantly derisked our balance sheet, and we remain focused on the credit quality of our existing book and new business opportunities in order to grow the bank.

Our portfolio is well diversified with limited exposures to industries highly affected by COVID-19 in the near term. Still, we have reviewed the sectors which are expected to be highly impacted in the short term. This has resulted in loan loss provision of EUR 154 million in the quarter, of which EUR 120 million was an additional management judgment to provide coverage for the likely near-term increase in loan losses. Adding the special provision we made in Q3 last year, we now have EUR 327 million in additional provisions, which are made on top of the model-based collective provisions and individual customer-based loan loss provisions. This means that the total amount of allowances is EUR 2.4 billion.

However, it is still too early to conclude on a longer-term outlook for future loan losses as the economic impact of COVID-19 is very uncertain. Further assessments will be made in Q2 following updated macro assumptions. This is in line with the guidance given by the regulators.

In any circumstances, we are ready to adapt to the developments of the crisis and take mitigation actions over time. We will remain committed to delivering on our financial targets in '22.

COVID-19 is an extraordinary crisis for all parts of societies. There has been a dramatic change. In these situations, banks are significant contributors to societies. We want to be, and we are part of the solution. Let me be very clear. All actions we are taking in the current situation are fully focused on our immediate priorities, doing all we can to support our customers, ensure business continuity and keep our employees safe.

Our customer activity levels and accessibility have remained high despite limitations and even lockdowns in our branch offices in certain countries. And several parts of the bank, transaction levels has never ever been higher. At the same time, we have doubled this year of remote meetings from 40% to 80%.

In the first wave of the crisis, we quickly launched extended installment-free periods and offered extended credit facilities to our customers. Through this, we are supporting our customers and societies. These actions has been very well received. And now we have received more than 60,000 applications from households and corporate customers, and we are steadily approaching 70,000 applications in total.

In the corporate sector, customer interactions has been at record-high levels. We have proactively contacted more than 30,000 corporate customers and received credit requests worth EUR 13 billion in March alone. Thanks to our committed employees, we have been able to stay fully operational and active during the crisis.

More than 70% of our employees have worked remotely from different locations. We have taken several actions to create a safe, healthy and smooth working center, and we have secured trading and other criticals of business operations.

Our group business -- our group crisis management team has led and coordinated all measures taken to strengthen our operational stability and increased cybersecurity measures. I would like to take the opportunity to thank our customers for their flexibility and our employees for their dedication and extremely hard working -- work during this crisis.

Let me now move over to our results. Overall, I'm pleased to see that our business is resilient, and we have been able to report solid numbers. Net interest income increased by 5% and net commission income by 4%, due to our continued high business activity. Net share value result was significantly affected by the volatility we experienced in the financial markets, especially lower interest rates and the dramatic fall in asset prices which impacted total operating income negatively. Our efforts to improve operational efficiency are reflected by 8% decrease in costs compared to the same quarter last year, and this led to an unchanged cost-to-income ratio of 57%.

The return on equity was 7.1% in the quarter impacted by significant market turmoil and our large capital base. In terms of loan losses, our net loan losses in Q1 amounted to EUR 34 million and, as I just said, on top of that, we have made management judgments of EUR 120 million in total to cover likely near-term increase in loan losses. I'll go back to this on our credit portfolio later.

If you double click on the income lines, we are seeing a continued positive business performance. 3 out of our 4 business areas are reporting higher income compared to the first quarter last year. Net interest income was up 5% following increased lending volumes, which were up 4%. And the margin remain largely stable. Our increased customer interaction levels grow net commission income growth by 4%. Net fair value was down 59%, and market turmoil led to valuation adjustments in markets and treasury, while customer arrears were holding up well.

Costs were down by 8% compared to the first quarter last year. I'm pleased to see that we are improving our operational efficiency and progressing according to plan. We are heading towards our '20 targets below EUR 4.7 billion. Part of the decrease is explained by lower resolution fees in Q1 '20. Adjusting for this, costs are down 3%.

In light of COVID-19, bank lending and funding has become even more crucial to keep the economies and our societies running. Nordea has a solid liquidity position to respond to this situation. By the end of the quarter, we had a liquidity buffer of over EUR 100 billion. Our liquidity coverage ratio was 182%. This was an increase of 16 percentage points from the previous quarter. In addition, our long-term liquidity risk, our net stable funding ratio also strengthened from the previous quarter to 109.7%.

We have witnessed increased customer activity with loan -- with loans and facility drawdowns but deposit inflows has been even more pronounced, so far. In the first quarter, we issued approximately EUR 5.7 billion in long-term debt, of which approximately EUR 4.8 billion was in corporate bonds and EUR 0.9 billion in senior debt. The new covered bond market has been functioning throughout the crisis.

In these first weeks of the COVID-19 turmoil, we witnessed challenges in the international funding markets, which often means immediate shock. On the introduction of central bank facilities and support, the market started to stabilize towards the end of the quarter. Despite our overall robust liquidity position, we have chosen to participate in selected central bank liquidity facilities to ensure additional capacity to support our customers and their funding needs. Our funding pricing has remained competitive in the volatile market environment and is among the best within our Nordic and European peers.

Our strong capital position gives us a solid foundation to face the next phases of COVID-19. This is also an important building block for sustainable long-term growth, supporting both our economics -- economies and societies around us. Our CET1 ratio was broadly stable at 16%. And together with the reduction in macro prudential buffers, this led to a total CET1 buffer above requirement of 5.8 percentage points, corresponding to EUR 8.8 billion. We have room to meet increased credit demands, while also having the capacity to absorb potentially higher loan losses and credit migration during the exceptional times.

The Board of Nordea has decided to postpone the Annual General Meeting to the 28th of May, and proposed to postpone the dividend decisioning, a decision following the ECB guidelines. The maximum 2019 dividend amount will be continued to be deducted from the capital position.

Our risk exposure amount remains fairly stable. We have increased by EUR 1.9 billion, driven by stronger lending activities, high market risk and increased counterparty credit risk. The overall REA increase was partly offset by favorable FX effects.

Our balance sheet expanded by 8% in Q1 following the increased lending and our participation in central bank facilities in all countries. Fair value changes and repo activities increased the balance sheet by EUR 32 billion.

As mentioned, we have a strong capital position entering this crisis. Moreover, we have demonstrated the stability of our capital base during the past years, which gives us resilience in times of high volatility.

Our solid capital position gives us a buffer to absorb unexpected shocks like the current COVID-19 situation, while the EBA '20 stress test experience was postponed. Utilizing EBA 2018 stress test, our current capital buffer of 5.8 percentage points is more than double the size of that result. This stress test was particularly tough on the Nordic economies. In summary, we are entering the crisis with a solid capital position and the willingness to stand by and support our customers.

Let's now move on to our risk picture and loan portfolio. We have a long history of low and stable loan losses. Our average loan loss ratio amounted to 19 basis points since and including the most recent financial crisis. During the financial crisis between the year 2008 and 2010, the annual loan loss ratio amounted to 33 basis points, well below the average level of Nordic peers.

Since then, we have furthermore actively lowered our risk profile by continuously exiting the non-Nordic markets, and we have further reduced our risk appetite in several risky segments.

Our credit portfolio is very well diversified across our stable Nordic home markets. We have an even distribution of lending across the 4 Nordic countries, and with an equal distribution between household and corporate exposures. The largest part approximately 85% of the retail portfolio is mortgages and the corporate portfolio is well distributed across many sectors.

We are in close dialogue with our customers, also to follow our credit risk position closely during the ongoing and very uncertain COVID-19 outbreak. For the time being, we have identified that the most immediately affected segments make up 9.6% of our total loan portfolio. We have made loan loss provisions, taking into account all factual development until end March, but not on the basis of implications for our customers that have not yet materialized. We have added a management judgment into our allowances of EUR 120 million, based on the already identified possible losses in the near term. We have not estimated the total loan losses that might occur due to the pandemic because of the great uncertainty about the economic outlook. However, we consider that our provisioning approach is prudent and fully in line with regulatory guidance.

Nordea is well positioned to cover future losses with a total of EUR 2.4 billion of allowances on the balance sheet, including a total of EUR 327 million of extraordinary management judgments.

Our underlying credit policy remains solid, and the stable trend continued up until start of the pandemic. In the first quarter, we had a largely unchanged level of impaired loans and a nonperforming loan ratio of 1.7%, well below the European average. We have also readily increased our coverage of nonperforming loans. This has now increased to 39%. With underlying loan losses of a EUR 34 million, and the additional management judgment, our loan losses amounted to EUR 154 million.

We have taken care in managing the crisis and have not changed the customer ratings due to the temporary COVID-19-related liquidity problems. We will continuously monitor the situation, update credit assessments on our customers and plan to adjust the macroeconomic scenarios used for our collective provisions models in Q2.

To conclude, while the crisis imposes challenges for our customers, the bank and societies as a whole, we enter the situation from a position of strength with a well-diversified low-risk Nordic portfolio and a prudent provisioning approach.

Now let's have a closer look at the business area results. We start with Personal Banking. In Personal Banking, mortgages volumes continue to show good growth rates in all 4 markets. And net interest income increased by 1% and by 3% in local currencies. Net fee and commission income increased 2% and by 5% in local currencies. Total income was 5% lower compared to last year or compared to a year ago, the main reason being lower net fair value. Costs decreased 11% and cost-to-income ratio improved to 54%.

In Business Banking, our customer activity was very strong, and revenues increased by 12% with double-digit growth in Norway and in Sweden. We have had good customer activity in markets products and see a strong trend on all income lines. Costs decreased by 5%, leading to an improvement in the cost-to-income ratio to 46%.

In Large Corporates & Institutions, total revenue were up 3% despite the net fair value decrease. The main driver was strong commission income from equities and advisory. Lending was up 14% from Q4, with high demand in March. Costs came down by 11% from Q1 last year. As mentioned before, net fair value was strongly affected by valuation adjustments of negative EUR 46 million. Operating profit decreased from higher net loan losses in the quarter of EUR 52 million, which includes a management judgment of EUR 26 million. The repositioning of Large C&I is progressing. It is about reusing capital consumption, increasing active capital reallocation and taking down costs.

Asset & Wealth Management's performance was affected by the financial turbulence, and assets under management decreased by 14% to EUR 280 billion due to lower asset prices. The market turbulence also caused negative flow of EUR 3 billion, but this was partly offset by higher deposits. However, total income was still up 2% and net commission income by 7%. Costs were down 14%, leading to a reduction in the cost-to-income ratio to 48%.

In setting the new direction for Nordea last year, we decided on a new business plan and new financial targets. That means that we will improve our operational efficiency, drive income growth initiatives and create great customer experiences. We are progressing in line with the plan. And we are focused on the execution, also during these challenging conditions. We remain committed to delivering on our financial targets in '22.

It is a bit too early to conclude on the long-term economic consequences of COVID-19, but we are staying agile and ready to take mitigating steps over time. Our immediate priorities are clear: to continue to support our customers and societies, keeping our employees safe and the bank fully operational during these extraordinary times.

Thank you for listening.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have is from the line of Peter Kessiakoff from SEB.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [2]

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Just a few questions from my side. To begin with, the press release that you sent out yesterday evening with the announcement to the AGM and where you state that you hope to get or hope to pay out the dividend during the autumn or after October. Could you perhaps, to start off with, kind of elaborate on what do you think that you need to see in order to be able to pay it out during the autumn? So that's my first question.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [3]

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Yes. So let me take that one. So what we have said is that we have postponed the decision to after October. And what we need is more visibility or better visibility. So we will keep the AGM -- the Nordea AGM the 28th of May. And the decision of the dividend will be postponed to later on the year after the first half of October. And it is about visibility.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [4]

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Okay. Is there anything tangible that you could say that this is what we're looking for or anything like that? Or is it just...

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [5]

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No. We think the right thing to do is to postpone it and try to get some more information what is happening in the world, how does it look and so on. But of course, as we mentioned, we are entering with a very strong capital position and we have all the capital we need. But we also need to be very humble about the situation right now, and that is the decision the Board has taken. So better visibility is what we like to see.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [6]

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Okay. Then just on the cost savings, and you are, of course, reiterating your message on cost for this year and the long-term ambitions. But is there any -- are there any challenges that you see on the back of COVID-19 for cost savings during 2020? And the savings that you expect to see during the year, could you elaborate on kind of how much is related to staff reductions and how much is related to consultants and perhaps reducing kind of external services, et cetera?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [7]

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Yes. We don't give any guidance on the detailed number within the -- you can say the cost line. But what we have said is that we are -- our target is for -- on the cost side for '20 to deliver a cost base below EUR 4.7 billion, and that we confirm. And I can't really see any changes and why we should not be able to do that. And if you look at the composition of the cost line, if you can say so, then until now, we have reduced the number of FTEs in the bank by 700 and quite a big number also on the consulting side. But we have also done a lot of other actions. So it is -- there's a combination of many, many, many go small and larger initiatives. And that job will continue.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [8]

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All right. But in order to reach the cost savings for this year, is there a need to reduce FTEs further in order to reach that during the year?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [9]

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The way we look at it is that we want to increase the operational efficiency in the bank, and how then the composition of, you can say, the cost savings will be, that's a little bit secondary. But of course, as 70% of our cost base or nearly 70% of our cost base is related to people, then there will be a people impact. And I know that, and that will continue.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [10]

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Okay. Then just kind of a final question from my side on the provisions. And as you mentioned, you have the allowances, which are management judgment based. How should we take these and the provisions that you took under the ECB-specific -- well, during the latter part of last year? How should we look at this in combination with IFRS 9, which -- or you will update your macro scenarios, et cetera, in Q2? Does that -- does these 2 tie into each other in any particular way, which means that IFRS 9 could be a smaller effect in Q2?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [11]

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No. So Matthew, are you on the line?

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Matthew Elderfield, Nordea Bank Abp - Chief Risk Officer and Head of Group Risk & Compliance [12]

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Yes, sir. If you can hear me? So with regards this...

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [13]

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Matthew is Chief Risk Officer. And I think that -- and Matthew, try to explain how we have done and how it all is intellect, please.

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Matthew Elderfield, Nordea Bank Abp - Chief Risk Officer and Head of Group Risk & Compliance [14]

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Yes. So let me, first of all, differentiate between the underlying loan losses and then explain the approach we use for the management judgment. I think it's very important to emphasize we think it's too early a stage to assess the full impact of COVID for the loan losses, and therefore, we're not providing an outlook on these. But let me try to break down what the numbers are. And if you look at the net loan losses section in the Q, you'll be able to see the detail that I'm going to give you.

In terms of underlying loan losses, I think the key points are as follows: the Q1 underlying net loan loss was EUR 34 million. And in our view, that shows positively on the solid underlying credit quality, and that's better than the average quarterly run rate we've had in the past. The gross losses, and again, we give you the detail in the Q on this, before write-offs, reversals and asset sales, were EUR 84 million for Large Corporates & Institutions, EUR 21 million for Business Banking and EUR 39 million for Personal Banking. That LTI number is mostly driven by increased provisions for offshore customers. So that's already a very heavily-provisioned book. We could get into that if you want. But the lower oil price impacted collateral values.

But in all those cases, we did Q1 loan losses based on observed credit developments. So we have not, at this stage, updated the macro scenarios in the IFRS 9 model. We've not attempted to bring forward a rerating of customers based on coronavirus factors on the liquidity on the firms. And that, to our mind, is very much in line with the regulatory guidance. But as Frank emphasized in the presentation, we have provided an additional management judgment on our provisions. So an additional buffer, we've added to above and beyond the calculated provisions. So in addition to that EUR 34 million underlying loan losses, we've made a management judgment of EUR 120 million, and that's for the likely near-term impact of COVID-19. Again, important to emphasize, it doesn't cover the full impact, but the most likely near-term impact.

So I thought what I could do is take a moment to explain how we assess that. Again, there's more detail in the Q. For the large corporates, we individually assessed the high-risk customers in the most effective sectors, and Frank showed you the most effective sectors. And so that was 1 reference point for the large corporates. The Business Banking portfolio, we did a downwards rating adjustment for those small businesses, again, in those most impacted sectors. And then for Personal Banking, I think important differential between mortgages and unsecured. We don't see a near-term impact on mortgages. We have very strong LTV levels. Nordic economies have a strong safety net. If there's going to be an impact in a more severe stress scenario, it will be over the medium term. But we did assess the impact on the unsecured consumer lending and credit cards. And we did that through a downwards rating adjustment. And then we sat back, we looked overall as a matter of judgment to come up to the EUR 120 million, considering, again, the likely near-term impact, but not all the way out to the future.

So in terms of that future level of loan losses, it's very unclear. Too early to conclude on the long-term impact due to the factors you're very well aware of: the uncertain macroeconomic forecasts; uncertainty around lockdown periods; uncertainty around the benefit of government actions.

But let me just add. I think it's important to emphasize that whilst we can't forecast the loan losses through to the end of the COVID stress, we do believe we come into the crisis with a very strong starting point. As you'll have seen, the current trend on loan losses is very low. We've built up our allowances to EUR 2.4 billion, with the latest management judgment of EUR 120 million in addition to the previous ones in Q3 of EUR 100 million and before that, we have EUR 327 million of management judgment above and beyond the calculated provision level. And we have a very strong track record of credit risk management. You look at our loan losses compared to our peers during the financial crisis and indeed, since the financial crisis, there's been a significant sustained period of derisking, exiting the Baltics, reducing Russia, reducing the offshore portfolio. So we think that by having a well geographically diversified portfolio for the 4 Nordics, good sector diversification and relatively low exposure to those most impacted areas, we start at this situation with a strong credit risk profile.

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Operator [15]

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The next question we have is from the line of Andreas Hakansson from Danske Bank.

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Andreas Hakansson, Danske Bank A/S, Research Division - Research Analyst [16]

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So could you just start with a quick follow-up on your loan loss comments there? Have you made any -- you said you haven't changed the macro assumptions, but have you made any changes to your oil price assumptions? Or what's actually being reflected in the market already today?

And then just a small detailed question on asset quality. We see a sharp drop in Stage 2 loans; I think it's 18%. Could you confirm, is that mainly FX? And is that the -- given that it's in Norway, is that the way I should read it? Let's start there.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [17]

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Yes. Thank you, Andreas. Matthew, could you start? And then Rodney and Chris you can chip in, please?

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Matthew Elderfield, Nordea Bank Abp - Chief Risk Officer and Head of Group Risk & Compliance [18]

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Yes. So we have factored in the oil price, as I mentioned briefly in terms of the collateral values for the offshore book. Our offshore book is one that's shrunk over time. It's gone down by over 40% since 2014. We -- it's a -- we have already a heavy level of provisions in place there for the impaired customers of EUR 1.7 billion. We've already got a 40% loan loss provision coverage. But what happened is the broker values of the collateral was impacted by oil. We've already taken big reductions in broker values over time. We have a very significant haircut there, 25% to 50%. Those broker values have come down by 60% over the last 5 years. So we've got quite heavy provisioning on that portfolio, but we took some additional adjustments in that gross LTI number that I mentioned to you.

In terms of oil more generally, we only have 10 customers in the oil segment, 1 high-risk customer, the other big majors, so limited exposure to oil and limited impact on the numbers from oil.

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Andreas Hakansson, Danske Bank A/S, Research Division - Research Analyst [19]

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And just on the Stage 2 loans, the big decline there?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [20]

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Yes, Rodney, here, you're right, it's 18%, but it's fairly small. It's only EUR 8 billion of our loans at Stage 2. So it's not a big euro amount. It's been movements between Stage 2 and Stage 1. So it's not -- I mean, it's in percentage, big, but given that Stage 2 is so small part of our total loan book, it's been a small movement in euro terms.

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Andreas Hakansson, Danske Bank A/S, Research Division - Research Analyst [21]

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But if things have moved from Stage 2 to Stage 1, we're actually seeing an improvement in the quality loan book in the quarter, if it's not FX, right?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [22]

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We have actually seen a small improvement in the credit quality, yes. Then that's had a positive on the CET1.

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Andreas Hakansson, Danske Bank A/S, Research Division - Research Analyst [23]

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Yes, sure, sure. Then on -- if we start with the mitigating actions, Frank, that you talked about, I remember in the Capital Markets Day, you stressed that your target is overall a cost/income target. And if revenues are falling, you're going to do more on costs. Is this what you're thinking about when you talk about mitigating actions that you're going to look for more potential cost savings if revenues would be on the weak side?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [24]

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Yes, and on lots of things. But, yes. So our focus now, as I said, to, of course, continue to support our customers, keep our employees safe and keep the bank fully operational. But of course, if longer term plays out in a different way than we expect or had hoped, then the mitigating actions will be -- 1 of the 2, of course, will be the cost side.

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Andreas Hakansson, Danske Bank A/S, Research Division - Research Analyst [25]

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Yes. And then finally, could you tell us a little bit about the momentum on the corporate volume side, how and when it happened in the quarter? And also what type of margins you saw? Did you see a meaningful improvement in margins as you were adding new clients in a more difficult environment, so reflecting the credit environment, credit spreads and so on? Or what's the development there?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [26]

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Yes. So it picked up. We have -- in general, we had a quite good momentum, a high activity level during quarter and from the start of the year. But the activity level increased even to each of the corporate side in March. And that was very much about credit requests in different ways. And that -- the number was actually EUR 13 billion in credit requests in March. What that then leads to it is, of course, an open question and still there are dialogues and so on and so on. And I think the -- it is like -- the larger companies now, they have started to, of course, ask for, you can say, revolvers, credit facilities, so on. Not to handle immediate liquidity issue now, but to basically cover for the future. And the pricing of these facilities in the market has increased, while the pricing for the more SME block, you can say, lending, that has been stable.

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Operator [27]

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The next question we have is from the line of Magnus Andersson from ABG.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [28]

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Yes. First, 2 follow-ups on Peter's and Andreas' questions. First of all, on costs. And Frank, you mentioned the headcount development which has been quite dramatic now in both in Q4 and in Q1, almost EUR 500 million down in Q4 and now EUR 700 million. Are we -- is -- I mean, the lion's share for the year, what do you expect to see taken? Or do you think head count will continue down quarter-by-quarter throughout the year from the end Q1 level? That's the first one, on cost.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [29]

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Yes. Let's see how it plays out. The costs will come down. Operational efficiency will increase and then how the compensation will be exactly, that's too early to conclude on. But costs will come down.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [30]

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Yes. But head count should obviously continue down, be lower in Q4 '20 than it is now.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [31]

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Yes. But I don't want to guide on the, you can say, the steepness of the curve. That's the truth.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [32]

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Okay. And then just on corporate activity and loan demand. If you compare the situation of the 2 most hectic weeks in March with what you've seen so far in April, without revealing any figures or anything, it's just has the behavior changed? Have the corporates calmed down? Or -- and also about the impact, when I look at the NII bridge, there is not much impact from lending quarter-on-quarter. Do you think we will see a significant impact quarter-on-quarter in Q2 from that?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [33]

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I don't want to guide on that one there. I think our customers, what I sense and what I hear is that our customers, they are calm. Of course, they are concerned. We all are concerned. But you can say, March was a special month. It was -- on the SME side, it was very much about, you can say, installment-free periods. We had a lot of these. We had a lot of credit, you can say, requests in order to handle the lower, you can say, immediate liquidity potential challenges. I should say, now it's more ordinary, if you can say so in a middle of a crisis, but it's not the -- it's more like looking forward now. So it is a little bit different type of questions we have with -- from our customers right now or dialogue there.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [34]

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Okay. And then finally, just on risk-weighted assets. And obviously, you have a huge capital buffer is not the problem, but -- or far from it. But just do you think we will see any cyclical effects on your risk-weighted assets coming into Q2, Q3 from potentially deteriorating asset quality? Or will this be very small effect most likely?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [35]

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Chris, will you take that one, please?

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Christopher Rees;Group CFO, [36]

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Yes. Thank you, Frank. I can take that one. I think quite frankly, it's a little bit like Matthew said, it's too early to tell. As he said, we will update some of our macroeconomic scenarios as we go into Q2. You will also see from this quarter that risk-weighted assets did go up a bit because of the very significant market risk development. That will remain, I believe, elevated in Q2 as that is model based and based on a moving average. And then, of course, as we go through this, there will -- we will have to see and wait what the rating migration will be. It is, as I said, too early to tell.

However, we can all imagine that the pressure, of course, will be more likely upwards on REA than downwards. But as said, you mentioned yourself, we come in with a very strong management buffer, 580 basis points above the requirement. And if you look at some of the stress test, that is a well-covered, particularly if you refer to 2018 EBA stress test. So we are going into the -- quite from a strong position, and we will have to wait and see how the economy and the ratings develop in Q2 and onwards.

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Operator [37]

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The next question we have is from the line of Matti Ahokas from Danske Bank.

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Matti Ahokas, Danske Bank A/S, Research Division - Head of Equity Research of Finland [38]

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Matti Ahokas from Danske Bank here. You said you were going to update your macro assumptions and macro scenarios in the second quarter. And yesterday, we got some news from the European Commission that they're basically saying that banks should not mechanically apply the expected loss approaches in these times. What's your take on this? Does it mean basically that you have to bring or have to have less aggressive assumptions on, and will you actually apply these commission suggestions and what are basically your regulators saying about this?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [39]

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Thank you. Matthew, won't you take that one, please?

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Matthew Elderfield, Nordea Bank Abp - Chief Risk Officer and Head of Group Risk & Compliance [40]

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Yes. I mean, a couple of points. I think first what we say, we're still digesting the announcements from the commission. I think it's been welcome the actions of the ECB and the EPA and the commission to provide more flexibility and to try to take some of these procyclical effects out. That's certainly behind the reasoning of the actions we took in Q1. We are looking at what the appropriate macro assumptions to take will be. We're doing our own analysis. We also know the ECB will be providing an updated view, and the key question also is, as Frank mentioned, is what's the rating migration development over the quarter and what's the best way to differentiate between the short-term liquidity impact and the longer-term solvency impact. So I think all banks are thinking about that and we want to get some more data points in terms of customer interaction, see how the macroeconomic stats evolve on the ground, see what's happening in the lockdowns. So I think it's helpful that the regulators have provided this flexibility to not be procyclical, but there's still some decisions to be made in Q2 and some facts to be observed before we can approach our Q2 provision levels and how the IFRS 9 model is going to work in practice.

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Matti Ahokas, Danske Bank A/S, Research Division - Head of Equity Research of Finland [41]

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If I may have a follow-up, does it basically mean that it's not 100% sure whether you're going to use these more lenient approaches that you actually might use your existing models anyway? Is that a possibility?

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Matthew Elderfield, Nordea Bank Abp - Chief Risk Officer and Head of Group Risk & Compliance [42]

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Like I said, I think in terms of the commission package, which is quite a heavy one last night, a lot of the detail there, we're still working through that to decide what's the best approach there. So we've not made a judgment call yet on what to do on the commission proposals. But we have a lot of dialogue with the ECB, and we will take account of that in terms of the macro, looking through the cycle and then thinking about what the right rates are and what the right macro scenario. So that's still to be decided.

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Operator [43]

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The next question we have is from is from [Hugh Emmett] from UBS.

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Johan Ekblom, UBS Investment Bank, Research Division - Equity Research Analyst of Benelux and Nordic Banks [44]

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Sorry. Sorry about that. It's Johan Ekblom from UBS. Just a few follow-ups. Number one is when we think about the capital, clearly, we have some volume growth that's likely to come, potentially some procyclicality. You highlight the big buffers that have strengthened partly because of lower requirement. How do you think about that lowering of the requirement in terms of what is temporary in nature? And we could see reverting to old levels in the future. And what's a kind of permanent reduction? So that's the first question.

The second question is just, as one of the few banks with big operations across the Nordics, can you talk a little bit about what kind of impact you are seeing across the different countries, given the slightly different approaches to the lockdown, et cetera? And if you expect that to translate into material differences in credit quality on a 1- or 2-year forward-looking basis?

And then thirdly, just on the cost savings. I mean, you mentioned that part of the reason that costs are lower are there's less travel and less entertaining and things like that. To what proportion of the cost saves that we're seeing could sort of come back in the normal operating environment and is driven by these temporary factors?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [45]

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Thank you. Let me take the cost part and then also try to talk about the -- let's say, the pan-Nordic perspective and also the different government actions, and then we can finalize with the capital side and, Chris, you can take that one, please.

So let me start with the cost. If you look at the Q1 performance on cost, there is no really positive impact on the COVID-19 situation. Of course, traveling went down a bit in the end of the quarter and so on, but nothing substantially. There will, of course, as we -- basically nobody is really flying anywhere at the moment, at least a very lean portion, then, of course, this line also auto lines present to management and so on and so on with low growth.

So it's many, many small, you can say, pieces that, of course, adds up to a certain number. But we're not talking about substantially amount. We're talking about a pretty large amount. But the question now, I think, for most companies and also for Nordea, is what is it that should not come back? What is that we have learned to do in a different way, creating great customer experience, supporting our customers, aligning our business, coordinates things across and be -- then still be very efficient? And that we want to see more. And I think the time, of course, is now to focus on running the bank, helping our customers through the crisis, but it's also -- and that has started in Nordea. That is, of course, what is that we want to change, what is that we don't want to come back to? What is it that we want to do already now? And one thing, for example, is traveling. We think we can work. We are a true pan-Nordic bank. We have a lot of traveling. And one thing is the immediate cost on the traveling as such. But it also takes out a lot of time and so on and so on. That, we are starting to move into how is that passenger should look like going forward, for example. But that's just one out of many, many questions we're asking ourselves now and will, I should say, during the next coming months have flowed through. So that's one.

When we look -- when we take the question two, the impact on a different impact, if I can say so, due to the 4 countries, of course, to some extent, I remember also different approach to the crisis. I think generally, I should say that what I think we can -- it's encouraging to see the speed and the -- we can also see power behind the decision that has been taken by the governments and also with the authorities in the 4 Nordic countries. And that, of course, will help us as a society through crisis better.

It is too early to conclude, I should say, if the different -- slightly different approaches will lead to any longer-term difference in impact on the economies. I think all the countries, governments has taken quite strong decisions, acted fast, and now the question is about how to exit, how to gradually, cautiously starting to open up. So at the same time, we can fight the crisis, the COVID-19, but on the other hand, also starting to, you can say, kick start the economy. That's the question. And so that part we need to see and that part is very, very important. One thing is to close down; another thing is to open up again. And that has just started very cautiously. So I think the next coming months also will show how things will play out.

And then the capital situation, Chris, and the -- would you take that one, please?

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Christopher Rees;Group CFO, [46]

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Yes. I could take that one, Frank. Just to recap what has actually happened here. I think I would put it into 3 buckets. First, we've seen a significant reduction in the countercyclical buffers in the -- both in Sweden, Norway and in Denmark. And of course, they are there for a reason. And the authorities' action to take them away means actually, they are working by reducing the requirements. And that for us has actually been the biggest effect.

Then you have the potential authorities, reducing the SRB from 3% to 0%, which means the OSI buffer is the -- kind of find a constraint for us, which is at 2%, so that's a reduction of 1%. And then you have the ECB also allowed to dip into PTG, but most importantly, they put forward the proposed CRD V implementation in terms of the capital composition for the P2R, which reduced our CET1 1 requirement.

So to come back to your question, I think the P2R, given that is a future regulation that has come forward, I think that is more of a permanent nature. I think the countercyclical buffers, they are there for a reason, they've been taken away now given the crisis that we're going in. So one could envisage a time when the economy is better, we're through the COVID, and we know, it's now where I would expect some authorities to cautiously start building that up a little bit again. So I would assume that one could be more of a temporary effect, but I think it will take some time before that comes back. And the SRB is also related to the overall CRD V implementation. And I would expect that one or hope that, that could be slightly be a more of a permanent nature. But that remains, again, to be seen what the authorities do.

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Operator [47]

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Thank you. Due to time constraints, the final question will be coming through, and then we'll be handing over to Rodney, Nordea's Head of Investor Relations for closing. The last question we have is from Sofie Peterzens from JPMorgan.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [48]

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Sofie from JP Morgan. I was wondering if you could just make a comment on what level of payment holidays you have seen in your portfolio based on mortgages in different countries, also on consumer lending.

And sorry to go back to the question on provisions, but the management overlay provisions of EUR 124 million, how are those distributed across the different countries? I know you gave out distribution across the divisions, but how should we think about that distribution across the different countries?

And what is your outlook on Swedish and Danish mortgages, the growth? Based on newspaper articles, it seems like demand has come down quite significantly.

And lastly, could you just make a comment on what you expect the capital benefit from the software deductions are to be on Nordea?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [49]

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Well, could you just repeat the last part of the question, so I didn't get that one, you broke up there, so, please what was it?

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [50]

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Okay. Sorry. It's the software, so the capital benefit from the software intangible deductions on capital?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [51]

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Yes. Okay. Let me take the payment holidays. Matthew, if you have the country numbers, that's about the way we normally divide our business. But if you have the numbers, and then you can take it afterwards. And Chris, the software part that was announced yesterday evening, I think it was, you can take that one.

When it comes to payment holidays, it has been between 6 and 12 months payment holiday. It has been primarily on the mortgages. And of course, for corporate customers, it is on the traditional facilities, credit facilities. Consumer finance is not really a big area for Nordea of our retail portfolio, 85% in mortgages. And that's a very strong book we have. SME is -- we don't have the exact number here, but it's 60 plus, you can say in SME. And in the Nordics, you're not experiencing dramatic problems on the Nordics book. But 6 to 12 months, and that is a common -- and that's the same way it has been happened across the Nordics, but with different tools due to the bond market in Denmark is different compared to the Swedish one and so on. Matthew, could you take the other question?

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Matthew Elderfield, Nordea Bank Abp - Chief Risk Officer and Head of Group Risk & Compliance [52]

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Yes. I can give you that. So the split is Denmark, EUR 21 million; Finland, EUR 52 million; Norway, EUR 24 million; Sweden, EUR 20 million; and the international unit's at EUR 3 million.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [53]

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Thank you. And Chris, would you take the software impairments?

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Christopher Rees;Group CFO, [54]

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Yes. I can take that one. Yes, I think it was supportive information that came out yesterday. But as you know, we are still waiting to -- for the EBA to develop the standards with the specifications on how this exemption will be applied and, in particular, the specification of the -- what type of software. We are, of course, at this point in time, digesting this and looking into, in particular, the difference between own developed and what is we purchased from vendors. So in short, we're waiting for more specific agent digesting it and it's a bit too early for us to come out with a guidance of what the impact will be on the CET1. But overall, the direction is helpful.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [55]

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And could you also make a comment on the outlook for Swedish and Danish mortgages that you're seeing at the moment in terms of the production? There was -- for example, there was another European bank saying that new production in some of the European countries is down 80%. Are you seeing anything similar in terms of new production on mortgages?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [56]

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I mean, the new production is not really the biggest driver. So -- but if I look at the activity level at the moment in these 2 countries, it's good activity. So there has been -- you can say, Sweden has been a little bit less, you can say, new homeowners. But on the other hand, it has been a much higher activity within top-up loans. I think the Danish activity last information I have, and that is 2 days old, good activity. So we don't see a dramatic change in the activity. We expect, of course, the activity to come lower in the coming quarters, that's for sure, but no dramatic activity within our businesses.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [57]

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Yes. Thank you. This concludes the Q&A session. I know that there are more analysts wanted to have -- ask questions, and please don't hesitate to call me or the IR team. So if you want to have a more detailed split up of the loans -- of the loan losses between countries and the age, you have it on Page 13 in the report.

So this concludes the Q&A and this presentation. Thank you very much for attending this very special quarter. And let's meet again when we disclose the second quarterly report in July. Thank you very much.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [58]

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Thank you.

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Operator [59]

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Thank you. Ladies and gentlemen, this concludes your call for today. Thank you very much for joining. You may now disconnect your lines. Thank you.