DNB Bank ASA

OSE:DNB

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon, and welcome to the DNB Quarter 2 2018 Conference Call. My name is Anna, and I will be your coordinator for today's conference. [Operator Instructions]

I will now hand you over to Head of Relations, Rune Helland, to begin today's conference. Thank you.

[Rune Helland, executive]

Thank you very much, and welcome to all of you to DNB and the conference call for the second quarter being here in Oslo and represented by the CEO, Rune Bjerke; the CFO, Kjerstin Braathen; CRO, Ida Lerner; and we have also the CFO of DNB Life or Liv, Thor Tellefsen.

CFO, Kjerstin Braathen, will start by giving you highlights for the quarter and then we will follow up and open up for questions. Kjerstin?

[Kjerstin Braathen, executive]

Thank you, Rune, and good afternoon, everyone. Just briefly, a few comments to touch upon some of the highlights of the quarter.

In aggregate, we believe the second quarter results are showing many points of strong performance in all the lines of business areas in DNB. And looking at the 12-month rolling average of the return on equity, we are up to 11.6% return, 11.8% return on equity for the quarter, which are strong signs that we are continuing to bridge the gap towards our most important goal that we've talked about, namely, achieving a return on equity above 12%.

The results are underpinned by a very strong macroeconomic condition and situation and outlook in the Norwegian economy. Growth has picked up through the quarter, in particular with the doubling of the growth in the personal customer segment, but also, positive growth contributions from both SME and Large Corporates. And the growth picked up through the quarters, so at the end of the quarter, there's a higher level and a higher activity throughout the second quarter and a smaller growth when you consider the average volumes on the balance sheet.

Earnings per share grow alongside return on equity and are up by NOK 0.60 from the second quarter last year, underpinning our dividend strategy to pay an increasing cash dividend and combining this with share buyback.

Another strong point of the quarter is the development in fees and commissions, in total an increase of 10% compared to the same quarter last year. All of the areas are performing satisfactorily, but the 2 elements to highlight is the investment banking for one, which is up close to 50% compared to same quarter last year, and the other one, money transfer and banking services, that have continued to show increasing revenue as a result of the series initiatives in this area.

Improved asset quality and strong macro also -- is also visible in the losses that, for the second quarter in a row, is a positive contribution for us, continued very low losses in both personal customers and SMEs.

Some movement in both directions if we look at the Large Corporate portfolio and it's in all majority offshore-related exposures that moved, but more positively so than negative, with a net positive contribution in Large Corporates of NOK 189 million.

Capital remains strong. We have announced a buyback, as you are well aware, of 1.5% during the second quarter. And the full capital consumed in the buyback of 1.5% is deducted from the core capital position at the end of the quarter, which now stands at 16.2%.

And with that, I think we can open up for questions.

[Operator]

[Operator Instructions] The first question comes from Johan Ekblom from USB (sic) [ UBS ].

[Johan Ekblom, analyst]

Johan Ekblom from UBS here. Just a couple of questions. Firstly, on NII, you said that the activity in personal customers picked up during the quarter and I guess that means we should expect a bigger rise in average volumes. Is the same true for the Large Corporates segment? Or how should we think about the fact that average volumes were just marginally up quarter-on-quarter in both deposits and lending, but there was an almost 9% increase in net interest income? So that's the first point. The second question is just how should we think about the P&L impact of both, I guess, the deconsolidation of Vipps and then of your P&C insurance operations, I guess, towards the end of the year?

[Rune Bjerke, executive]

So very good question, Johan, and let me start by saying that the ambitions for the SME segment as well as the personal customer segment remain firm. We intend and plan to grow those 2 segments at levels higher than 4%, if possible, in a profitable manner. When it comes to the Large Corporate clients segment, we are more dynamic and pragmatic regarding growth. If we see short-term profitable growth opportunities, we will grab them. And as you can see in this quarter, we have some exposures being taken on the balance sheet, both short-term on-balance sheet commitments and short-term off-balance sheet commitments and these commitments will vary from quarter-to-quarter and will be pursued in a more dynamic, pragmatic way. We have said that growth ambitions for the group in total should be between 3% and 4%, and we're now saying that you potentially should look for a position in the range in the high end instead of in the low end, so closer to 4% than 2%, 3%. But you are absolutely right that going forward, the plateau level for NII is higher entering the third quarter than we have had in average on -- or in average during the second quarter.

[Johan Ekblom, analyst]

So just so I understand there. On the LC&I, you're essentially saying that, I guess, there's a mix shift towards higher-margin product on balance sheet and then there's off-balance sheet commitment. Does that mean we should expect the margin improvement seen in LC&I to be sustainable?

[Rune Bjerke, executive]

It's both off-balance, short-term transactions and on-balance, short-term transactions that we only take on because they are profitable. And we can maneuver in a more dynamic way regarding such kind of activities than we actually can do in the PC segment and in the SME segment where you have a much more stable ongoing business cycle. So we are firm when it comes to the growth ambitions related to these 2 segments. And the Large Corporate segments will have a more flattish development, exactly as we said after last quarter. We will not see the decrease that we have seen in the past. It might be a flattish or modest growth all in all when we move forward.

[Kjerstin Braathen, executive]

But it's important to highlight, I mean, this is a very natural development in relation to what we've talked about strategically, transitioning to an originated distribute business model where we do underwritings and then we syndicate and distribute the exposure and this is in particular what Rune is referring to; that we've done some large deals towards the end of the quarter that will go off the balance sheet again coming into the third quarter. You also asked about the P&L effect and Vipps, BankAxept, BankID I think you've seen the effect of this quarter is NOK 465 million that was booked. When it comes to the nonlife insurance deal, it's a bit early to talk about details. But what we can say in relation to timing is that the first possible closing window for the transaction is first quarter next year. So this will not be a deal that will close during the course of 2018.

[Johan Ekblom, analyst]

And just to finish on Vipps then et cetera. I mean, should we expect it to have any meaningful impact on costs or revenues in upcoming quarters? Or is it too small to make a difference?

[Rune Bjerke, executive]

It will only -- I mean, Vipps is a part of the total payment strategy that we pursue. Establishing Vipps outside the bank and putting more emphasis on understanding the value chain in the payment sector as well as negotiating in a different way by having more products and more opportunities brings on advantages on the commission and fee line related to transactions and payment services. As you can see, we have a 5% increase in the second quarter this year compared to second quarter last year in that particular area and Vipps is part of the explanation. We are doing a lot to improve this line going forward as well and hopefully, you will see small effects, both on our P&L but also related to what will happen in Vipps as an entity outside the company. But we will give you more flavor about Vipps when they are up and running in the third quarter and they will present themselves for investors in due time.

[Kjerstin Braathen, executive]

And just to make sure that I'm clear enough when we're talking about the future, hopefully a merged entity with us and SpareBank 1 on nonlife insurance, post closure of that transaction, that company will be booked and have P&L effect in line with Vipps, for example. It will not be consolidated line-by-line, but be included in the P&L as an associated company.

[Operator]

[Operator Instructions] The next question comes from Nick Davey from Redburn.

[Nick Davey, analyst]

Two questions, please. The first one on the trading income. If I look into the split of that trading income and just focus on Markets' trading revenues down at only NOK 74 million, I just wondered if you could comment specifically on what's happened to that Markets' trading line this quarter. Is there a -- some cyclical events? And have they responded badly to volatility? And if so, what volatility particularly is -- makes that line vulnerable? Is it more structural, anything to do with MiFID II? Just some comments there, please. Second question on to the capital ratio, please. Just 16.2%, clearly not far away from your 16.1% requirement. I guess the main question here for me is you're talking about upgrading your growth aspirations now towards 4%. The buyback, I know, is deducted. But I suppose people are settling into thinking about as permanent. If you're distributing 75% or so of your earnings and growing at 4%, it just feels like the capital generation becomes a bit of a challenge, put so close to your target. So can you appease any of our concerns that might be building on that side?

[Rune Bjerke, executive]

Start with the trading line. It's obviously the basis swaps that lead to the most negative impact this quarter and it's not related to MiFID II at all. So far, we haven't seen any negative impact on DNB Markets' results related to MiFID II. On contrary, they have actually managed to increase most customer-driven revenues, not only in IBD but even in some of the areas of the fixed side. It's also fair to say that trading on our own book as such has not been a success neither in the first quarter or in the second quarter, but over time, this has been a very stable and profitable business for DNB and we should expect some volatility in the results coming from trading on our own book. So going forward, it should be a kind of average number of the last 10 quarters and that's definitely positive numbers for the group. Second question was about the dividend policy and capacity, Kjerstin?

[Kjerstin Braathen, executive]

Yes, it was about the capital ratio and I think it's important to look at this over more than 1 quarter specifically. And this quarter growth was trending higher than we were looking for in the year and in particular, talking about some larger temporary exposures in the Large Corporates book. For the year as such, our expectations is within the interval we've indicated, 3% to 4%, maybe towards the higher end, but definitely still with a higher pace in SME and personal customers, which is a more capital-efficient growth. We have said that as long as we have room for profitable growth, it may be even a little bit above that, but we are definitely mindful of maintaining our dividend policy and remain very committed to that as such. Our dividend policy, as you're well aware, is to pay a minimum cash dividend above 50% with an increasing nominal cash element per share and then buybacks as a tool to optimize. And in fact, this is exactly what we have done this quarter announcing the 1.5% buyback initiative and we're comfortably at 16.2% above our targeted ratio. And bear in mind that we are building substantial capital on a quarterly basis from our revenue that are consistent.

[Rune Bjerke, executive]

Let me also add that we have said that we give priority to profitability before growth. And if you look at the composition of growth in this quarter, it's very profitable. Even the growth we have had in the Large Corporate clients area has shown a return on allocated equity higher than 14%. And based on the fact that this is kind of short-term commitments that we have added on top of the ordinary business, it should be looked at as a positive and not as a negative. We have the flexibility to maneuver going forward. We have shown in the past that we have ability to deliver on the flexible [ and the ring ] positions we have and you should expect that to be continued going forward.

[Nick Davey, analyst]

Very clear. Could I just ask one follow-up question about trading on your own book? I mean, as you said in the past, that delivered you between NOK 500 million and NOK 700 million a quarter; this quarter, about NOK 70 million. So how many quarters of patience do you have if that kind of volatility continues? And how many sort of big loss events or loss-making days did you experience in the quarter? Was there something extraordinary on that side?

[Rune Bjerke, executive]

I mean, DNB Markets, as such, is very profitable. In total, they yield a return higher than 19% in the quarter if you add on all the elements. And we are patient when it comes to DNB Markets. They have been extremely successful in the past and we expect them to deliver in the future as well. But what really is important regarding DNB Markets is the growth in the IBD commission and fees. And if you look at the numbers, they are [ at ] 45% in the quarter compared to last year. And this is really the IBD platform we have been talking about in the past where we have said that this is a strategic initiative that we invest in. So when I evaluated DNB Markets in this quarter, it's obviously so that it's below the NOK 1 billion we have been used to, but the quality of the revenues and the composition of the revenues as such is much more, I would say, comforting that what we have seen in the past. Less volatility, more stability and more customer-driven revenues.

[Operator]

The next question comes from Adrian Cighi from RBC.

[Adrian Cighi, analyst]

This is Adrian Cighi from RBC. Two questions please, one on NII and one follow-up on capital. So we've seen personal loans spread compression in part due to the increase in money market rates and I know we can't talk about future pricing, but conceptually, one would expect to see higher cost of funding being passed on to the customers, which we're not seeing here. Now we have an upcoming rate looking likely in September. How confident are you that we can pass even part of that increase in cost of funding to the customers? On capital, the timing on the convergence of Basel I transition with Basel III is getting closer, yet you're still at 16.9% under Basel III. Do you expect to see this as only as an optical excess capital? Do you have any indication of this higher capital requirements under Basel III framework?

[Kjerstin Braathen, executive]

Thank you for your question. First, on the NII, it is true that movement in the money market rate has a different impact in the various customer segments. And as expected, there is a negative development in personal customers and yet a positive one in SMEs and Large Corporates. And as we have stated, we are relatively neutral when it comes to these movements in view of the mix of assets and debt on our balance sheet when you also take into consideration the increased revenue on the equity. Having said that, and you know that we can't talk to margins, we obviously are aware that there are expectations of increasing interest rates and can say from -- on a general basis that this is very important for our business. And over time, looking at history, there is a rational market there that would react up on -- off an event. And what is important to state on our side is the flexibility and the nature of the assets that we have on our books. And we've talked to this before, but 90% of the loans in the mortgage book can be repriced with a 6-week notice. 30% of the loans on the SME book can be repriced with an 8-week notice. And 75% of the deposits can also be repriced. So we are not locked into long-term assets at fixed price. And this, in addition to the fact that it's very beneficial for the life insurance business and the solidity there with increasing interest rates, that is a very positive outlook for the business. On to capital, I'm sure you're aware as you're referring to that the Norwegian FSA has sent a letter to the Department of Finance suggesting that the Basel floor that we are currently tied by is removed as a preparation also for the transition to Basel III. When it comes to Basel III and the floor, we said that we are well positioned for this and have ample capital on our balance sheet already. What the FSA is proposing is that the floor is removed and that is one possibility at the end of the year, this year, that it will be removed. At the same time, we think it's important to stress that you should not expect any capital relief from this. I think they're also clearly stating that they would look at measures in a way to maintain what they consider to be a very sound capital situation for Norwegian banks.

[Operator]

The next question comes from Riccardo Rovere from Mediobanca.

[Riccardo Rovere, analyst]

Three questions, if I may. The first one is on the growth in securities issued on the back -- on the liability side. I was just wondering whether you have, let's say, done some prefunding and if that had an impact on the NII in particular in this quarter. The second question I have is more a conceptual one. If you could explain, like we were children at 5 years, why short-term rates, which have constantly gone up systematic over the past 6 to 9 months in Norway, why it looks like we see nothing on your NII yet? And the third question I have is on -- is more a kind of strategical one. If I look at Vipps, you have developed it internally, then you have decided to spin it off to, let's say, share the investments with other banks. Some -- you, together with other Swedish banks, have recently announced that you want to, let's say, share the cost of the KYC procedures. Is there any other area where you think some of the costs, which are common to all banks, could be dealt in a similar manner, sharing, or let's say, creating kind of consortiums, or I don't know how to call them, to share the costs?

[Rune Bjerke, executive]

Thank you for 3 very interesting questions. Let me start by the last one regarding the initiative you mentioned related to KYC. This is a very sophisticated and meaningful example on how banks can cooperate to share the costs related to complicated matters belonging to all of us. So we are part of the Nordic KYC initiative and that is one example, as you mentioned. We are doing exactly the same when it comes to the so-called P27 initiative, where the bank, the biggest banks in the Nordics, have decided to support each other in establishing real-time clearing systems for the currencies in Norway, Sweden, Denmark and Finland, i.e., the euro, so that we can have a clearing system open real time for all the different currencies. And that will be a great advantage not only cost-wise, but it will also open up for new opportunities to build platforms or products on top of a Nordic infrastructure. We are obviously looking into other areas as well, but the 2 initiatives clearly show that we have ways on bringing down costs by cooperating. In Norway, the Vipps example will be extended to the bank infrastructure belonging to BankID and BankAxept and it will not only be a Norwegian game going forward because that new company will have bits and pieces being very suitable for other markets in Europe. So you will see new initiatives coming from Vipps not only to cut costs, but also to increase the top line by selling some of the experienced competence and products in the value chains to new markets. But that is news that the Vipps company itself has to talk more about going forward.

[Kjerstin Braathen, executive]

I believe you asked about short-term movements in interest rates and why this is not having an impact, was that correctly understood?

[Riccardo Rovere, analyst]

Yes, exactly the question, yes. That is exactly the question, yes.

[Kjerstin Braathen, executive]

So I'm not sure I'm going to succeed by explaining this in a way that a 5-year-old could understand, but I'm sure that I'll try and make you follow. What we said earlier is that we are more or less neutral to short-term movements and then I guess your question is how can that be. And that is related to the structure of the assets and liabilities on our balance sheet. And this impacts the segments differently. So let's just take an example in the personal customer segment. There, you can see a drop in the lending margins and the average landing margin is 153 basis points. And there, the client would pay the same interest rate. So when the reference rate increases, they don't pay any more. And the margin that we are then having in excess of the reference rate decreases. On the other hand, we're not paying anymore either for the deposits. So you would see on the other hand -- other side of the balance sheet an increase in the margin that we're having on the deposits.

[Riccardo Rovere, analyst]

All right. But one thing, but just -- sorry to interrupt you, but the vast majority of your funding is deposits and those by definition are variable. And I would imagine also the asset size from an asset/liability management should be one way or the other swapped to variable, too. Now I doubt -- I'm not sure, but I doubt if I were a Norwegian, I got, let's say, 50 or 70 basis points higher remuneration on my current account given the movement in NIBOR 3 months. So I was wondering how this is not -- still don't get it why we see nothing on that. Maybe just competition just is eroding the whole possible benefit maybe. But I doubt that you have transferred the holder rate movement, short-term movement on your funding side because that is not the case, by the way.

[Kjerstin Braathen, executive]

But this is a factor of the mix of the assets, how large a part of the portfolio on the lending side is then floating rate and how large part of the funding side that are deposits are floating. And then the other elements on the funding side is covered bonds where there is the reference rate and the margin. And the vast majority of the lending in LCI and 70% in SME are also based on a reference rate and the margin. So if you add these up together with the equity position, it is more or less a full match, which is why we are not impacted in the short term. And we are not structuring any derivatives in addition to this on the portfolio. Of course, what is important for us is the flexibility to reprice if that is opportune with the development overall in the market and the competitive situation.

[Riccardo Rovere, analyst]

Right. And on the prefunding in the growth of the securities issued by DNB in the quarter, is it the case you have done prefunding this quarter?

[Kjerstin Braathen, executive]

We have increased our funding somewhat, but we are not extremely long on funding. What you might be referring to is that we have a higher activity over the quarter on our balance sheet related to short-term money market taking deposits from customers and placing them with central banks. And this is an interesting business, but a low margin because it's very short term and overnight positions. So you won't see the same P&L effect. But they are visible on our balance sheet.

[Operator]

The next question comes from Jan Erik Gjerland from ABG.

[Jan Gjerland, analyst]

I just had 2 follow-up questions. The one is the equity method, which is sort of NOK 267 million this quarter after being negative for many, many quarters. Could you give us a split of the different line in that area between Luminor, Vipps and export finance? Or at least give us a hint of what kind of level we should expect going forward? And finally, on the life insurance side, we see risk results being weak in the quarter while the financial return is good. What has happened underlying in those 2 lines?

[Kjerstin Braathen, executive]

You're quite right, Jan Erik. The results from the associated companies are essentially up compared to what we have seen. We are not giving details on each of the companies as this portfolio has grown. But we can say that there was some, and I think we talked to some write-downs in the Baltics early phase after closing the merger and the result development there has picked up as expected. When it comes to Vipps and the other trends, I think we have talked to this and Rune Garborg, the CEO, has also talked to expected developments in Vipps. When it comes to the risk results in the life insurance business you asked about, there is some volatility in those numbers. There has been very good results. This quarter, there is a one-off effect from additional reservations made on historical portfolio where we've seen that the reserves are a little bit low, but that's a one-off. When it comes to the financial results, they are very much in line with expectations, but if you compare them to last year, there was a substantial effect from the ownership in the Oslo Stock Exchange and there was also a one-off from the sale of Nordic Trustee. So life insurance business, NOK 359 million, well within what we have guided for and that's based on sound day-to-day operations and no large one-offs.

[Jan Gjerland, analyst]

Okay. Could you just give us what's -- tell us what Rune Garborg has told the market because I don't think everyone knows what he has told the market, if you can shed some light to that?

[Rune Bjerke, executive]

He has said that the Vipps costs should come down due to the fact that we are moving peer-to-peer transactions from using the Visa, MasterCard schemes to the bank -- to bank account scheme, which is about 1/5 of the price taken by the big global schemes. So Vipps costs related to peer-to-peer transactions should come significantly down. He has also said that transaction-wise, Vipps should be positive in the first quarter of 2018, which is already proven. But this is transaction-wise, you obviously have costs on top of that. So when it comes to the cost of transactions going forward, they will continue to go down as more and more banks participate in the account-to-account payment scheme instead of the Visa, MasterCard schemes. But on the other hand, they will probably be taking on some more costs, especially if Vipps plan to go internationally with some of the products and services. But that's not me to talk about, it's more the Vipps management who should answer such kind of questions going forward.

[Jan Gjerland, analyst]

Okay. Finally, on the Luminor then. If I make the correct -- calculation correct, it looks like you had some NOK 150 million in gain on the bottom line in the past -- or pretax profit. Is that the kind of level you are seeking these days on an annual basis? Or is that a little too low?

[Kjerstin Braathen, executive]

Jan Erik, I believe we -- upon the closing, we issued historical figures for Luminor, so that should be a basis and I'm sure you appreciate, and I think we've stated, that we feel even more comfortable with our position today. We believe there's a potential in -- amongst other cost synergies and a stronger market position in the merged company. So there is a business case that will take us in the right direction profitability-wise in the new entity.

[Operator]

[Operator Instructions] The next question comes from Sofie from JP Morgan.

[Sofie Peterzens, analyst]

Here is Sofie Peterzens from JP Morgan. Your fee growth was exceptionally strong in the second quarter and you made some comments that investment banking division has being going according to plan. But how should I think about fee growth going forward? I guess the growth levels that we saw in the second quarter are unsustainable, at least kind of -- or to maintain those run rates is going to be tough. So if you can just talk a little bit to how do you think about fee growth going forward? And my second question would be on the basis swap. In the past, you talked about -- or in the past, the thinking around basis swap was always that over time, it will be kind of mark-to-market neutral given that you hold most of those swaps until maturity. Is that still the case? Or how should we think about the basis for movement going forward? And lastly, I know you don't really give that much guidance on recoveries, but we saw recoveries again this quarter in the LCI division. How should I think about potential recoveries going forward?

[Rune Bjerke, executive]

Thank you, Sofie. We have been confident when we have been talking about the commission and fees and that is due to what was delivered from the investment banking division, as you said, as well as the development in commission and fees from money transactions and payment services. If you look into the future for IBD and adjust for seasonal effects, the trend should be positive. When I ask the IBD people today about the pipeline, they at least smile for a while and they are pretty positive to what is happening in the quarter to come. But on the other hand, this is obviously also related to market conditions as such. In the quarter, we were especially successful related to corporate finance and ECA activities. Debt capital markets wasn't that fantastic in the quarter. So all in all, we believe to have a stronger platform with good growth opportunities going forward adjusted for seasonal effects. We continue to believe that there will be a positive trend in money transactions and in payment services. We have also good faith in the asset management area where we haven't booked any performance fees so far this year as we did last year, so there should or could be a positive effect coming up in the next 2 quarters. Liv should also continue in the same positive way, opposite to what we have seen in the past. And real estate brokering will be more or less the same as it looks now. High activity level, profitable and well linked and connected to what we are doing in the mortgage business in the bank. So all in all, the commission and fees should continue to develop in a positive way.

[Kjerstin Braathen, executive]

And you asked about the basis swaps, and indeed, the basis swaps are still a zero-sum game. The basis swaps are a mere hedging of our funding that we do in foreign currency against our lending in Norwegian kroner. And we do not -- we are not sitting on any risk exposure there related nor to the currency nor to the interest rates. So over time, it's a zero-sum game, but we are, of course, exposed to the volatility on a quarterly basis in relation of the -- to the market-to-market adjustment. And I thought I'd ask Ida Lerner, our CRO, to talk to recoveries.

[Ida Lerner, executive]

Yes. I think it's important to highlight that we -- as Kjerstin said in the presentation earlier today, we don't expect the impair -- or the reversals to continue quarter by quarter as it has the last 2 quarters. But on -- and also, it's important to say that we still see some cautiousness in the offshore segment. And we know that there is still some instability in that segment and we know that there will be further restructurings going on. On the other hand, we feel very confident that we've taken most of the impairments that is associated with those customers within offshore and oil-related industries. So we're not giving any guidance on impairments. And on the other hand, I think, with IFRS 9, you have far more visibility than you've ever had before in terms of our portfolio and the status.

[Operator]

The next question comes from Matti Ahokas from Danske Bank.

[Matti Ahokas, analyst]

Two questions, please. Firstly, could you give us some kind of estimate for a run rate for the trading income excluding basis swaps and the AT1 cost? It seems like it has been trending down not only with you but your competitors. So some kind of guidance on the run rate would be excellent. The second question is regarding the NII on the personal customer side. The lending spread was down 23 basis points in the quarter. How much of this was due to interest rates and how much of the other factors like competition and product mix?

[Kjerstin Braathen, executive]

I'm not sure we can give you a run rate for the trending -- for the trading income. I think Rune has talked to the development for the trading part of the financial income as such. Even so, there are a couple of factors to keep in mind when you are making your estimates. One of them is, and this is why you were seeing this development in -- across the market, one other factor is the results that we are seeing over time from the reform in the U.S. money market leading to lower volumes in that market and also some pressure on the market. I think this has led to periods of historically very high revenues in this sector. On the other hand -- or in addition to this, there has also been positive elements that you've seen over time in our numbers from CVA/DVA, SVA resulting from a narrowing of credit spreads and improved credit quality. And obviously, we're getting to a level where it's hard to see how much further that can actually go. So we do believe there is potential beyond what you've seen first and second quarter. We're not be able to give you a run rate, but maybe these are a couple of points that you could also bear in mind. When it comes to the margin movement in personal customers, I think all we can say is that for the vast majority, this is related to the movement in the money market rate. There is a slight element also in the book -- of a back book pressure on margin development. However, we are all the time looking at optimizing as best we can within the segment and across the segments without having done any larger repricings in this quarter as such. But you can see when we are not having movements in the money market rates, it's been very stable over time and that is what we continue to believe also going forward given a stable money market environment.

[Matti Ahokas, analyst]

If I may have a follow-up on that. If I look at the 23 basis points decline, the average NIBOR is probably up around 13 basis points, so that still leaves like 10 basis points on this competition and mix effect. Is that a fair assumption?

[Rune Bjerke, executive]

You could also add in other elements among the mix between mortgages and consumer finance products. And as you know, we haven't targeted to grow in the consumer finance area. We have been more cautious and strict when it comes to following up on the guidelines from the Norwegian FSA. So that's why we have had stronger growth in other product areas than we have had in consumer finance, which is a typical product with extremely high margins. So that is another element. So it's not that easy to make assumptions.

[Kjerstin Braathen, executive]

And I must also refer you to the developments in the deposit mix; that is also an increase of 21 basis points. So I don't think you can actually read it like you are directly related to the money market movements as such. When you see a harmonized effect on both sides, that is money market movement.

[Operator]

The next question comes from Jacob Kruse from Autonomous.

[Jacob Kruse, analyst]

Could I just ask first on the other division, the decline in NII of about NOK 100 million? Was that effectively treasury? Is that the comment you make on money markets in your presentation? And secondly, the core Tier 1 decline, it seems like part of the effect at least was increased expected loss deductions and increased deductions for financial holdings? So is that Vipps? And how do you get the increase in expected loss deduction if you're seeing stronger credit quality? Is that just very low loss -- very low actual losses being compensated for?

[Kjerstin Braathen, executive]

Yes, the last question is a little bit technical, but I'll try to shed some light on it and I think you're on to what it actually is. There is a correct -- a deduction in the capital calculation related to the aggregate loss level that we have on our balance sheet. So if we have less losses in aggregate on our balance sheet than what is normalized losses in the model, there is an additional deduction in the capital ratio. When it comes to the holding in the financial companies, that's also very technical where we are deducting capital in a different way. The holdings and aggregate are more than 10% of the group as a whole. And given the fact that we have written down our capital, the subsidiaries are relatively increasing and thereby there's also an effect from that. I'm not sure I caught the NII question, I haven't seen another NII element that is decreasing.

[Jacob Kruse, analyst]

So I'm just looking at what you call the other operations segment where you made NOK 449 million of NII in Q1, and I think NOK 330 million or so in Q2.

[Rune Bjerke, executive]

Jacob, do you have it -- is this in the table in the fact book?

[Jacob Kruse, analyst]

Yes, it's table 2.1.1.

[Kjerstin Braathen, executive]

2.1.1 where it's net interest income and net other operating income?

[Jacob Kruse, analyst]

Sorry. Let me just see this. It's 2.1.1 last quarter. And this quarter, it was also 2.1.1, yes. It was net interest income from other operations this quarter was NOK 340 million. And if I look at the Q1 fact book, it was NOK 449 million, so there's this decline of NOK 109 million quarter-on-quarter.

[Kjerstin Braathen, executive]

I think we will have to come back to you on that. I'm not that familiar with that bit there. Sorry.

[Operator]

[Operator Instructions] The next question comes from Andreas Hakansson from Exane.

[Andreas Hakansson, analyst]

We've gone through most areas. I just want to follow up on the NII. Riccardo was asking you why we don't see any impact of rising market rates. And if we assumed instead that we get the Nordea's Bank hiking in September, if we assume that you will pass on the rate hike on your asset side but not on your liability side, is the old number you used to give us, that's a while back, of 100 bps being a positive at NOK 1.3 billion, is that the right sensitivity still? Or are we -- have you changed that number?

[Kjerstin Braathen, executive]

We haven't given a specific number, but I think if you think about what we talked to earlier, that 90% of the mortgage book can be repriced upon a notice and 30% of the lending -- of the SME book can be repriced, it should be relatively straightforward as long as you just decide on the assumptions. I think that...

[Andreas Hakansson, analyst]

So the NOK 1.3 billion, if that's the -- whatever number it is, it's smaller than what we see it was with some other Nordic banks. And is the reason that you still have a fairly big chunk of your SME book and the Large Corporate book where you actually see a margin contraction, is that your understanding?

[Rune Bjerke, executive]

No.

[Kjerstin Braathen, executive]

I don't think we can give you a confirmation on the NOK 1.3 billion. It's not the number that we are using and I haven't looked at the other Nordic banks.

[Rune Bjerke, executive]

But you can easily calculate this yourself based about what Kjerstin said about the repricing potential and you can make the assumptions you want, then you get the number.

[Operator]

And we do have a follow-up question from Riccardo Rovere from Mediobanca.

[Riccardo Rovere, analyst]

Just one quick follow-up. For the first time in many, many quarters, I've seen a little tick-up in the exposure default in oil and gas while shipping keeps going down. I was wondering whether you are starting to get maybe worried about tariff wars. Or is there anything in the decline that we have seen within shipping has anything to do with what's going on outside in the whole world? Or is this an area you are starting to get more worried about or you are monitoring more closely?

[Kjerstin Braathen, executive]

I think we have been reducing our exposure in shipping for a long time from more than 10% when the financial crisis hit down to below 4% for the first time this quarter. And we have said that this is a part of our plan to reduce the volatile elements of our portfolio. And we have continued that direction for quite a while without setting a target as to how low it will go. Because it is important to say that we will maintain activities within shipping and offshore and we are selectively doing transactions, but doing transactions based on a business model and the customers that are profitable over time. Our view in particular on the shipping segment as such has not changed. Some of the segments there have been struggling for a while and the outlook is different from segment to segment. But there's no, in particular, concern for us related to the current situation. Also in the oil and gas area, we are doing selective new transactions that we do consider to be profitable. One element you may catch up on if you read into the details is that there is an increase in the nonperforming exposure, and there is a simple explanation for that and that is that we have done a cash-backed secured transaction or provided a guarantee that is secured by cash deposits to one of the customers in this portfolio and that would also appear as an exposure on offshore. So there's a higher volume, but there's no risk attached to the transaction on our behalf.

[Operator]

The next question comes from Kim Bergoe from Deutsche Bank.

[Kim Bergoe, analyst]

I think most of my questions have been answered. But just one sort of quick follow-up. When I look at your outlook statement and they look like it's pretty much unchanged from Q1 to Q2 except from where you used to say in Q1 that the volume-weighted spread are expected to be stable, you're now saying that net interest margins are expected to remain relatively stable. Everything else looks to be the same. So should we read anything into this? Is there -- why the change?

[Kjerstin Braathen, executive]

No big reason for the change. It's just that, and I think we did say it, but maybe we didn't write it in the first quarter, that the movement in the money market rate that we've seen more of, that has an effect -- higher effect on the combined rates than actually on the net interest margin where you also get the revenue element from the equity/liquidity. So with a more volatile environment for money market, it seems better to try to give you an outlook on the NIM. It's the same message. It's the same message when you think about the underlying pricing for our customers that we would always look to optimize also.

[Operator]

[Operator Instructions] The next question is a follow-up question from Jan Erik Gjerland from ABG.

[Jan Gjerland, analyst]

Just curious to see what kind of levels of consumer finance you put into your Personal Banking division and if you can split then into consumer finance and core financing and leasing, et cetera, just so we understand the variation on the spreads?

[Rune Bjerke, executive]

Out of competitive reasons, we are not giving the product mix in the segments. I mean, this is part of the strategical decisions we are taking all the time and we are reporting segment by segment, not product by product when it comes to different deposit products and lending products.

[Kjerstin Braathen, executive]

But again, I highlight a 23 basis point reduction in the lending spreads and a 21 basis point increase in deposits spread in the personal customer market. You can see there's a symmetry; that's related to money market rate in majority.

[Operator]

[Operator Instructions]

[Rune Helland, executive]

I think we will stop here, and if you have any more questions, please call the IR. We would just like to thank you for all participating, and wish you a great summer. Thank you.

[Kjerstin Braathen, executive]

Thank you.

[Rune Bjerke, executive]

Thank you.

[Kjerstin Braathen, executive]

Bye-bye.

[Operator]

Thank you for joining today's conference. You may now replace your handsets to end this call. Thank you.