Quarter and full year 2019 results. My name is Rodney Alfvén. I'm heading the Investor Relations at Nordea. We will start with a presentation by the President and Group CEO, Frank Vang-Jensen. That will then be followed by a Q&A session with Frank, the Group CFO, Christopher Rees, and myself. Frank, please.
Thank you, Rodney. Good morning. Today, we have published our fourth quarter and full year results for 2019. More of this has been the first quarter of the new phase of Nordea, and we have taken the first steps to deliver on our business plan and financial targets. The Q4 results reflects our priorities on our very much as planned. As a part of these first steps, or as a part of the first steps in our updated business plan, we announced a new organizational structure with clear roles and responsibilities and full accountability in the business areas. It means that the business areas now have greater influence over the size and cost of internal processes and tools, as well as the level of support functions they need and can afford.
In relation to the new organization structure, I'm happy to announce that we have now established the new group leadership team with new senior leaders being appointed. The team is committed to our targets and is ready to deliver. There are several promising signs that we are delivering towards the financial targets for 2022, with higher income and business volume and lower costs. Of course, we have a lot of hard work ahead of us to get to where we want to be. Therefore, we will continue to focus on our three key priorities to deliver on our 2022 financial targets. These are to optimize operational efficiency, to drive income growth initiatives, and to create great customer experiences. In the last quarter of the year, we started executing on the updated business plan. We continued to grow in all markets and gain market shares.
We had good business activity and solid lending growth, especially in the private and SME segments. One good example of how we are exploring opportunities to strengthen our customer offerings, build a stronger market position, and grow income took place in December last year when we announced the acquisition of SG Finans. The company runs a successful business with very satisfied customers in three of our four home markets. The acquisition strengthen us and our ability to advise and help small and midsize corporates with their financial needs. In Q4, cost to income ratio was down to 57%. We are targeting 50% in 2022. The key drivers for the improved cost to income ratio are our customer focus and income initiatives. It is now starting to be evident in the top line. Compared to the fourth quarter of 2018, revenue increased by 6%.
We have also been able to improve our efficiency and delivered on our 2019 cost plans. The number of people was down in Q4. The number of external consultants was down 9%. Internal traveling was clearly lower. We have taken the first steps to establish a new cost culture. We are proceeding as planned and as communicated at the Capital Markets Day in October. In the fourth quarter, our net loan losses were somewhat higher than normal. The reason for that was additional provisions on a couple of large corporate exposures. Our expectations for the coming quarters is that the credit quality will remain largely unchanged. The Common Equity Tier 1 ratio increased to 16.3%, which is 120 basis points above our management buffer. This strong capital position enable us to meet any potential changes in regulatory requirements and capture growth opportunities.
We had a return on equity of 7.6%. We are targeting above 10%, which means that we have a lot of work ahead of us. To deliver on our targets, we need to take steps forward to create better customer experiences, and we have started to make gradual progress. We have managed to shorten waiting times significantly in our 24/7 contact centers. The number of customer complaints have decreased by 20%, and we have better stability in our systems. In 2019, we launched our new Nordic mobile banking platform, which has been very well-received by our customers. Of course, we are far from being satisfied, in particular customers in the broader segments, they should expect more of us. At least we have a positive trend in customer satisfaction across all business areas.
As announced and communicated in connection with our financial targets in October, the board proposes EUR 0.40 dividend to the AGM. Let me now go deeper into the fourth quarter results. I'll talk about these items individually in a moment, I'm encouraged by the fact that we are making progress on cost income, both compared to the previous quarter and to the same quarter last year. We have a long way to go, it's good to see the direction. Total revenues were up 6%, while costs were down 5%, compared to the same quarter in 2018. Return on Equity increased compared to the fourth quarter of 2018. To compare the full year results, 2019- 2018, total income was 1% lower than last year, also cost declines by 1%, reaching our 2019 absolute cost targets of EUR 4.9 billion.
The cost to income ratio was thus unchanged compared to 2018, and return on equity was 8.1%. When we compare with same quarter last year, you can see that net interest income is not contributing to the group's income growth of 6%, since margin pressure had a negative impact. We see an encouraging development when comparing with Q3. The net interest income was up 2% or 3% in local currencies, supported by increased volumes in all business areas. Lending margins were under pressure throughout 2019, but stabilized somewhat in the latter part of 2019. Interest rate movements in the same period had a negative impact on deposit margins in both Denmark and Finland. Compared to Q3, our funding cost improved, leading to an unchanged total margin for the group. Other income compared to the previous quarter was stable over the year.
Business volumes grew in 2019 after several years of decline. Personal Banking volumes increased in all countries. In Business Banking, volumes showed a positive trend in Large Corporates & Institutions. We gained volume growth in Finland and in Sweden. Lending volumes were up 5% year-on-year, and 1% quarter-on-quarter. We regained market shares in mortgages and grew volume in all countries. Our customer focus and income initiatives improved performance. Deposit volumes were higher both year-on-year and quarter-on-quarter. Assets under management were at an all-time high, up 16% year-on-year, despite the difficult start of the year. We had a total net inflow of EUR 9 billion in 2019. We expect the net inflow to continue in 2020. Net fee and commission income was a major driver of our solid income growth in the quarter.
Compared to the same quarter last year, net fee and commission income increased by 9% in local currencies. Asset & Wealth Management was a main contributor and generates half of the group's fee commission income. Lending activity remained at a high level, driven by our debt capital markets and from high refinancing activities in Denmark. In the fourth quarter, we had a broad-based improvement in customer-driven net fair value, which was up 46% compared to the same quarter last year. Corporate activity in Business Banking was especially strong, driven by both FX and interest rates. In Large Corporates & Institutions, customer activity increased somewhat, and market-making activities improved during the end of the year, but are still at subdued levels. Asset management, where most of the net fair value results stems from, life and pensions, was seasonally strong in the fourth quarter.
Time to move on to the business areas results.
In Personal Banking, total income was 2% higher compared to a year ago, since we have seen tough margin pressure the last 12 months. We have more to do in Personal Banking to develop the results we aim for and expect. In saying this, we also see signs of stabilizing margins, which makes us slightly more comfortable regarding revenue development. Costs were largely unchanged, and the cost to income ratio improved by 1 percentage point to 58%. Our volume trend in mortgages represent higher customer activity for us. There is a positive volume growth quarter-on-quarter in all markets. During 2019, we incrementally increased our activities within this business, and we are now seeing a much stronger momentum compared to earlier years. Our omni-channel and service offering supports business development by creating a better customer experience and offering the scale we need to improve our sales.
In Business Banking, key ratios continued to improve, driven by better business activity and our initiatives to free up more time for our advisors. Sweden was the key income driver with double-digit growth, and Norway also had a solid growth. Revenue increased by 5% and cost decreased by 5%, leading to a 4 percentage points improvement in the cost to income ratio to 49%. Pressure deposit margins are partly offsetting the results. The acquisition of SG Finans is now in the closing process. SG Finans has a diversified customer base of about 50,000 corporates in Norway, in Sweden, and in Denmark. That will get access to Nordea's full product offering throughout this acquisition. In our newly named business area, Large Corporates & Institutions, we started our strategic repositioning during latter part of 2019. We are in early stage of the execution, but the first actions has been taking effect.
Total costs came down by 4% in the quarter, including a - 6% in the number of staff. Economic capital has been reduced by EUR 400 million compared to the previous quarter in 2019. Of the reduction of economic capital, approximately EUR 250 million comes from the ECB decision to lower the risk weights from 100% to 50% on commercial real estate in Sweden and in Norway. The Swedish FSA decision to increase risk weights for Swedish banks to 25%-35% improves our ability to compete on a more level playing field in Sweden. However, our risk weights are still higher than our Swedish peers, so it is important for us to improve the internal-based risk models. On the income side, net fair value was up 19% compared to Q3, and net interest income up 3% quarter-on-quarter following higher lending volumes and customer margins.
With improving revenues and cost discipline, the cost to income ratio improved from 66% to 51% compared to a year ago. The return is still far away from a satisfactory level, but we are determined to meet the 2022 targets, which is the first milestone. Asset & Wealth Management continued to deliver good investment performance and reported positive net inflows for the fourth consecutive quarter. 85% of funds have outperformed indices over the last three years, which we are very satisfied with given our focus on actively managed assets. Our ESG funds attracted a lot of interest, and the value of these assets increased by 140% over the year and represent 40% of net inflow during 2019. Net flows were lower compared to the previous quarter, but stronger in retail and private banking. The total net inflow during 2019 was EUR 9 billion.
Revenues increased by 7% compared to the fourth quarter of 2018. Costs decreased by 13%. It's promising that the cost to income ratio decreased to 40% in Q4. Let me come back to the group results. First, let's look at costs. Our actions in 2019 followed the cost plan. Costs were reduced by 4% compared to 2018. In Q4, the number of staff was down by 2%. Depreciation amounted to EUR 156 million. This led to a cost to income ratio of 57%. In 2020, we expect to reduce cost by approximately EUR 200 million and reach a cost base of below EUR 4.7 billion, with planned continued net cost reductions beyond 2020. This is in line with our communicated cost plan, and we are proceeding as planned towards our 2022 targets.
At our Capital Markets Day, we said that the cost target would require some EUR 700 million-EUR 800 million in cost savings. I would like to emphasize that one thing is short-term, to take down a structural too high-cost base. Another thing is our long-term way of working. For me, it is critical that we build a strong cost culture. This work will take several years. We are fully committed to scrutinize all corners of our business and group functions to find ways to operate smarter and more efficient to avoid complex solutions. We should be proud of always improving our cost efficiency. This work has started, and as I said in the beginning, the number of people is falling, the number of consultants is falling, and traveling spend is declining. In Q4, we identified over 70 cost savings initiatives, and the first one have already been implemented.
For example, we have consolidated expenses for legal services with a small number of preferred legal firms and strengthening our internal procedures to optimize the value for money. We have also been able to simplify our product offering and closed 80 account products. We will proceed with a wide range of cost initiatives also in 2020. Our cost plan will have staff impacts. We need to be fewer people going forward. We will do our utmost to support our people and assist those impacted by change. We will also make sure that the changes will not hurt our business. Today, we have better solutions and tools to face this new business environment. Our asset quality continues to be solid, and impaired loans have been stable throughout the year.
As mentioned before, additional provisions on a couple of specific corporate exposures in Q4 increased loan losses provisions somewhat to reach 17 basis points for the quarter. Based on the current macroeconomic environment, our expectations for the coming years, or coming quarters, sorry, is that the credit quality will remain largely unchanged. With the current somewhat weaker macroeconomic environment and geopolitical risks, trade tensions, and now even potential health risks, business need solid ground under their feet. Our balance sheet gives us a very strong foundation in an uncertain environment. In 2019, total assets amounted to EUR 555 billion. The group's Common Equity Tier 1 capital ratio increased to 16.3% at the end of the Q4 2019, which is 120 basis points above our management buffer.
This increase was mainly driven by the reduction in risk weights on commercial real estate in Sweden and in Norway from 100% to 50% following an updated decision from the ECB as a part of the annual supervisory dialogue. The acquisition of SG Finans will consume some 40 basis points of the excess capital. We have a strong balance sheet that enable us to meet potential changes in regulatory requirements and to continue to capture growth opportunities. In Nordea, we are here to help people to realize their dreams and everyday aspirations. Our balance sheet provides good opportunities to handle the unknown and grow business. Eventually, our success is dependent on our customers. At the end of the day, it is the only way to achieve sustainable growth. Everything we do starts and ends with the customers. Our target is to meet and exceed our customers' expectations.
We will do that with a proactive approach. We understand that we need to step up, and we have started to make progress. We have invested throughout the organization to improve our customer experiences. We have increased advisors' availability and reduced the time spent on administrative tasks. Waiting times in our contact centers have decreased significantly. We have increased flexibility to open our doors wider with extended opening hours on evenings and weekends. Nordea is truly available anywhere and anytime, 24/7. We want to do banking smoother and easier for our customers. With the major investments we are making in technology, we are continuously expanding our digital offers. We have launched a new Nordic mobile platform, which has been very well received by our customers. Our digital platform has now 1 billion touch points per year.
More recently, we have introduced an easy digital solution to help our customers track their carbon footprint on the mobile. We want to lead the way by taking actions. We are keen to lead a sustainable banking operation. We integrate sustainability throughout the bank, benefiting both our customers and the societies around us. This is a clear trend in the industry, and we want to accelerate our actions to help customers make sustainable choices. In 2019, we had a wide range of new initiatives, including 11 new funds, expanding green corporate loans and mortgages, as well as offering green car loans. I expect this development to continue throughout 2020. We published our new financial targets in the Q3 report.
Our new capital and dividend policy states that we should have a management buffer of 150 basis points-200 basis points above the requirements and a dividend payout ratio of 60%-70% of net profit. We intend to distribute excess capital through our buybacks. The board proposes a dividend per share of EUR 0.40 in line with the communication in Q3. When we decided on our three years financial targets, we analyzed the current macroeconomic and operational environment, and we also analyzed the big trends of the banking industry. For example, the low rate environment, low cost-based services in Asset & Wealth Management, a mega trend of digitalization, as well as new competition with big tech and fintechs. We are convinced that we will meet our targets by focusing on three priorities: to optimize operational efficiency, to drive income growth initiatives, and to create great customer experiences.
We are focused on execution, and we are committed to moving forward in the right direction step by step and determined to deliver. Thank you for your attention.
Thank you for that, Frank. We now close this webcast, and we will start an audio telephone conference where you can ask questions to Frank, to Christopher Rees, the CFO, and to myself. Please move over to the audio.
Audio, please press zero one on your telephone keypad. If you change your mind and decide to withdraw your question, simply key zero two. Please hold until we have the first question. First question we have is from the line of Peter Kessiakoff from SEB. Please go ahead.
Yes. Hi, Peter Kessiakoff from SEB here. Just a few short questions to you, Frank. First of all, looking at the capital ratio, which clearly was strong in the quarter, what's your updated view on the likelihood of buybacks now perhaps coming during the early parts of 2020? How do you pair that with the potential for further acquisitions? You've made a few smaller bolt-on acquisitions like SG Finans recently. Could there be coming more in the short term, or are you basically integrating these? Those are my first two questions.
Thank you for the question. We have a very strong capital base, and we have a policy having a 150 basis points-200 basis points above requirement. At the moment, we are running 320 basis points above. There are some incoming factors we need to be aware of. The one is, of course, SG Finans. For that, we will use around 40 basis points. No, [40% points]. 40 basis points, yes, of course. Then we have incoming, you can say local buffer demands. For example, in Denmark, we have an increased countercyclical buffer. All in all, some 60 basis points we expect to have an impact from these actions. Then, what will happen during 2020, we, of course, will carefully follow. Of course, our intentions is not to run the bank with too much capital. We want to basically stay within our buffers. That is our intentions.
The timing of when we will be ready for buybacks is still an open question.
All right. Just on risk exposure amount and the reduction that we saw in this quarter, which is then, to some extent, perhaps front-loading some of the benefits from model approvals with ECB that you mentioned might come during the end of this year. What's the updated communication around that? Should we still expect some benefits coming through during the end of this year?
Chris, will you take that one?
Yes. Thank you. As you point out, we had a reduction in risk-weighted assets this quarter. As Frank mentioned in his speech, that is mainly due to the dialogue we've had in our ongoing discussions with the ECB and as part of the SREP, in terms of reducing the risk-weighted floors on the corporate real estate portfolios in Norway and Sweden. That's the main reason for that. That is actually not necessarily a model change per se. We continue and progress according to plans with our model development program, which we have previously announced, and we would submit those applications during this year. ECB will take a certain amount of time in terms of reverting back to us with respect to the outcome of those models. As such, that timing is unclear and uncertain for us.
I expect we deliver this year, and then we'll see when the ECB comes back, but I suspect that will go into 2021.
Okay. Any comments on the magnitude of that?
No, we can't comment on the magnitude of that, I'm afraid.
Okay. I thought I'd try. Just a final question. On margins, where it seems like you have a bit more optimistic message around margins that the pressures are leveling off and so on. Are those comments based on the lending margin side, or is it mainly impacted by that we have had the ECB tiering implementation of negative deposit rates in Denmark and so on, which could, to some extent, be seen as one-off improvements. What's your view on the margin trend throughout 2020?
If I should start, Chris. On the mortgage side, I think we have seen stabilizing trends now recent quarter. Of course, it differs between the countries. Denmark quite stable, a little bit up in Sweden, Finland and Norway a little bit down. All in all, I think it seems more stable than it did a quarter ago. We have the deposit side. Deposit side, you can say is, there, of course, we had an impact earlier, or it was in Q3 after the change of the ECB rate. Remember that the changes or adjustments we have done in Denmark, charging negative interest rates for deposits above EUR 100,000, has not been implemented. Actually, it has been implemented, but from 1st of February.
All in all, including the corporate segment, with the information we have right now, at the end of the Q4, I think it looks more stable than in Q3.
Thank you. The next question we have is from Robin Rane from Kepler Cheuvreux. Please go ahead, Robin.
Thank you for the presentation, thanks for taking the questions. If I start with, in the quarter, staff costs were down partly due to lower variable costs. Now, as the business momentum seems to improve, how sustainable is the lower staff costs that we saw in the quarter? That's my first question.
Yes, thank you for the question. As you point out, yes, variable compensation was lower. That is, of course, related to the fact that performance for the firm was lower. You also need to look at the salaries for the staff, the fixed salaries, and they were also lower this quarter. This quarter, we've also reduced headcounts by 500 FTEs. We do think that we need to work with both the income line, continue focusing on the priorities that Frank set out and some of the activities, as well as the cost line. We can see that the run rate of our fixed salary costs have actually come down quite a lot in the second half of this year, and we expect a continuation of that.
All right. Thank you. On fees. In Denmark, in 2019, as rates have come down, there has been a lot of remortgaging activity to my understanding. How has this impacted fees in 2019? Yeah.
Chris.
Yes. Thank you. In Denmark, as you know, they have a very specific mortgage market. There, yes, we have had a lot of activity in Q3, and that impacted revenues and fees in a good way, particularly in Q3, both for Personal Banking and for Business Banking. We also had a good level of that activity in Q4. Not quite as good as Q3, but still good. As we look forward, I would suspect that that will come down and soften up a little bit as we move into Q1. Overall, that has been a good revenue generator in the second half of this year, or last year, 2019, I guess.
All right, thank you. Last question. As the risk weights on corporate real estate was lowered now at the end of quarter, will this in any way affect your pricing in this segment?
No, it will not. It will lead to that our, you can say competitiveness will increase. Remember, we came from 100% to 50%, and we are still competing in the Swedish market with banks having lower risk weights within these segments. It will not impact our prices, at least not by design from here.
Okay, thank you very much.
Thank you. The next question we have is from the line of Andreas Håkansson from Danske Bank. Please go ahead.
Good morning, everyone. Two follow-up questions really. On the NII, we saw in the fourth quarter that finally that the lending volume impact was bigger than the lending margin impact, but that you had a negative deposit margin impact. Given the items you talked about with the Danish negative rates, but then we also had the Swedish rate hike and the ECB tiering, do you think that the deposit margin would actually turn into a positive in Q1? That's the first question.
Thank you, Andreas. Chris, will you take that one please?
Yeah. Thank you, Andreas.
We can hardly hear you.
Sorry there. Thank you, Andreas. I think if we look forward, of course, the deposit margin this quarter or last quarter was impacted by the rate movements and in particular the deposit margin Denmark and Finland, therefore. I think there will be some and not fully adjustments in Denmark as Frank pointed out. I think there's still some pressure on deposit margins there. I think we have a tailwind in Sweden. We are still have a headwind in Finland. I would still suspect a subdued deposit margin as we go forward in Q1.
Not the same magnitude, right?
No, not the same magnitude, but it'll still be a headwind.
Sure. On the staff cost side, you talk about quite large FTE reductions. Could you tell us how did that develop over the quarter? [audio distortion] W as the impact really small in the fourth quarter in terms of costs since people were fired in the end of the year? How much of the restructuring charge have you used by now? Thanks.
Thank you. Your first question with respect to staff. I think over the year we're broadly flattish in staff. We've reduced the Nordics somewhat. Of course, we've also hired in Poland. If you look at the last quarter, we saw a clear reduction in net staff of 500 FTEs approximately. That was also including the fact that we hired 250 in Poland as part of that shift. We expect a large part of that.
When did the net reduction happen in the quarter? It didn't happen on the first day of the quarter. It rather happened towards the end since you launched the plan.
Yes.
Is the cost savings rather going to come through in Q1?
It happens evenly throughout the quarter. You will see, if you look at Large Corporates & Institutions, where large part of that was, costs came down by 4%, but FTEs were down by 6%. Yes, you will see some of that effect coming into Q1.
How much of restructuring charge have you used up by now?
That we can't comment on yet, of course, we have utilized the restructuring charges that we took in Q3 as part of this. Remember, the restructuring charge is for the whole of 2020 and beyond. That is something that we will be using continuously throughout next year.
Okay. Thank you.
Thank you. The next question we have is from the line of Magnus Andersson from ABG. Please go ahead.
Good morning. If I can follow up on Andreas' questions just on the headcounts. Of course, encouraging to see the FTEs down by 500 quarter-on-quarter, and also that is quite broad based, both in Personal Banking, Large Corporates & Institutions, and group functions. Can you say anything about what we should expect in terms of headcount progression during 2020?
I can take that. No, we don't guide on the number of FTEs. Of course, I understand why you're asking, we don't do that. We focus on cost income, and as we don't have the right balance between cost and income, and 70% of our cost base is related to people, of course, it will lead, unfortunately, to us having fewer people. I think what we have seen in Q4 is as planned.
Okay. Given that you took a restructuring charge of more than EUR 200 million in Q3, I guess it's fair to assume that this number should continue to decline every quarter until your plan is fulfilled, right?
That would be fair to believe, yes.
Yep. Okay. Thank you. Just on NII, is there anything that prevents you from introducing negative rates in Finland on the deposit side like you've done in Denmark?
We have no such plans. You can say basic. The question is relevant in two countries. It is Denmark, it's Finland. These are either euro countries or connected to the euro. In Denmark, you know where we are. In Finland, I should say that the structure, you can say structural question, of course, is the same, but you also need to have a market that is ready to handle the negative interest rates. As I see it now, that is not the case at the moment.
Okay. I think the Finnish FSA was out saying that it would be okay before Christmas, right?
The information I have is not showing any hinder technically to do it. Of course, the question is more complex than just using a technological approach. At the moment, we don't have any plans to introduce negative interest rates in Finland.
Okay. Just on your acquisition on SG Finans, I just have a question there, since in the press release, you said you expect an income impact of EUR 140 million. If I annualize the nine-month 2019 number, I get to EUR 155 million. They've had quite good growth historically. What am I missing here? I'm arriving at a larger impact than you suggest. Do you expect any client runoff, any clients to stay with SG Finans, are you not buying the whole company, what's the reason for your estimate there relative to what they're actually reporting?
Yeah. Thank you. I guess it's a positive question, but a very relevant question. Chris, any information around that question?
Yes. We obviously purchased them and had a discussion with them before earlier in the year. There is a little bit of crossover, but not that much. Of course, we hope to be able to leverage that acquisition even further and their client base, because we do think that that has a very good complement to our business, both geographically and technology, and also the way they do the business and how they approach credit. In that sense, it's a good acquisition for us, and we hope to leverage it as we go forward into 2021.
Yeah. My question was really, why do you estimate the income impact to be EUR 140 million? The acquisition will go through in Q4 2020, perhaps. That should be 2021 or so, while they're already now making EUR 155 and growing quite rapidly. Shouldn't that number be significantly higher?
I think that is the number that we have used. There is a little bit of a crossover on clients and sort of contracts that we overlap with. There will be some reduction, and I think that's the estimate. Of course, as we go forward, we would like to grow that business as well when it's on board.
You're buying the whole company?
Yes.
There's no carve-out or anything?
No. We're buying their Nordic business. Yes. We're buying the whole company.
Yeah. Okay. Yes. Okay. Finally, just a detailed question, follow-up on Robin's question on net commission income. Your lending fees remained very strong in Q4. Is that mainly remortgaging fees?
Remortgaging was positive, as I mentioned in Q3 and Q4. As I said, it might become a little bit softer as we go into Q1. It was also related to the capital markets business that we've had, that's been very strong in the second half of the year. That momentum we hope to continue. It's not just the mortgaging fees, it's also lending. DCM.
Okay. Just on income, sorry, just the EUR 150 million you mentioned at the Capital Markets Day as a potential decline in what you formerly called Wholesale Banking, because of your reduction there. Is that estimate still valid? How should we think about it in terms of timing?
Yes. If you remember what we said in the Capital Markets Day, what our targets were for Wholesale Banking and what we need to improve both our operational efficiency as well, and most importantly, our returns. That number was part of the fact that we do need to reduce risk-weighted assets for Wholesale Banking, and those targets communicated in the Capital Markets Day remain the same now as well. There's no change in that. That timing will obviously be over the next few years to achieve those targets in 2022.
Okay. Thank you very much.
Thank you. The next question we have is from the line of Sofie Peterzens from JP Morgan. Please go ahead.
Yeah. Hi, here is Sofie from JP Morgan. I just had a question on net interest income. When we look on a divisional level, most of the quarter-on-quarter improvement actually comes from group functions and also the new LC&I division tends to always have a higher fourth quarter NII, given that you have some bridge financing and other things. How should we think about NII in the first quarter? Are there any group functions, should it remain at the current level of EUR +8 million or will it change or how should we basically think about that going forward? That's my question.
Chris, please.
In terms of the group functions, there were a couple of specific events, ECB tiering came in November. That is actually going to be stable income that we are going to distribute, and that should be in the business areas. That will be supportive for the business areas. We also had a call of some sub-debt that improved our cost of funds, which is more of a one-off. As we look forward on that line, I would expect that line to again be more in the negative territory, call it a EUR -0 million-EUR -10 million . This is a positive quarter with respect to that. Going forward it would be more normalized.
Okay. That's very clear. Then my second question would be on your intangibles. They increased by EUR 100 million in the quarter. Could you just explain what drove the EUR 100 million increase in intangibles this quarter? Could you also confirm that you're not taking any restructuring costs through the balance sheet?
The intangibles was basically part of our continued investments in both our digital platforms and our core banking platforms. That's relatively normal, and I can confirm that of course, on a semi-annual basis we do look at our assets, but we had a change in our business plans, as you know, in Q3 and made a large impairment then. I expect those to be very much more significantly smaller if at all, going forward.
Okay. Last question, sorry. On the credit quality, you say that it should remain broadly unchanged versus low loan losses, that was the previous guidance. How should we think about the loan losses going forward? When you talk about stable credit quality, should we use the fourth quarter as a base or should we use 2019 as a base or what would be a good base for stable asset quality?
Rodney, you want to take that one?
Yes. Thanks, Sofie. The reason we moved from loan loss guidance to credit quality guidance is simply the fact that when loan losses are as low as they have been in previous years, and we expect them to continue to be low, also small movements make big changes in percentage points. Therefore, we want to refer to the credit quality instead. If you're looking at the loan losses, I would like to answer it this way. If you look on our website, we have published a consensus on loan losses of EUR 354 million, and that's not a number that makes us nervous.
Basically, you're saying consensus estimates on loan losses look reasonable to you?
They look sensible, yes.
Okay. Thank you.
Thank you. The next question we have is from the line of Jacob Kruse from Autonomous. Please go ahead.
Hi. Thank you. Two questions, I guess. Firstly, on the capital side, when it comes to buybacks and the discussion there, do you need to apply with regulators? If so, have you done that? Also, your capital policy, I thought was pretty clear if there was excess capital and no clear use for it, you would return it to shareholders. Assuming you run through this year and you don't deplete that 60 basis points on top of your management buffer upper end, should we expect that to be almost by definition used as a special distribution to shareholders? Then I just wanted to follow up on Sofie's question on the credit guidance. Should we basically take this to be a change in how you want to define it rather than a change in your expectation for the outlook for credit losses? Thank you.
Would you say it, Chris?
Yes, I can start with the first question. There were three questions here. If I recall the first one correctly, it was regarding approvals. Yes. We do need to have approvals both from the AGM, but also from our regulators in terms of executing on buybacks. As I mentioned also in the CMD, but also now, we will and have, are actually, having conversations throughout now and throughout this year on that particular topic with our regulators. I want to be clear here. We are, of course, very happy and that we have a very strong balance sheet that gives us the opportunity to grow the business, also take other opportunities that may or may not come along, and of course, manage the potential regulatory change that Frank talked about earlier on, as well as consume SG Finans.
As we go through this, we are not in the position to hoard capital. Excess capital that we don't have these uses for when we have clarity, we intend to use the tool of buybacks to distribute excess capital to shareholders.
Okay.
I think the third question was loan losses. Yeah, we want to point out that Stage 3 losses were actually down this quarter. We are very comfortable with the credit quality. It is more a way how we talk about it given that one quarter to the next one specific event can actually have a big percentage change. We want to be comfortable that our underlying credit quality in our business is, and remains strong.
Okay. Thank you very much.
Thank you. The next question we have is from the line of Martin Leitgeb from Goldman Sachs. Please go ahead, Martin.
Yes, good morning. First, just a follow-up on the various capital questions. I was just thinking more broader. I would like to know how you think about capital for the bank on a kind of more medium-term perspective. Do you think given how the balance sheet is now that there is the right level of capital you're running the bank at? Do you see scope for either the capital base you have to underlie that business to be the higher or lower over kind of more medium term, three, four, five years period? Secondly, I was just keen to understand, in terms of growth ambitions and obviously your comments on regaining market share, which growth areas are you most excited about at this moment in time? Thank you.
Yeah, thank you for the question. Let me take the second question and start with that one. We have four business areas, and the by far largest business areas in Nordea is Personal Banking and Business Banking. That is a traditional household business, and it is a SME business. We grew last year in both business areas, and actually for a very long time. That's the first time since several years of quite flat development. We, of course, would like to continue to develop that business, in line with the market growth, you can say. I think what we see now after have struggled there some years in the mortgage business, for example, which is very important for Nordea, is that we are back in business.
We have turned it around, and we are both growing and have increased the growth rate during the year in all countries. Actually is now more or less meeting our back book now. The same goes actually for the SME market share. That leads there you see and find our, you can say, some of our focus areas. Of course we have Large Corporates & Institutions. That is also a very important business area, and we want to develop that one. Of course, we want to develop the business within areas where it's profitable. How that will play out, it's up to be seen.
Before Chris takes the next question, in Helsinki, it's 10:00 A.M. now in the morning, and unfortunately, Frank needs to leave us for interviews, but me and Chris will be here. We continue the Q&A here. Thank you, Frank.
Yeah, thank you.
Thank you, Frank. You asked about the growth, but you also had a first question. Would you mind just repeating that question for me?
Yeah, I was just wondering on capital. Just to kind of the medium, obviously we are aware of the more immediate moving parts for capital and capital requirements going forward. I was just trying to understand what your expectation would be for the banks going forward. Do you feel essentially that the capital targets, the capital levels you run the bank at will stay broadly similar in terms of if you just think about the absolute quantum of Core Tier 1 capital around the bank, or do you see the upward or downward pressure to that capital requirement base? Thank you.
As I said, we're happy that we have a strong balance sheet now. Of course, we are utilizing some of that already for SG, and then we'll see what the regulatory requirements are throughout this year. If you look beyond that, we have a management buffer and a capital policy of 150 basis points-200 basis points above the requirement. Long-term, of course, our intent is to be within that. Of course, really long-term, it's very difficult to see how Basel IV plays out and so on and so forth. There's so many changing things in the regulatory landscape. Given the current capital policy, the buffer that we have, if that remains the same, we would like to be within that buffer. Again, any excess capital that we don't see utilization for, we will distribute to shareholders.
Perfect. Thank you very much.
Thank you. The next question we have is from the line of Chris Hartley from Redburn. Please go ahead.
Hi there, guys. Just a quick one from me actually. Just, I was looking at your net fair value line. You used to give us a chart in your presentation that split that out between customer activity and then market making, some derivative valuations, et cetera. I couldn't see that this time around. If I have missed it, do let me know, but if not, are you able to give us a sense of how the EUR 266 million this quarter is split up amongst those categories, please?
Yeah. Well spotted. I think how we see the business going forward in the net fair value line, particularly on what is very clearly customer related, and that is that it is a customer business. We need to focus on the customer. All the flows that we get is to support the customer franchise. Also, given recent changes in regulation, it is very difficult to what is exactly trading and what is customer. To us, it is a customer business, and that is why we want to show the customer business more in totality. If you look at the various lines in this quarter, we did have some revaluations in treasury, which we've had in the previous quarter as well, which is roughly around EUR 30 million of that.
I do also want to point out that we sold LR Realkredit in the back end of last quarter, which is a capital gain of EUR 138 million, and that one we've actually booked in other income lines.
Okay, thanks. There isn't anything significant on the derivative valuations in there, is there?
There is a positive compared to Q3 in terms of the evaluation adjustments. There was some tailwind in this quarter on that.
They were EUR 10 million higher compared to Q3.
Okay. Yeah, that's great. Thanks very much.
Thank you. The final question we have is from Riccardo. I think it's from Mediobanca. Riccardo, please go ahead and ask your question.
Yes. Good morning to everybody, sorry, I had to connect to the call with a little bit of delay. Sorry if someone has already asked this question. The first one is on the guidance you provide on credit losses. When I read the wording, to me, it sounds a little bit more conservative than the previous one, but I'm not 100% sure this is your mindset, this is the way you think about it. The second question I have is, in this set of numbers, in the fourth quarter numbers, do you see anything that you could consider really one-off or by nature or by magnitude, let's say? Thanks.
Thank you. Let me maybe comment on the first question. I think as you said, you connected late, we talked a bit about this. We've changed it to talk about the underlying credit quality, as you see, last quarter, actually our stage 3 came down somewhat. That is because when loan losses are at this low and you have one or two specific events that may or may not occur, which happened in Q4 on a specific exposure, the percentage change is quite significant. We are very comfortable with our underlying credit quality. I'd also like to just highlight the consensus that we have published, and we are very comfortable with that consensus number. There's nothing I intend to say that will change any of that outlook. I'm sorry, I didn't quite catch your second question.
It was just to get an idea from you, if you think there is anything one-off in the fourth quarter results, by nature or maybe by magnitude, not by, let's say, not a one-off in itself, but just the magnitude of some lines could be a little bit above normal or below normality or what you think could be a normality level?
The only real item affecting comparability, if you're talking accounting terms, is our sale of LR Realkredit at the end of last quarter, which was a gain of EUR 138 million that we have in other income lines. There are some smaller things that is more normal course of business that happens, but that is the main, let's call it one-off in Q4.
Okay. No, I was thinking about except that, of course. Okay, thank you very much. Thanks. Very clear.
I think, Riccardo, what you can say is that when you do your models now for 2020, the starting point on all lines are fair to start with, so to say.
Yeah. Thanks, Rodney.
Thanks. Okay. It seems [crosstalk] like there are no further questions here. We conclude this call. Thank you very much for attending and asking questions. As you know, the IR team, we are available 24/7 if you have more calls. Thank you.
Thank you very much. Have a good day.