Quarter and full year 2019 results. My name is Rodnan Wieren. I'm heading the Investor Relations at Nordea. We will start with a presentation by the President and Group CEO, Frank Frank Janssen. That will then be followed by a Q and A session with Frank, the group CFO, Christopher Rees and myself.
So Frank, please?
Thank you, Rodney. So good morning. Today, we have published our Q4 and full year results for 2019. Moreover, this has been the Q1 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 and are very much as planned.
As a part of these first steps always, 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 a 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 'twenty two.
With higher income and business volume and lower costs. But 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 3 key priorities to deliver on our 2022 financial targets. And 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 Finance. The company runs a successful business with very satisfied customers in 3 of our 4 home markets. The acquisition strengthened us and our ability to advise and help small and midsized 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, our customer focus and income initiatives. It is now starting to be evident in the top line. Compared to the Q4 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% and 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 Q4, net loan losses were somewhat higher than normal, and the reason for that or for this 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 Tier 1 X2 ratio increased to 16.3%, which is 120 basis points above our management buffer. This strong capital position enabled 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 20 fourseven 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, far from being satisfied in particular customers in the broader segments. They should expect more of us. But 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 40 dividend to the AGM. Let me now go deeper into the 4th quarter results.
I'll talk about these items individually in a moment, but 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, but 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 Q4 of 2018. To compare the full year results, 2019 to 2018, total income was 1% lower than last year, but also cost declines by 1%, reaching our 'nineteen absolute cost targets of €4,900,000,000 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. However, 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 '19 after several years of decline. Personal Banking volumes increased in all countries. In Business Banking, volumes showed a positive trend in large corporates and 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.
Asset under management, we're at an all time high, up 16% year on year despite the difficult start of the year. We had a total net inflow of €9,000,000,000 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.
Assets and Wealth Management was a main contributor and generates half of the group's fee commission income. Lending activity remained at a high level, driving driven by our debt capital markets and from high refinancing activities in Denmark. In the Q4, 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 and 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 came from life and pensions, was seasonally strong in the 4th 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 in the last 12 months. So 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 points 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 omnichannel 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 advisers. Sweden was the key income driver with double digit growth, and Norway also had a solid growth. Revenue increased by 5%, and costs decreased by 5%, leading to a 4 percentage points improvement in the cost to income ratio to 49%. Pressured deposit margins are partly offsetting the results. The acquisition of SG Finance is now in the closing process.
SG Finance 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 Corporations Institutions, we started our strategic repositioning during latter part of 'nineteen. 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 minus 6% in the number of staff. Economic capital has been reduced by €400,000,000 compared to the previous quarter in 2019.
Of the reduction of economic capital, approximately EUR 250,000,000 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 wage for Swedish banks to 25% to 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. However, the return is still far away from a satisfactory level, but we are determined to meet the 'twenty two targets, which is the first milestone. Asset and Wealth Management continued to deliver good investment performance and reported positive net inflows for the 4th consecutive quarter. 85 percent of funds have outperformed indices over the last 3 years, which we are very satisfied with given our focus on actively managed assets. Our ESD 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 €9,000,000,000 Revenues increased by 7% compared to the Q4 of 2018, and 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 'nineteen followed the cost plan. Costs were reduced by 4% compared to 'eighteen. In Q4, the number of staffs was down by 2%. Depreciation amounted to 100 and €56,000,000 All of this led to a cost to income ratio of 57%. In 2020, we expect to reduce cost by approximately EUR 200,000,000 and reach a cost base of below EUR 4,700,000,000 with planned continued net cost reductions beyond 2020.
All of this is in line with our communicated cost plan, and we are proceeding as planned towards our 2022 targets. At our canceled markets day, we said that the cost target would require some CHF 700,000,000 to CHF 800,000,000 in gross 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 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, and 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 needs solid grounds under their feet. Our balance sheet gives us a very strong foundation in an uncertain environment. In 2019, total assets amounted to €555,000,000,000 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 of 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 Finance 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 Odea, 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 advisers' 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 20 fourseven.
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, And our digital platform has now 1,000,000,000 touch points per year. More recently, we have introduced an easy digital solution to help our customers track their carbon footprint on a 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. And 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 'twenty.
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 to 200 basis points above the requirements and a dividend payout ratio of 60% to 70% of net profit. We intend to distribute excess capital through our buybacks. The Board proposes a dividend per share of €0.40 in line with the communication in Q3. When we decided on our 3 years financial targets, we analyzed the current macroeconomic and operational environment.
We also analyzed the big trends of the banking industry. For example, the low rate environment, low cost based services in Asset and Wealth Management and make a 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 3 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 Reitz, the CFO and to myself. So please move over to the
first question we have is from the line of Peter Kastiakoff from SVB. Please go ahead.
Yes. Hi, Peter Kjersthoff from SEB here. Just a short a few short questions to you, Frank. I mean, first of all, looking at the capital ratio, which clearly was strong in the quarter, what's your kind of updated view on the likelihood of buybacks now perhaps coming during the early parts of 2020? And also, how do you pair that with the potential for further acquisitions?
I mean, you've made a few smaller bolt on acquisitions like SG Finance recently. Could they 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 to 200 basis points above requirement. And then 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 Finance.
That will for that, we will use around 40 basis points no, 40 percent points, 40 basis points, yes, of course. And then we have incoming, you can say, local buffer demands. For example, in Denmark, we have an increased country sickled buffer. All in all, some 60 basis points, we expect to have an impact from these actions. And then what will happen during 2020, we, of course, will carefully follow.
But of course, the law our intention is not to run the bank with too much capital. We want to basically stay within our buffers. That is our intentions. But the timing of when we will be ready for buybacks is still an open question.
All right. And then 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. And as Frank mentioned in his speech, that is mainly due to the dialogue we've had in our ongoing discussions with ECB and as part of the SREP in terms of reducing the risk weight floors on the corporate real estate portfolios in Norway and Sweden. That's the main reason for that. So that is actually not necessarily a model change per se.
So 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. Then ECB will take a certain amount of time in terms of reverting back to us with respect to the outcome of those models. And as such, that timing is unclear and uncertain for us. So 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 kind of the magnitude of that?
No, we can't comment on the magnitude of that, I'm afraid.
Okay. I thought I'd try. Then 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. Is that are those comments based on kind of the trends you're seeing 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 kind of a one off improvement. So what's your view on the margin trend throughout 2020?
If I should start, Chris. So on the mortgage side, I think we have seen stabilizing trends now, recent quarter. And of course, it differs between the countries, but Denmark quite stable, a little bit up in Sweden, Finland and Norway, yes, a little bit down. But all in all, I think we it seems more stable than it did a quarter ago. Then we have the deposit side.
And deposit side, you can say is of course, we had an impact earlier or it was in Q3 after the change of the ECB rate. And remember that the changes or adjustments we have done in Denmark, charging negative interest rates for deposits above €100,000 has not been implemented. Actually, it has been implemented, but from 1st February. So all in all, including the corporate segment, we with the information we have right now, at the end of Q4, I think it looks more stable than in Q3.
All right, thanks.
Thank you. The next question we have is from Robin Rain from Kepler Cheuvreux. Please go ahead, Robin.
Thank you for the presentation and thanks for taking the questions. So if I start with, in the quarter, staff costs were down partly due to lower variable costs. But 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. We as you point out, yes, variable compensation was lower. That is, of course, related to the fact that performance for the firm was lower. But you also need to look at the salaries for the staff, the fixed salaries, and they were also lower this quarter. And this quarter, we've also reduced headcount by 500 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Feet Feet Feet Feet Feet Feet.
So 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. And 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 continuation of that.
All right. And then on fees. So in Denmark, as in 2019, as rate has come down, there has been a lot of remodeling activities, to my understanding. How has this impacted the fees in 2019?
Chris? Yes. In Denmark, as you know, they have a very specific mortgage market. And 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. But overall, that has been a good revenue generator in the second half of this year or last year, 'nineteen in that case.
All right. And then last question. As the risk weights on corporate real estate was lowered now at the end of the quarter. Will you will this in a way affect your pricing in this segment?
No, it will not. It will lead to that our, you can say, competitiveness will has been will increase. But remember, we came from 100 to 50, and we are still competing in the Swedish market with banks having lower risk weights within this segment. So 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 Haakonsson from Danske Bank. Please go ahead.
Good morning, everyone. Two follow-up questions really. On the NII, I mean, we saw in the Q4 that finally that the lending volume impact was bigger than the lending margin impact, but that you had a negative deposit margin impact. But given the items you talked about with Danish negative rates, but then we also had the Swedish rate hike and 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? Yes. Thank you, Andreas. Thank you, Andreas. As we look forward
we can hardly hear you.
Sorry. Thanks, Andreas.
Yes, I think we 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 in Denmark and Finland, therefore. I think there will be some not fully adjustments in Denmark, as Frank pointed out. So I think there's still some pressure on deposit margins there. I think we have a tailwind in Sweden, but we are still have a headwind in Finland. So I would still suspect a subdued deposit margin as we go forward in Q1.
But not the same magnitude, right? Or?
No, not the same magnitude, but it'd still be a headwind.
Sure. And then on the staff cost side, you talked about quite large FTE reductions. Could you tell us how did that develop over the quarter? And I. E, did was the impact really small in the Q4 in terms of costs since people were fired in the end of the year?
And how much of the restructuring charge have you used by now?
So your first question with respect to staff, I think over the year, we're broadly flattish in staff. We've reduced the Nordics somewhat, but of course, we've also hired in Poland. If you look at the quarter, the last quarter, we saw a clear reduction in net staff of 500 FT feet
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Feets 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? So because it didn't happen on the 1st day of the quarter, it rather happened towards them since you launched the plan. So is the cost savings rather going to come through in Q1?
So it happens throughout the evenly throughout the quarter. And so you will see, if you look at Large Corporate Institution, where a large part of that was, costs came down by 4%, but FTEs were down by 6%. So yes, you will see some of that effect coming into Q1.
And how much of restructuring charge have you used up by now?
That we can't comment on yet, but of course, we have utilized the restructuring charges that we took in Q3 as part of this. But it is remember, the restructuring charge is for the whole of 'twenty and beyond. So that is something that we will be using continuously throughout next year.
Thank you. The next question we have was from the line of Magnus Anderson from Abigail. Please go ahead.
Yes, good morning. If I can follow-up on Andreas' questions just on the headcount. It's, 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 Corporate Institutions and Group Functions. Can you say anything about what we should expect in terms of headcount progression during 2020?
I can say that. No, we don't guide on the number of F3s. Of course, I understand why you're asking, but we don't do that. So we focus on costincome. And as we have a 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 to unfortunately to be to us having fewer people.
And I think what we have seen in Q4 is as planned.
Okay. But given that you took a restructuring charge of more than €200,000,000 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.
Yes. Okay. And then 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. It is you can say basically the question is relevant in 2 countries. It is Denmark and it's Finland. These are either euro countries or connected to the euro. And in Denmark, you know where we are.
And in Finland, I should say that the structural, you can say structural question, of course, is the same, but you also need to have a market that are that is ready to handle the negative interest rates. And as I see it now, that is not the case at the moment.
Okay. But it is 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. But of course, the question is more complex than just using a technical approach. So at the moment, we don't have any plans to introduce negative interest rates in Finland.
Okay. And then just on your acquisition on SG Finance.
I just have
a question there. Since in the press release, you said you expect an income impact of EUR 140,000,000. But if I annualize the 9 month 2019 number, I get to EUR 155,000,000, and they've had quite good growth historically. So 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? Or are you not buying the whole company? Or what's the reason for your estimate there relative to what they're actually reporting?
Yes. Thank you. I guess it's a positive question, so but a very relevant question. So Chris, any information around that question?
Yes. I mean, we obviously purchased them and had a discussion with them before they earlier in the year. And the there is a little bit of crossover, but not that much. And then, of course, we hope to be able to leverage that acquisition even further as and their client base, because we do think that it 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. So in that sense, it's a good acquisition for us, and we hope to leverage it as we go forward into 'twenty one.
Yes. But I mean my question was really why do you estimate the income impact to be SEK 140,000,000? And that's the acquisition will go through in Q4 2020 perhaps. So that should be 2021 or so. While they are already now making 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. So there will be some reduction, and I think that's the estimate. But of course, as we go forward, we would like to grow that business as well when it's on board.
But you're buying the whole company?
Yes.
There is no carve out or anything?
No. Behind the Nordic business, yes. We're buying the whole
company. Yes.
Okay. Yes. Okay. And 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. And as I said, it might become a little bit softer as we go into Q1, but 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. And that momentum, we have seen we hope to continue. So it's not just the mortgage fees, it's also lending, DCM.
Okay. And just on income, sorry, just the SEK150 1,000,000 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? And how should we think about it in terms of timing?
Yes. The 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. And 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. So there's no change in that. And 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 Sofia Petterzen from JPMorgan. Please go ahead.
Yes, hi. Here is Sofia from JPMorgan. I just had a question on net interest income. Some of the when we look on a divisional level, most of the quarter on quarter improvement actually comes from group functions. And also the kind of new LC and I division tends to always have a higher 4th quarter NII given that you have some bridge financing and other things.
How should we think about kind of NII in the Q1? Are there any like group functions? Should it remain at the current level of plus €8,000,000? 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, a tiering, ECB tiering came in, in November. That is actually going to be stable income that we are going to distribute and that should be in the business areas. So that will be supported for the business areas. Then 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 be again be more in the negative territory, call it, €0,000,000 to €10,000,000 negative.
So this is a positive quarter with respect to that. But going forward, it would be more normalized.
Okay. That's very clear. And then my second question would be on your intangibles. They increased by €100,000,000 in the quarter. Could you just explain what drove EUR 100,000,000 increase in intangibles this quarter?
And could you also confirm that you are not taking any kind of restructuring costs through the balance sheet?
I mean, the intangibles was basically part of our continued investments in our both our digital platforms and our core banking platforms. So that's relatively normal. And I can confirm that, of course, we have we on a semiannual basis, we do look at our assets, but we looked we had a change in our business plans, as you know, in Q3. It made a large impairment then. So I expect those to be very much more significantly smaller, if at all, going forward.
Okay. And yes, that was mine. And yes, last question, sorry. On the credit quality, you say that it should remain broadly unchanged, kind of versus level or low loan losses that was the previous guidance. How should we think about the kind of loan losses going forward?
So when you talk about stable credit quality, should we use the Q4 as the base? Or should we use 2019 as a base? Or what would be a good base for kind of stable asset quality?
Rati, will you take that one?
Yes. Thanks, Otti. Yes, 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. So therefore, we want to refer to the credit quality instead. Then if you're looking at the loan losses, I would like to answer it this way.
If you look in our website, we have published a consensus on loan losses of €354,000,000 and that's not the number that makes us nervous.
So you 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 Jakob Krud from Autonomous. Please go ahead.
Hi, thank you. So 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? And if so, have you done that? And 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. So 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? And then I just wanted to follow-up on Sohve's question on the credit guidance. Should 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?
Yes, I can start with the first question. So if I there were 3 questions here, if I recall the first one correctly. It was regarding approvals. Yes, we do need to have approvals both from our from the AGM, but also from our regulators in terms of executing on buybacks. And 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.
And 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 Finance. But as we go through this, we are not in the position to hoard capital. So 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.
And then I think the third question was loan losses. Yes, we want to point out that Stage III losses were actually down this quarter. So we are very comfortable with the credit quality. So it is more a way how we talk about it given that 1 quarter to the next one specific event can actually have a big percentage change. So 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 Latke from Goldman
Sachs. First, just a follow-up on the various capital questions. And 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?
Or do you see scope for either the capital base you have to underline to that business to be the higher or lower over kind of more medium term 3, 4, 5 years period? And then secondly, I was just keen to understand in terms of grow ambitions and obviously your comments on regaining market share, which grow areas are you most excited about at this moment in time?
Yes. Thank you for the question. So let me take the second question and start 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. And we grew last year in both business areas and actually for a very long time.
Since and that's first time since several years of quite flat development. So we, of course, would like to continue to develop that business in line with the market growth, you can say. And I think what we see now after I have structured 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 and actually is now more or less meeting our back book now.
And the same goes actually for the SME market share. So that means there is there you see and find our you can say our one of some of our focus areas. Then of course, we have large corporate institutions. That is also a very important business area, and we want to develop that one. But of course, we want to develop the business within areas where it's profitable.
So how that will play out, it's up to be seen.
Before Chris takes the next question, in Helsinki, it's 10 a. M. Now in the morning. And unfortunately, Frank needs to leave us for interviews. But me and Chris will be here, so we continue the Q and A here.
Thank you, Frank.
So thank you, Frank. Now you mentioned not you asked about the growth, but you also had a first question. Would you mind just repeating that question for me?
Yes. I was just wondering on capital. So just the kind of the medium I mean, obviously, we're aware of the more immediate moving parts for capital requirements going forward. But I was just trying to understand what your expectation would be for the banks going forward. So would you do you feel essentially that the capital targets, the capital levels around the bank at will stay broadly similar in terms of if you just think about the absolute quantum of core Tier 1 capital you run the bank risk or do you see the upward or downward pressure to that capital requirement base?
Thank you.
Yes. I mean, as I said, we're happy that we have a strong balance sheet now. And then, of course, we are utilizing some of that already for SG and then we'll see what the regulatory requirements are throughout this year. But if you look beyond that, we have a management buffer and a capital policy of 150 to 200 basis points above the requirement. And long term, of course, our intent is to be within that.
And hence, that and then of course, really long term is 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. But given the current capital policy, the buffer that we have, if that remains the same, we would like to be within that buffer. And hence, again, any excess capital that we don't see utilization for, we will distribute to shareholders.
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 for me actually. Just I was looking at your net fair value line and you used to give us a chart in your presentation that split that out between sort of customer activity and then Market Making, some derivative valuations, etcetera. 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 266 this quarter is split up amongst those categories, please?
Yes. Well spotted. I think what is 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, and we need to focus on the customers. So all the flows that we get is to support the customer franchise. And 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. Then if you look at the various lines in this quarter, we did have some revaluations in treasury, which is which we've had in the previous quarter as well, which is roughly around €30,000,000 of that. I do also want to point out that we sold El Arrayal Credit in the back end of last quarter, which is a capital gain of €138,000,000 And that one, we've actually booked in other income lines.
Okay. And there isn't anything significant on the derivative valuations in there, is there?
There is a marginal there is a positive compared to Q3 in terms of the valuation adjustment. So there is adjustments. So there was some tailwind in this quarter on that.
They were CHF 10,000,000 higher compared to Q3.
Okay. Yes, that's great. Thanks very much.
Thank you. The final question we have is from Ricardo. I think it's from Mediobank or Mediobank. Ricardo, please go ahead and ask your question.
Yes. Good morning to everybody. I'm sorry I had to connect the call with a little bit of delay. And sorry if someone has already asked this question. The first one is on the guidance you provided on credit losses.
When I read the wording, it sounds 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? And the second question I have is, in this set of numbers, in the quarter or 4 quarter numbers, do you see anything that you could consider really one off or by nature or by magnitude, let's say?
Thank you. Let me maybe comment on the first question. I think we have as you said, you connected late. We talked a bit about this. We've changed it to talk about the underlying credit quality.
And as you see, last quarter, actually, our Stage 3 came down somewhat. And that is because when loan losses are, they're slow and you have 1 or 2 specific events that may or may not occur, which happened in Q4 also specific exposure, the percentage change is quite significant. So we are very comfortable with our underlying credit quality. And I'd also like to just highlight the consensus that we have published, and we are very comfortable with that consensus number. So there's nothing I intend to say that will change any of that outlook.
And then 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 Q4 results by nature, right? Or maybe by magnitude, not by, let's say, not the 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 talk in accounting terms, is our sale of LR Real Credit at the end of last quarter, which was a gain of 138,000,000 euros that we have in other income lines. Then 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, no, no. I was thinking about except that, of course. Okay. Thank you very much.
Thanks. Very clear.
Yes. 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.
Yes. Yes. Thanks, Rodney.
Thanks. Okay. It seems like there are no further questions here. So we conclude this call. Thank you very much for attending and asking questions.
And as you know, the IR team, we are available 20 fourseven if you have more calls. Thank you.