Good morning, a warm welcome to this press conference where we will present Nordea's third quarter 2017 result. My name is Rodney Alfvén. I am heading up the investor relations. We will start with a presentation by our Group CEO and President, Mr. Casper von Koskull. Before you journalists will start interviewing him, he will actually practice as a journalist and interview one of our customers. After that, journalists will, as I said, have the opportunity to interview Casper, and the rest of you have the opportunity to do a further Q&A session with Torsten and me. Casper, please.
Thank you very much, Rodney, also on my behalf, welcome to this third quarter result review. It feels almost like this was yesterday when I saw you all. Time runs when you are having fun, as they say. When I look at the quarter, if I look at just a summary overall the quarter, I have to say that, I have said that before, is that it is probably the first time of my seven years at Nordea where we actually see pretty stable macro environment with synchronized growth in all of our four home markets. Good, stable macro backdrop to our business. Having said that, there are still surprisingly many geopolitical risks out there which are not really reflected in the marketplace, there are also unbalances in the Nordic economies, particularly on the housing side and the real estate side.
Those are segments and markets where we have been more cautious, we also have grown in those segments lower than the market in general. Also in this macro environment with stable macro, I am somewhat surprised that the corporate demand is actually quite subdued, maybe reflecting something about also the macro risks or geopolitical risks that are out there. Overall, a stable quarter, also for us. Our operating profit is up 8% from last quarter. It is down from last year, but if I look at the first nine months, our performance on operating profit level is the same as last year. All in all, a good start or a good nine months of this year. I think very importantly, our credit quality continues to improve, which I think is important in this part of the macro cycle.
When I look at credit losses going forward, we will expect also with improved credit quality that loss levels will actually stay meaningfully below the 10-year average also in the coming quarter. Very good news on that side, I think what I have always said here before is that when I look at our capital and capital generation, I am very proud because the capital generation stays very solid. We have a core Tier 1 today at 19.2, where our capital requirements have actually gone down. With the buffer today at 180 basis points, it is already below our set management targets, which we have set at 50 to 150. Capital generation, I think also at this point of the cycle, is enormously important. We come to really what we have been doing for the last two years.
Last two years, you've heard me stand here quarter after quarter, where we have actually said that we are investing heavily to build a much more robust, agile bank. We've invested more last year, this year, and also in the coming year than we have ever invested before. We invested in simplifying the bank. We are invested in transforming the bank, making the bank more digital, and of course, we have a big investment in our core bank system replacement. That, of course, has also driven up costs. I've said that before. Those costs have been planned, very happy to have done them. Now we come to the stage where we can also start reaping some of the benefits of those investments that we have made, both on digital simplification and that we have done.
In that next phase, three years, we will actually start bringing down our cost. This is part of transforming the bank to become really, truly front-to-back digital and actually creating really the future relationship bank as the way I've said. The next three years, we will be bringing down the cost structurally, and the targets that we are now setting is one for next year, which we've always said that we will bring down cost already next year, will be at EUR 4.9 billion in cost next year, and by 2021, we will be below EUR 4.8 billion. EUR 4.8 billion in a bank where we will have front-to-back digital, strong core bank system in place, probably the most modern, most efficient bank, certainly in this region, if not in Europe.
With that cost base, I'm extremely comfortable that we are doing the transformation that I have been talking to you for now the last two years. Next phase starts now. When I look at numbers, maybe a little bit more in detail on the NII, stable both Q on Q and vis-à-vis last year, up 1%. Pretty much stable lending and deposit margin across the board. Fee and commission is down from last quarter, somewhat lower activity levels, but up from last year. Even on fee and commission, I think it's stable and solid. I think where we are down is in net fair value, and that really reflects that we are operating in a very low volatility environment.
Our net fair value in the first three quarters of this year have been very stable, but at a lower level than last year, given that very, very low volatility, of course, resulting in somewhat less customer activity. That has actually meant that revenue is down 1% from last quarter. 4% year-on-year really driven by net fair value is, I guess the key number. On the cost, I was bold here last quarter, and I said that the cost of the quarter in Q2 was probably the highest that you will see as long as I'm here. I'm happy to say that our cost is down 7% from last quarter. It's a good start, as I say. Now, of course, when we kick in in the bigger transformation, that will continue to go down in line with plan. Again, something that we are very comfortable.
Credit quality, I already mentioned, continues to improve. Hence, I'm pretty comfortable in saying that loan losses or provision for loan losses will also stay below the 10-year average in the coming quarters. I see no elements there that would kick in. The capital level of 19.2%. Again, emphasizing that we are now 180 basis points above our regulatory requirement, which actually has gone down to 17.4% because of shifts from Pillar 2 to Pillar 1. If we look at some of the income lines. Net interest income, as I said, stable both on margins. Probably the growth that we see is in personal banking, +3%, mainly driven by lower funding cost. In the Commercial & Business Banking, pretty, again, stable, unchanged.
Where we have had lower NIIs in our wholesale bank, that has been driven really by the fact that we have lower volumes in both shipping and offshore, again, by design, and lower volumes in Russia, again, by design. Of course, those are segments where actually the margins are quite high. Of course, the risk has been higher. In a way, what we have been doing is de-risking the bank over the last many quarters. I think that's something that, as I say, also is reflected in the credit quality. Moving in the right direction. Fees and commissions, as I said, year-over-year, we are up on fees and commissions. We have seasonally lower transaction levels in the third quarter. The summer months were actually quite good, but in September, I think, it was less active than we had expected.
Hence, when we look at the third quarter, somewhat down from second quarter. Again, when I look at the wealth business in particular, we have stable asset under management, somewhat down from the last quarter, but this is mainly structural. The structural change is really the fact that we have now Luminor in place, and we have also sold our life business in Poland. Without those, actually, our asset management and asset under management would have actually again hit an all-time record. Net inflow has been somewhat lower in really all of the three quarters of 2017. Probably driven a lot by also the compliance and regulatory preparation for MiFID II. Our long-term estimate on asset under management stays that we do believe that we will have 4%-5% growth on that side.
In the coming quarters, you will probably see somewhat lower than that, but our medium to long-term target is still a 4%-5% growth in asset under management. I think the most pleasing to me is that we have very good and solid fund performance. When we have 88% of those outperforming over a three-year period, I think it's a very solid performance on that side. Fair value, I have already mentioned, we are probably operating at a level of volatility which is record low historically. If you use the VIX index as a benchmark. When you look at the three quarters we've had in 2017, very stable business, but at a lower level because of that low volatility that we see in the marketplace. Of course, this fair value is the one that has probably the biggest impact on total income.
Our position there, relative position, if anything, is being strengthened given the investments we've done on that side and the position we have in the Nordic region as the clear leader in risk management for Nordic corporates. That position is rock solid and unchanged. Cost, I have already mentioned. We have brought cost down from last quarter, as we had said. Still, cost in local currencies, if I look at the nine months of 2017, is actually up around 5%. I have said that we will bring that to 3%-5% growth in all of 2017. You can clearly see that we have turned the corner and actually are bringing costs down.
When I look at the cost components of that growth, it really is in three elements where we have increased cost, and that has been very much by design, building a stronger, more agile bank. One, compliance and operational risk, very big investments. I think it's important that a bank in an environment like this and also going forward is best in class in this area, risk and compliance. We have done a lot of transformation projects really in transforming the bank to become truly digital. Big investment into digital. Big investments into our core bank system replacement, and then cost that comes from that transformation. If I take those costs out, which are very much what we have planned, then costs are pretty much flat. We have actually no cost growth in the other cost items. Credit quality and asset quality, I have already mentioned.
Net loan losses at 10 basis points. Our 10-year average lies about in 15, 16 basis points, so it's meaningfully below that. Those losses come predominantly from corporate customers in Denmark, Norway, and outside the Nordic. As in last quarter, the biggest losses are related to oil and offshore, although that portfolio is today meaningfully smaller and actually in, I would say, good shape. I think I'm very comfortable where we are today and hence can say with pretty good confidence that may expect these loss levels to maintain at the levels that we have today. Of course, impaired loans, also importantly, have also decreased, reflecting again that improvement in asset quality. Common Tier 1 equity ratio at 19.2%. You may say, isn't this the first quarter where you have not improved that or increased that?
This is actually, as I said, the fact that some of our Pillar 2 requirements have moved into Pillar 1, so mathematical. That means also that our capital requirement has gone down, and hence our capital buffer has increased to 180 basis points, which I said. Very solid number, very comfortable with that, and again, demonstrates one thing that is very characteristic to Nordea. We generate capital quarter after quarter. Stability in generation of capital is the key. Maybe some, just to give a little bit more flavor of what's happening in the bank, and also a little bit flavor of the future, is that when we look at banking today, we've always talked about the mobile. mobile being the future channel for banking. That is now becoming more and more true. Today, everything we design for customers, we design first for the mobile.
The mobile is becoming the first point of entry to millions of our customers. We have almost 1 million logins per day today in the Nordic region, and millions of customers using the mobile really as the first entry point. Hence, we are designing everything first for the mobile, and then, of course, we have an omni-channel strategy. We will, of course, have it elsewhere as well. I think very exciting, in the last few days, we have announced a cooperation with Apple Pay as the first bank here in the Nordics. Now Apple Pay has entered the Nordics together with Nordea and actually allows us Samsung Pay, we had done before. Now in-store card payments with Samsung Pay, Apple Pay using your mobile is something where we have taken a lead.
We have also done the same into peer-to-peer, where we have now a cooperation agreement with Vipps in Norway, which means that we have a peer-to-peer solution in all four countries. Siirto in Finland, Swish here in Sweden, Vipps in Norway, and MobilePay in Denmark. Again, all in place. The mobile platforms have all been freshened up in all the countries, and we have now launched a new mobile platform in Finland, which will also be rolled into Sweden and the other countries starting next year. Very exciting. Those mobile platforms will then allow online face-to-face meetings, chat, and so on and so on. Mobile will be at the core. Maybe the last announcement that we have done is that we announced cooperation with Tink, which is really, I think, the poster child for PSD2.
It's a personal financial manager, an aggregator of information and data that we can use in PSD2 world. We have also made an investment in Tink and are now a shareholder in Tink. Again, a very exciting way of making that mobile and banking experience much more live to our customers. In Norway, we have launched a chatbot, Nova, which is now in use, and that will, of course, be something that we will be rolling out in other markets. It's not only on the mobile; we also look at the savings side, where we will use robotics as a way of also giving choices to our customers. The customers that want to have a 24/7 ability to manage their savings and investments using our savings and investments competencies and processes and our portfolio of attractive products. We've actually created Nora, which is really our robo-advisor.
We are launching that now in the fourth quarter here in Sweden, then we will roll that out in the other countries as well. These are examples on how the digital tools will actually allow better customer, certainly satisfaction, but also more availability. The bank becomes available 24/7, anywhere, anytime. To me, this is only the start. This is what you will see also going forward. It's not only about digital solutions or not only about customers, which of course is the most important thing why we exist. It is also about the broader society. I think it's very clear that we need to take a bigger responsibility as a bank for the sustainability and have sustainability at the core of what the bank does, take that responsibility.
Some examples of that is that we are investing heavily into be much more presence on both sustainable and responsible advice, investment, and finance. The green bond area is one area where we have now taken a lead. We have actually facilitated the issuance for both Folksam and MuniFin here in the quarter. When you look at our position today in this market, we have taken a lead position here in the Nordic. We also organized the largest, probably first and largest responsible finance seminars here with more than 200 participants here in Stockholm. Very well-received, it's something where we want to take this forward also with not only our clients, but our employees and so on.
We have also launched a community engagement program internally where we will give our employees an opportunity to spend two days a year on Nordea time really to engage with society to do good. Here we want to focus on financial skills, entrepreneurship and financial skills for both young people and migrants, have more than 30,000 Nordea people use their time to mentoring, to help and teach entrepreneurs, youngs, migrants in financial skills and entrepreneurship. Something I think is very important that we will also continue. Sustainability and social responsibility needs to be at the core of the bank. Maybe lastly, in terms of customer achievements is our wholesale bank. We have strengthened further our position. You have always heard me to say it's important wholesale banking to be the leader. It's only the leaders that will, in the long term, succeed in this business.
We've improved our position in particularly M&A, come down from a lower level to the top five today advisers in the region, actually have strengthened also our positions in our debt capital market business, of course kept our absolute lead position also in our equities and ECM businesses. Being a leader in debt, equity, and also green bond sustainability is something that is very important for us going forward, we will invest and make sure that we keep that number 1 position also going forward. It will be the only guarantee of both sustainable revenues and profitability for the bank. Something I'm very proud of. Transformation. You heard me say in the beginning, transformation is something that affects not only Nordea, it affects the whole financial industry.
Frankly, it affects all of our industries, given the fact that society is changing with digital revolution that we have hitting us. In transformation, I would first like to just remind you that we concluded the creation of one of the largest banks in Baltics by merging our Baltic business with that of DNB and creating Luminor. As of the 1st of October, Luminor is operating as one bank in the Baltic region. Very exciting. A bank with a balance sheet of EUR 15 billion, as I said, one of the leading banks now in that region. That Baltic transaction was part of our transformation. Part of our transformation is also our redomiciliation decision. It's a decision, it's of course a proposal to our shareholders. May I remind you that this is not done yet. We will have an AGM where the shareholders will vote on this.
Of course, this is something which is part of our transformation. We are moving the bank to the banking union. That's really what we are doing. It is about regulation and oversight of the bank, which has four home markets. We're not leaving Sweden. We are committing and are committed to all of our four home markets. We are a bank, a Nordic bank, operating in four home markets, and this move means that we will be supervised by ECB, the SSM, which is the supervisor under ECB, and it's the natural place for a bank of our size, our complexity, and the fact that we have four home markets. We are fully committed to our customers in all our four countries, and frankly, nothing will change, particularly here in Sweden. We have the same responsibility in terms of a taxpayer here.
We actually are increasing our resolution fee payments in the coming few years. We are extremely focused on making sure that some of the misunderstandings of Nordea leaving are not facts. We are very committed to all our four home markets. This actually, this move and being under the supervision of ECB in the banking union, in the long run, will benefit our customers, our employees, and our shareholders. It's the right move to make. When I look at kind of the key topic probably of today is that we have moved and are moving now to the next stage of our transformation journey.
I already mentioned that for the last two years, we have spent a meaningful amount of money investing into really ramping up, making the bank more robust, investing in compliance, operational risk, invested in simplification, and started investing heavily into our core bank system replacement, and invested heavily in the digital capabilities, which I already talked about some of the rollouts that you already saw. Now I would say that in the next three, four-year period, we really go into a execution mode in starting to shape the bank in a new way. When I say shape a bank in the new way, that is actually becoming truly digital back to front. That means that we will have much more common, one bank, One Nordea, common processes, common systems, common ways of working, which will, of course, lead also to less people.
That's inevitable. That's the thing that will happen not only for Nordea, for this industry as a whole. This three, four-year period will result into, yes, lower cost, less people, but it's less people because we operate in a new way. We will operate in a much more agile, fast-moving way, and we will operate as one bank rather than four banks in the past. What has happened when we've made these investments, of course, is that our underlying cost base has gone up by design. With the investments that we have made, we have also made future depreciations higher. Yes, our cost base has gone up, but in an industry that actually grows at GDP, roughly, which I expect, that is not something that is sustainable.
When I look at the underlying cost growth, which has been by design, some of it has been probably more than we expected, but we wanted to do it because being a robust, agile bank is the only way you can compete in the future. We probably have a EUR 600 million-EUR 700 million extra cost that has got kicking in because of those investments, both in terms of running costs and depreciations that we did. We knew that, and that was actually by design. What we have now been spending really is the last four or five months, we have involved 600 people within the bank to really go through how do we create that future digital, future relationship bank, as I call it.
What we have done is that we have with the 600 people, the whole management team, we have identified the areas where we will transform the bank. This is not about cutting costs per se, it is actually operating in a new way, which I just said, more common, more centralized expertise, and also nearshoring in a way where we get the benefits. Also, speeding up the digital migration and ramp up solutions on that side, continuing to simplify the IT platforms and actually have future, and using future technology to actually drive down efficiency and drive up customer satisfaction and of course, drive down cost. With those identified, and they are line-by-line identified changes, we expect that we will reduce the running cost base by a gross of EUR 900 million, almost EUR 1 billion.
It is a big number, but it is well planned and it is well identified, which we will do. That, of course, means that we will be less people. On a net basis, we will be at least 6,000 less on a net basis because we will also be recruiting people. There are new competencies that we need. Of those 6,000, roughly 2,000 will be actually consultants and maybe the rest then internal. That is a big number. We take that responsibility with huge care. We have very committed people, and we will do this in a responsible way where we will try to help people also retrain people and also people find jobs either internally, externally to make sure that is done as responsibly and as well as can be done. We take that very seriously, and we are committed to do it in the right, responsible way.
What this will then lead to that when we look at our, let's call it, financial guidance or what I see now in this period of execution and executing to become really truly digital, I do not expect a bank to grow more than GDP. GDP growth is something which I think is reasonable. On the cost side, for this year, we will stay within that 3%-5% cost, excluding any transformation cost that we will have. When we go into next year, we will end up 2018 at 4.9, and by 2021, we will be below 4.8 with a very digital platform, very robust, modern core bank system, and a bank that operates really truly in a digital way and lean and resilient. This also means that we will continue to accumulate capital. This will give a good backdrop to maintain our dividend policy.
If anything, I'm more confident of our progressive dividend policy today, not only because of what we do here, but also the re-domiciling decision gives me comfort on that side. In terms of our return target will be above our Nordic peer average, which we have said, and I think with what we do here, I think that is more than achievable. All in all, exciting times. Challenging times for the industry because this is the way we all need to go, and we are well underway, have worked on this for 2 years, and are now very ready to move on the next step and the next stage to deliver on a pretty exciting journey where we, 2021, it's going to be good.
With that, I get now to do the very exciting thing, because as Rodney said, I'm now allowed to do a little bit journalism here. I'm probably not very good at that. I want to invite one of our very dear fintech clients to the stage, somebody who's a serial entrepreneur, CEO of Okapi Finance International. Exciting, very exciting. Gisèle Miopo, please come on stage. What you have done is something that we all look at with admiration. Can you tell a little bit about, please, Okapi Finance? Somebody change the
Thank you, Casper. Thank you for inviting me. Okapi Finance is a five-year-old Swedish fintech company. Our goal is to bank the unbanked. Our mission, I'll call it a mission. 80% of people in Africa and 50% of the world population is still unbanked. In 5 years, we are planning to reach 145 million. Of course, this sounds really huge, but with Okapi being a mobile solution, easy to access and deploy, that is definitely achievable.
145 million. We have 11 million, I think that's kind of How did you come up with this idea? Can you
Yeah, of course. The idea with Okapi started with the passion I feel to financial include people at the bottom of the pyramid. I really believe that everyone should have access to financial services regardless of where they live and their financial status. That's how I came to the idea.
With that challenge, what's been your biggest single challenge? What has been the obstacles that you had to navigate by getting where you are now?
If I will mention my biggest challenge have really been to get two different world to meet under the same ecosystem. On one hand, you have the financial excluded people, and on the other hand, you have the financial institution. Really, it has been a great achievement to build a concept that includes everyone.
When you look at banks and banks as your financial partners, what do you expect from a bank that you work with? You need partners.
Of course. To succeed as an entrepreneur, you really need to have partners who believe in you. It's difficult to do it by yourself. For me, a bank is a very important partner. If I will really say an ideal bank partner for me is a partner which understand my needs and my role as an entrepreneur and be ready to do the journey with me, and of course, give me support as well. When I'm talking about support, I don't just refer to financial support, but I also refer to advices, and they should be ready to give me some advices which actually will facilitate my life as an entrepreneur. Yeah.
This, I think, is the future. We talk about our transformation, but I think something that Okapi is doing is something that there's some others, but I think this is unique and when you talk about more than 100 million customers, I can only look at that with envy. Good luck with that.
Thank you. Thank you.
I think it's something that we should all follow because this is the future.
Thank you.
Thank you.
Thank you.
You're not too bad as a journalist.
No.
Please stay a CEO.
I got that.
We have room for some two, three questions before we split up. Magnus, followed by Andreas, and then Peter.
Yes. Hi, Magnus Andersson.
Yeah.
Okay. Hi, Magnus Andersson at ABG. It's been a very long journey, obviously. You've taken restructuring charges now in 2009, 2011, 2014, 2015, and you're taking another five years of so-called transformation costs to get the cost level down to where you were basically in 2010, if I exclude for the Baltics. My question is, in four years' time, and a lot can happen in four years, we know that. I'm just wondering, what do I actually get? Your cost income ratio has diverged quite significantly relative to the Nordic banking sector since Nordea was formed back in 2001. Now I guess the ambition is to get it back down again, at least to the average of your peers in 2021. Is that how we should see it? That Nordea will finally become one bank.
That's really what this investment program is about, that you will come down to the level of your peers because you basically underperformed for 17 years.
A couple of points. One is that those targets, what we say, I don't want to take restructuring charges. I think as we go, I certainly want to go into a world where the cost is a cost, transformation costs are part of those targets. When you look at the numbers I will show you going forward, those are absolute numbers, and that's it. Of course, when you change, there will be cost, we will take them as part of our normal cost. That's a change. The second thing, where will we get? With this projection, we'll get probably to a cost income of lower 40s, right? 44% cost income.
Group, yeah
for the group. This is not about cost income, it is about the platform, the competitiveness. It's like if you have a cost income game and you compare that, then you're comparing apples to oranges, because it is about how can you compete and what is the platform that you create. I think I would argue that what we have done for the last two years and what we particularly will do in the next three years is unique. I think we can take a leadership role in on how a future bank operates. I don't want to start speculating how the competitive scene will look in 2021. I can tell you that I feel pretty comfortable in how that will look like. If I then have a cost income at the level of competitors that are not transformed, I feel extremely good.
It is also about something that we haven't done. We have not, and I said that two years ago, we have not created One Nordea, and now we are. Now we have, and now we are doing it. It's both the efficiency and cost side. For me it's much more capability. Those capabilities will be very exciting.
Okay. You're essentially keeping the cost at the 2016 level, lower them slightly. Do you think that you will be able to achieve higher income growth because of these investments relative to peers? Do you feel that you will really be ahead?
I'm not projecting that. I think our financial projections are, I would say, relatively modest, and I think I'd rather keep it that way. Of course, when you have looked at some, they're not many, because they're not many that have done what we do, then of course, there's very clear evidence that what you now say has actually happened. I don't usually like to run ahead of myself, and let's first look at it in from a very maybe more conservative, pragmatic, but that has been the case in similar cases. Let's take that when it comes. We do one thing at a time. That of course is the aim, if you look at what I just said.
Thank you.
Hi, it's Andreas Håkansson from Exane BNP Paribas. A little bit softer question. In the beginning of the year, you said a key focus this year would be to bring up customer satisfaction, and then all throughout the year, we're seeing that that's actually been slipping for a number of reasons. If you're now going to get rid of 6,000 staff, I think that's going to create some unhappiness internally. How do you think that's going to impact your clients, and what can you do to actually start to improve your customer satisfaction?
I think customer satisfaction, it's not always a quantity, but it is actually also. This is not about cutting staff in an existing model. I think then that would be the case. This is about transforming how you do business. This is the way you transform how you actually organize. This is about creating tools to actually improve availability vis-à-vis customers, tools that you actually can spend more time with customers. Of course, I recognize transformation is always challenging. That needs leadership to achieve. I think people always say one business model and then you cut costs. This is about transforming, and it's of course a leadership challenge.
This whole point and all the investments we've made, we haven't invested EUR 900 million last year, this year and maybe somewhat less next year, not to actually create tools that would actually, those investments have been done to improve our ability to serve clients. Transformation is always challenging, and that probably has been seen in the last few years when we've got a lot of new regulation as well that has been quite cumbersome for customers with KYC and other regulation. I think as we move through this transformation, the whole point is about only one target, customer satisfaction and becoming closer to the clients. Do I think we can do it? Yes, we can do it, but it is a transformation. It is not about cutting in an existing, it is changing how you do things, and that's why I find it so exciting.
Peter, and then Jan.
Yes. Hi, Peter Kessiakoff from SEB. A follow-up question on the customer satisfaction and the implications of reducing employees. What do you think will be the implications of income growth going forward on the back of headcount reductions? Looking at probably the last few years, income has been growing slower than what's been expected. Is that something that you think that will continue on the back of that?
No, I don't think so. It shouldn't. There may be a number of reasons. One, we have also de-risked the bank. We have actually reduced exposures in areas where, yes, maybe margins have been higher, but we felt that we need to be smaller. We have done that. We have also been more cautious in some of the areas where we think that there are dislocations in the economies that you can see as well, and that has been by design. We are repositioning ourselves. When you do the repositioning, then that.
I do believe that we have lost some, given some of the transformation that particularly we've done in the last few years that may have impacted in particularly some of the investments, some of the buildup in risk and compliance that has taken away some of the focus. When I put that aside, I don't see any reason why I would not and we will not grow in this transformation period with our peers or, to the earlier question, the longer term, of course my ambition is completely different, but I think that's too early to start doing projections on that. Of course, that's the aim. I think in that interim period, no, I don't see a reason why we wouldn't.
I think there's good reasons why you've seen what you've seen. Those are some of the reasons that I just mentioned. As I said, they've been mostly by design.
Just another question on costs. You mentioned in your CEO comment that investments in compliance risk, technology, and so on have been higher than you've expected since 2015, which has pushed up the long-term costs. Could you give a bit more color on that? What's the reasons behind that those investments have been higher than expected, and how much has the long-term cost level increased on the back of that?
I think I just showed the long-term cost, what the buildup has been. I wouldn't say the plans that we had were not, I think as we went through that, we actually did more than we originally maybe wanted to do and, not wanted, expected to do. What we have done, I wanted to do, because I think when you now want to build a much more resilient, robust bank, and with the agility, those investments were more than justified. It's not investments that have cost more. We have done more than we originally maybe expected to do, and we did it for good reasons. The cost, let's say, increase that we actually created was the one that I showed.
We have one final question from Jan. We move on.
If we look at the transformation program and the numbers that you present today, and I understand that you don't have all the details, and it's a long process, but still, you're aiming for roughly EUR 900 million in gross cost cuts over a few years. In the P&L today, I think you have something like EUR 500 million in project costs, so EUR 119 in the third quarter. We annualize that. I guess we end up at the EUR 500 million level. Is it right to think about first the EUR 500 million should fall out, then the EUR 900 million that you present today is over and above those EUR 500 in project costs that you've booked or that you're booking now? If that's right, we should take EUR 900 plus EUR 500.
I think maybe you take that in the-
No, I think, yeah, happy to. I think the question is really, you talk about EUR 4.8 billion in cost base in 2021.
Below.
Yeah, below.
Yeah.
Yeah. The question is really.
Yes.
How far below do you aim? Previously, Nordea has been discussing about EUR 4.8 billion for 2018, and now we have project costs coming out, and we have the program.
You're looking at two different banks. This is not about a financial model, that we're looking at a completely different bank. The investments that we have made, we will operate with a new core bank system with a completely different digital front end to our customers. That's why I'm just saying we look too mechanically. We need to look at a bank that, what is the bank, and what is that bank's cost base? You're looking at a completely different bank that has transformed, and that's the way you need to look at it.
What is driving the costs up then until 2021? Apart from inflation, obviously. Do you see anything else that should drive the cost up?
Depreciations.
Depreciations. Running costs for the IT systems.
Depreciation doesn't explain EUR 700 million, does it, or?
We showed it before that it's roughly half of the EUR 600-700 million that come from depreciation. It's a meaningful number given the investments we are doing right now. Please remember or welcome all of you also to a presentation tomorrow at 8:00 A.M. U.K. time, 9:00 A.M. CET, where we will webcast a presentation with Casper and Torsten, we'll go through all the details in this program. We're happy to.
Thank you.
We're happy to invite you there. Thank you very much.
That's tomorrow morning, yes.
Yes, tomorrow. Thanks very much for coming. Those journalists who would like to have interviews with Casper, please follow Peter and Magnus. The rest of you are most welcome to continue with the number crunching session with Torsten and me. I think we can continue. Now we also have a telephone conference joining us, so there will be opportunities to ask questions on the phone. If we start first with the audience in here. Please, Niklas.
Thank you. Niklas Malmborg, DNB. First, a question on cost again. If you could explain to us what has changed since you last time communicated the guidance of flat costs in 2018 versus 2016. I think you communicated that last time in conjunction with Q2, then also reiterated that after the decision to move the domicile to Finland.
I don't think as such anything has happened. If we just take the number part. The original target 2016-2018 discussion, the starting point is EUR 4.8 billion. We have the Luminor transaction that has been closed, meaning that you can say there's a further around EUR 75 million going out, and there's a LSP, that's our internal, the re-domiciliation cost added on top. I would say the new flat base is around EUR 4.775 billion, something like that, to be very specific, actually. That would be the renewed target. That target we will meet. What was not part of the original 2016-2018 flat discussion was the fact that we have now embarked on the next wave of huge transformation. We will come back to that.
We have done a lot of transformation, and the journey will continue, by the way. The estimated total transformation cost required for the next four years in the magnitude of EUR 600 million. We could take that upfront, would be the classical way. We have decided, as we have discussed before, that maybe that's not the most dynamic and value-for-money approach to do it like that, we have changed the approach, we now take it as part of running cost. We will front-load somewhat this next wave of transformation, that's why we now have put on top an estimated transformation cost, basically for what we will ramp up now, in the magnitude of EUR 100 million to EUR 150 million, which will be close to the annual level for the next years. That's why we come to the around EUR 4.9 billion for 2018.
It is actually on top of EUR 4.775 Luminor plus re-domiciliation. I think there is no change to the original 2016, 2018 target. Of course, the change you can challenge us on is that we are now adding transformation costs. We would have to do that one way or another because we are talking about significant, you can say, changes, as Casper alluded to, some net numbers, of course, gross numbers much higher, and we want to do it pretty quickly. That is the reason why we get this transformation cost effect in Q4.
Just as a reflection, I think, at least I would have been expecting that those transformational costs would already have been anticipated by you last time you indicated the cost growth for the coming years. We have been speaking about falling costs for quite a long time.
I think in all fairness, that when we set the 2016 or 2018 target, we had not made the plans yet for 2018 to 2021. I think we have said all along that we will be back in Q3 with information about the journey to 2021. That journey has not been concluded before yesterday in the board meeting where the targets, the plans, the people implications, the consultants implication, the project implication was finally decided. We have indicated that this might happen, i.e., that there would be transformation costs related to the plan we will come and present now. I think in all fairness, it would have been difficult to be very specific, i.e., the EUR 600 million is not a number I have just invented. It is of course a bottom-up generated number and has not been ready before now.
Then a question on revenues. You mentioned now that you expect revenues to grow roughly in line with nominal Nordic GDP growth. Can you break down that revenue growth a bit? Because if you look back on the past few years, it has been significantly lower than that. Do you expect lending volumes to pick up or is it more asset-light revenues? Or could you give us some color on where you see that growth coming from?
I think that, as Casper alluded to, we have been through, as part of transformation, there has always been an element of a de-risking process. We have discussed many times that we had probably built a corporate portfolio that was inflated because it was not based on what I would call it, capabilities. We are increasingly focused on building capabilities. That is what is needed for healthy, credible growth. I think we are relatively close to have it in wholesale banking. I think we are relatively close to have the credibility on our offering and our capabilities in wealth. I think we have admitted for a long time that we have been probably not fully credible from a offering vis-à-vis peers in the personal banking and CBB space. The last two years, we have invested around EUR 300 million in building digital platform capabilities.
That is unfortunately very expensive because you need to secure that you can release new products, release new capabilities, team up with partners, do it on top of something that is still relatively poor legacy environment. That's why you need to build a layer that allows you to be ready to participate in the new type of competition. I think we have built that. I think actually today, compared to three, four years ago, we are at least at par, if not better, if you look on mobile, payments, partnerships, partners offering new type of product and features. I think we have closed a lot of our stability issues. I think we have now ramped up for being able to serve our clients with digital solutions instead of the old physical, you can say, distribution setup.
I think we can take out efficiency and productivity without harming the customer relationship. Actually, I would argue that this will improve the customer offering. Based on all of that, why should we not grow at least with the market, if not better on wealth, wholesale, and now I think closer to par, maybe even better on personal banking and CBB. Exactly how much you never know, right? There will also be less of the dynamics. If you look on the fundamentals, there's no reason to believe that we will not start growing underlying much more with the market. I think also we have come a long way in, you can call it, come to the target portfolio within wholesale. The target customer portfolio, we are close. In CBB, we still have some way to go, but we have come much further.
You can say there will be bottoming out effects that will start kicking in somewhat positively, I think in wholesale, maybe earlier than CBB, but at least I think we will see some positive effects there. Long story, volume, everything else equal, I think we are through the worst, I think you could believe in more and healthy volume looking ahead.
If I just may, one thing. When you model now the cost base, the EUR 4.9, please remember that Luminor is not included there. You should have Luminor as an equity method. The cost base is now everything excluded. Obviously there will be a revenue impact, which we will come back with as well. You will have the profit on the equity method on one line.
Final question, a specific question on Swedish mortgages as a follow-up on the growth outlook as well. You can see that you're not really growing your Swedish mortgage book over the past couple of quarters. It's more or less flat. That means you're losing market share, at least in Q3. Could you give us your strategy here? I think you mentioned before that you think that the market is a bit risky, but I think all your stress tests indicate that loan losses in this specific exposure would be fairly low, even if the housing market were to come down in Sweden. At the same time, this is the most profitable market you have in personal banking. You have a ROIC in Sweden of 17% in the quarter. That's the best profitability in the group.
That probably means that you're lowering your profitability on a group level if you don't grow this part of the business. What's your view here going forward?
I think in general, you can say, looking across all the markets, including Sweden, that first of all, we don't have market share targets. What we do have is, of course, we want to grow our business, which means for residential mortgages, for the typical household customer, we want to grow with the market. We want to grow, but we don't have a target for it. There has been challenges on the public opinion about Nordea. We have had challenges on customer satisfaction. I think we are about to remediate that. Therefore, again, I don't think anything will prevent us to grow with the market. We have had in certain markets at certain point in times, also in Sweden on commercial real estate, we have actually had somewhat of a de-risking approach to it. That you can, of course, always argue.
We have not grown as much as we could. Again, this is a market where I think capability doesn't matter a lot. It's not difficult to grow more in commercial real estate. That's actually relatively simple. It's more a risk appetite seen in also a longer perspective discussion rather than a capability driven discussion.
Yeah, I appreciate that. I was more referring to residential mortgages, it seems also that you've been pricing yourself a bit out of the market. You've been having higher prices than your large competitors and the market as a whole. Would you expect them to get closer to market pricing to capture your share of the growth going forward on mortgages? Is that what you're saying there?
I get really confused when I discuss with my colleagues, our peers, and then internally about whether or not we are more expensive than others. I think in general, we have been, because we have been in a de-risking mode in general. We might have been pretty tough relatively on prices. I'm not saying that we will now suddenly swing around and be very flexible. I think from a portfolio point of view and from a strategic point of view, I think we have come a long way now in de-risking. We are more or less where we want to be now. That effect will start going out, and I think that we have built the capabilities that allow us to grow. Because we don't want to grow if you don't have a good offering?
Typically, historically, that is only price as the explanation. I think we are getting to a position where we have restored that gap to peers on credible growth.
You can not only look at the losses on mortgages isolated. As you know, if there will be a sharp house price correction, there will obviously be second line losses or second derivative losses. It's never good for a bank to have a sharp house price correction. We think we also have a systemic responsibility. We don't look at market shares for each and every time, but it's very good to have dry powder when things get rough. If we just go back in the global financial crisis, we were the fastest growing bank in Europe. We had a 6% CAGR because we had the ability to service our customers also in bad times. You think to look at it through the cycle.
Okay, thanks.
I think it's Jan followed by Andreas. Then we'll see. Sorry.
Yes. Going back to the cost question, obviously. Did you say that the EUR 4.9 billion for next year, that was excluding Luminor, and that was EUR 70 million or so?
75.
EUR 75 million.
Yes.
The project cost that I mentioned, how should we see them? They were now EUR 119 million.
They will come down.
In the quarter.
They will come down.
They will come down from here on, that is because of the completion of the IT projects and also the ramp up of reg and compliance.
The group projects we alluded to is mainly the ones that hits the P&L has mainly been relating to what I would call somewhat remediation activities. Two years back, we were hit by somewhat behind expectations by regulators on certain areas of compliance and certain areas of technology resilience. A lot of cost has been taken that has been capitalized IT investments, a lot has been taken on the P&L. We have more than peaked there. I think we are a long way through that. I think we are looking far better. I think we are ready to reduce and optimize the cost. That project cost, what we are alluding to is also that when you have more than doubled your second line of defense resources, that is permanent employees.
When you have within the last two and a half years, more than five times the number of people in first line. When you are building much more resilient systems, they all come with higher running cost. It's part of the equation. As part of a transformation, we are not done. We will also continue to reinvest quite a lot. We will continue, that will also hit P&L. We will continue to invest in certain capabilities. front capabilities in data technology. That is the journey that all banks, I think, will eventually be on. Of course, to the EUR 900 million is basically gradually and carefully taking down the old way of doing banking, both vis-à-vis the customer, either whole physical distribution network and the whole backbone of Nordea.
Please remember that Nordea operates in the Nordic, but have a complexity probably at par with European banks, and that is what we're trying to fix, basically, with this transformation, and that comes in waves.
Thanks. Just clarification there around the net reduction in staff that you expected, the 4,000 that you're discussing. Was that the net-
Yes
end of the day?
At least.
The same with-
At least 4,000 net, that is more or less equal over the years. Part of why we are in a hurry to be able to execute that efficiently for 2018, you can say. That will happen soon. That is more or less equal. The reduction of consultants back to group projects and change activity level is somewhat front-loaded. The 2,000 less consultants will be somewhat more front-loaded, also supporting somewhat the development from 2017 to 2018.
Just a follow-up on what you just said there, that it's front-loaded. Would that start in 2018? Because I thought that the decommission of the projects, I thought that happened a bit later or
No, we have had big remediation type of project running. Huge. They have peaked. Basically, many of them will be terminated by the end of 2018.
Yeah.
We have other programs running that are multi-year exercises. Some of them will end in 2018, some in 2019, and some in 2021. 2021 is a core banking replacement system for the bank, you can say. We have other projects running. We have core banking projects running in life, in finance, in trading and risk area, and they will deliver, you can say, as you go. That is why we will still have a relatively high investment level. We will have about EUR 900 million in 2017. We will have somewhat less in 2018 and somewhat less again in 2019. It is like that. That means that, I think the annual investment spend has peaked in 2017, will start coming down. That means that the capitalized amount of IT investments will peak in 2020. That means that the depreciation effect will peak in 2021.
That is why when we look on the run cost effect, there is a depreciation effect that will only increase as we move along because of all the investments we are doing. There is a run cost effect on the investments we are doing that also come, and that is why you need a pretty big gross effect to take down cost to the level we're talking about, the below 4.8. The reason why we say transformation cost now is that the journey will continue. If anybody believes that this will not continue, I think we are far better prepared than many other banks. I would argue that as in part of transformation, we also came from somewhat behind, right? I think we have catch up on a number of areas like compliance, resilience, and digital.
We still have the legacy to fix, that is a longer journey. We are also two, three years into it.
Thank you.
Hi, it's Andreas from Exane again. Just two shorter questions. You say roughly EUR 75 million falls out of the Baltic cost. Is it roughly EUR 200 on revenues?
We will give you more details later on. We don't have all the details. Please remember that we don't take out all the cost from the Baltic Corporation-
No
because we'll keep some IT costs.
We cannot do fully.
No
It's a little complex. The deal is on the income side, you cannot fully because certain exposures will be kept in Nordea. On the cost side, certain costs will be kept, and we will be a provider to Luminor for a while. That's why you cannot take the old Baltic banking numbers and just.
If it's 75 out of 100, roughly.
Is that the same relationship roughly on revenues?
No, because it's two different. I can't recall that, but I think it would actually be a bigger effect on income. We will do good reconciliation as part of Q4.
When we drift to IT, we will also get paid from Luminor.
There's no correlation. There's two different arrangements, so you cannot use that.
No, that's all right.
Just, we've been discussing about Swedish property and not so much about Norwegian property, and just want to check, you had a pickup in impaired loans in Norwegian retail or households. Was that just coincidence or are you seeing anything in Norway that worries you?
I think that's a single.
Yes
As I recall it, that's a single customer effect.
In retail? It's a big client there.
In retail. Yeah, retail.
We have corporate customers there as well, we don't see anything in Norway in general, we always have. You should not read in a new trend. Definitely not. No.
We're not completely clean always on the.
We call it household, if you have a small business.
Okay. I don't think we have a gentleman.
You want to have your business and your household in the same business area. It's a
Okay, thanks.
I think we should invite the telephone conference now before moving on. Do we have any questions from the telephone conference?
If you would like to ask a question, please do so by pressing star one on your telephone. If you're using a mute button, please make sure your mute button is turned off to allow your signal to reach our equipment. We will take our first question from Matti Ahokas from Danske Bank. Please go ahead.
Yes, good morning. Looking at slide 20, where you present the underlying cost pressure, is it so that it's 50/50 between underlying cost drift and depreciation and amortization? Also, how much is the amortization part in that depreciation and amortization?
I have no idea.
Is it euro? Do you know? Half, half is the answer.
Are we going to get those figures tomorrow, maybe?
We can support you with more numbers tomorrow. Definitely.
Okay, good. To follow up also on that, this depreciation amortization, we should see as an increase to the 250 that you report at the moment. The figure in the P&L roughly, or actually last year, 230 would go up to roughly 550. Is that the correct way to interpret it?
Something like that, yes. That's correct.
Also, if I may, finally, on the cost cuts and the staff reductions. If you're basically reducing 20% of the staff, not your own employees, but 20% of the staff you've been employing, shouldn't that also mean that the staff costs should come down by maybe not 20%, but at least 15%? Am I missing something here?
Consultants are not reported on the staff costs. Yes, everything is equal. You will see both staff cost and consultants cost coming down.
Great. Thanks a lot.
Any more questions from the telephone conference?
Yes. We will now take our next question from Willis Palermo from Goldman Sachs. Please go ahead.
Good morning. I have two questions. The first one is on a follow-up on the housing market development in Sweden and in Norway as your both country. Could you share some light on the differences and what you currently see and what you expect? Also in the context of the, if I remember correctly, when you aim for 4% per year revenue growth in personal customer, what was the underlying growth in volume that you assumed and how do you take those moves in the market into account?
To start with, I don't think we are particularly concerned in any of the market. The main reason being that the growth we are assuming and the growth we have had is, as I said, the main growth is in residential mortgages, and the historical loan loss levels in these segments and in these markets are very low. It's core customers. It goes with very little risk. We have been mainly concerned and are mainly monitoring closely commercial real estate and property developers. That is where you typically have seen the losses in the Nordic region. There you can, and I think there's a good reason for us monitoring it closely, both in Sweden and partly also in Norway. I think in Norway, we acted swiftly some time ago.
In Sweden, we are carefully monitoring in the most, you can say, risky part of the real estate market, broadly defined. We don't assume a lot of growth there, on the contrary. What I said before was that we expect to have less of a deselection effect going forward in this, and more of an expectation of growing with the market in what I would call the core of the mortgage market, i.e. the residential part of it. I don't know the 4%, but we have set at par with the market, and that's, I think, the best we can say for now.
So far, you don't see any shift in customer sentiment. Would you say the situation is similar in the two countries in term of the dynamics, volume-wise?
What we do see in Sweden is that it takes usually longer time to sell your house, and it's usually not as hot bidding auctions as it was before. It has clearly calmed down in Sweden. We don't see any drama, but it's clearly a change in trend. You can say it's from being overheated to being more normal. A Swede is not used to having a normal market, so for them it's a bit of a shock, but I would clearly define it as a normal market. Norway, we have seen a quite sharp decline in Oslo, but that was very expected because the market was very overheated there last year. It's more back to normal also in Oslo. In the rest of Norway, it's stable. What we also see in the commercial real estate.
In terms of the governmental measures potentially for next year in both countries, do you expect any changes from there? In Sweden, there was some FSA proposal, and in Norway, I think the government wanted to enhance growth measure. Would you say that those are going different directions?
No, we expect both markets to be relatively calm next year. If you look at the nominal GDP growth, that's the best assumption we can give.
Okay. Moving to the.
You should also be aware that in Sweden next year.
P&L on the revenue side. On the flow, I understand on the AUM balance, there were some changes in the structure, but the flow are very muted still with outflows also from retail. What will you do to reverse that trend, and do you expect any change?
Well, I think there are two things on the inflow side. One is obviously the fact that we had the soft closure last year, and we are in the ramp-up. We still have the same good distribution set up. We still have the same good teams. The pipeline now is being built for having new good products. We have had a slowdown in a couple of quarters. If you look on the intrinsics, there is no reason to believe that we will not get back to the type of inflow we have seen historically in the area of 4%, 5%. Some part of the distribution network have been very busy on the MiFID implementation. Denmark in particular, that was a little earlier out. We have a reset of what kind of products we now want to push more.
I think again, if you look on the things we are doing on the digital side and the mobile side, I think it will offer us an opportunity to penetrate a big part of the market, which has historically not been very well penetrated, which is basically the five, six million of our customers that are not the core relationship customers. There is a belief looking forward that there will also be improved distribution of relatively basic investment products. Putting all of this together, we are relatively comfortable. We will get back to around 4%, 5%. We have a period now of somewhat less, which was more or less expected. It is a matter of time how fast we can do this, but that is how we see that part of it.
Okay. Thank you very much.
Any more questions from the telephone conference?
We will now take our next question from Natasha Blackman from Société Générale.
Good morning. I have two funding related questions, please. The first is, could you provide an update on your sub-debt funding plans? I think you mentioned previously that you could look to issue an AT1 potentially within the next year or so. Secondly, on MREL, do you have any view on what your needs will be? I assume you won't have much clarity just because of the redistribution, et cetera. Do you think that you could still have some sort of desire to issue a non-preferred senior type structure in 2018? Any comments on that would be helpful.
I think you can expect us to do an AT1 issuance at some point in time. At some point in time, we will also do MREL, but we have only initiated discussions with our new lead regulator. Until further, we of course will comply with the Swedish MREL rules. We are, of course, somewhat in a transition, and at this point in time, we don't know enough to be able to say anything meaningful. As soon as we will, we will come back.
Okay. Thank you.
Can we move on then to the audience in the room, we'll come back to the telephone conference. Magnus followed by Peter K.
Yes. Thank you. Just a follow-up on, I think it was Matti's question about headcount reduction and impact on staff cost. Do you still have any further nearshoring potential, i.e., any potential to take down the headcount cost per employee that will also impact this?
Yes. So you can say on top of the net, there is a lot of growth going on. Some of the growth going on is that both on consultants and non-consultants, there is also a significant transfer expected from Nordic to nearshore, mainly Poland for now. Could also be Baltic. Absolutely, and it is a magnitude of 1,000 technology employees and 500 operations at least in the near-term plans. That is quite a lot compared to the fact that with the size of the nearshoring we have now. That is expected to continue. It is not really into the net numbers. This is more an effect of it is actually easier to get 1,000 new technology employees in Poland, and they are also cheap, of course. That is, of course, also supporting the 2018 and onwards cost development.
The headcount in the group, is it peaking now then and going down from 2018?
Yes.
Yes. Okay, thanks. Just on the income side, there has not been much discussion about that so far. Just on NII for 2018, if you assume you will get the resolution fund fee in the mid of your communicated interval, let us say EUR 105 million, do you think you will be able to grow NII year-on-year in 2018 on 2017?
I do not think we will be able to grow. I do not expect combined margins to improve. I think it looks tough. I think that NII could be helped by, as I said, depending a little of how fast we get into it, will be slightly more by volume than we have seen the last couple of years. That will be the swing factor, you can say. I think we will see better volume contribution, not a lot of margin. We will still see cost of funds coming down, but that will probably more or less mitigate the increased resolution fees. Right?
That's like for like including Baltics, of course.
Yes.
Okay. Thank you. Peter, followed by Jens.
Yes. First of all, following up a bit on income and NII. Treasury NII has continued to decline, peaked in Q4 2016, and I think it's down 17% or so year-on-year. Is this the bottom, do you expect it to come up from here or what's your view?
Well, I think that we have done well for a long time given the rate development. I know we don't expect anything to really happen on rates. I think you of course have a time effect. I think you will gradually see treasury NII coming down as we are not increasing risk. On the contrary, we stay. I don't think we can go lower, as I've said. Of course we also have the opportunity to do more risk, but we don't want to. There will be a gradual decline. Is it in a level of EUR 100 or?
In that magnitude, yes.
EUR 100 million a quarter, right? It will be probably a better level to assume. I think we have been somewhat above, looking back.
Okay. You expect roughly EUR 100 going forward, and I think you're at EUR 115 in the quarter?
Yeah, something like that.
Yeah. That's including some other as well. treasury, it's largely unchanged from today's levels.
Okay. You increased the risk level roughly, I think six or 12 months ago within treasury. At the time, I think it peaked as well. You're expecting it to remain at these low levels going forward?
We have a very flexible mandate, I think that in general, we have not seen any reason to increase risk in the current environment. We have a very low utilization of limits in treasury, and I think we will. We never know, right? That's the whole idea by having them, that you from time to time can take decisions. On a general note, I don't think you should expect us to make any big bets there.
Okay. Just on Denmark, I think you're commenting that competition is tougher in the Danish market, seeing outflows and I think overall, your customer satisfaction throughout the Nordics has been trending lower. I think Finland is probably the only market where, if I remember correctly, where you're improving it. What's your view on the Danish market? What do you need to do in order to improve your relative position there? Is it pricing, marketing?
I don't think you should underestimate the fact that we have been through a period of general market or public opinion, that is burdening not only especially new customers or customers considering where to go. It mainly impacts your inflow, not really your outflow. Our existing customers are relatively loyal. The good thing is about that kind of inflow, it can relatively quickly change with the kind of perception. I think a lot of the customer satisfaction indexes you have is where you ask everyone, right? You ask the full population. Again, own customers still very stable. The issue we have is, of course, that public opinion plus the fact that we have had our issues as part of the KYC remediation plans and the way we implement it in Denmark, both on the SME side and partly on the household side.
We are through much of that. We have a new management. We have excellent rollout now of new features. We have a lot of iPhone users in Denmark. There's, of course, pretty aggressive plans of utilizing now all kind of good features that we will be able to offer. New mobile bank, new pay possibilities and so on. In the Danish market, we do expect that we have seen the worst from a customer satisfaction point of view. We should start seeing the worst of the lack of inflow. I think they're doing all the right things. Of course, changing perception among customers considering to be a customer, it takes a little time. There's the first evidence of that what we are doing is working.
Looking further into 2018, I would also there expect us to improve customer satisfaction, improve inflow based on some of the features I just outlined.
Okay. Just one last question, a quick one hopefully. You mentioned branch reductions as a part of the gross cost savings going forward. Could you elaborate a bit on the numbers? I don't think you really disclosed how many branches you have today. Could you just mention-
I think we have.
500
520, 30 kind of branches today.
To what level do you expect that to go over, can you say?
I think we have learned that being too outspoken about it and actually also keep some kind of optionality. The key issue is the reduction in branches per se is not anymore, as I think we have discussed before. There's not that much. There's some cost in taking down a branch. Remembering some of the branches we're talking about reducing are basically a remote meeting facility with a simple network line. There is not a lot of people in branches anymore. There are some meeting rooms. Increasingly, of course, the reason for the big restructuring cost in personal banking, because they take a big part of the transformation cost, is that they transform completely. You will still be able to advise all your customers in a good way, but it will increasingly happen as a remote meeting. You don't need branches.
Instead of starting telling it, what we have learned is that before you tell people you close the branch, we show them that there is a very good way to interact with the bank on the laptop, on the mobile, or on the phone or whatever. I think we have learned that first show that very clearly and then you talk about reducing branches. In the plan is that ultimately we will have fewer branches, somewhat fewer. It's not the biggest cost driver per se. The biggest cost driver is that you centralize advisors. You give them much better tools so customers increasingly self-service themselves, both in personal banking and in CBB. There's a much higher. So the interaction stays constant you can say, but there's a lot of productivity gains in this.
It's not. So that is why you need far less people to service the same amount of customers in personal banking and CBB. Not really because you have somewhat fewer branches.
Okay. I think I remember Topi mentioning in May that you sell savings products mainly through physical meetings. I guess that would be impacted from branch reductions.
That is why you will still have a significant amount of branches that increasingly will be meeting facility. Where you really meet customers, that is of course in advisory sessions where you typically bring up pension savings, insurance, what have you, and you do the cross-selling. The belief is, of course, that you increasingly will be able to do more of that, you could say, online.
Okay.
Jens?
Yes. Just back on the 2018 cost and looking at your confidence in those numbers. Is this now a hard target or a hard cap? Or is there a risk that you will decide to do front loading more the cost of doing more investments?
Internally, it's a hard target. We don't give guarantees, of course, but internally it's a hard target and we have said that we believe that we can deliver EUR 4.9. We have also given you the underlying numbers. The restated baseline is EUR 4.775 approximately. We have said that we need transformation cost in the magnitude of up to EUR 150 million. We are around EUR 4.9, so it depends a bit. Is it EUR 4.900 or can we be allowed a little flexibility around it? When you are doing all this transformation and you are doing re-domiciliation and you are doing what have you, I understand you want us to be super specific about what will happen the next five quarters. This is the best we can say that EUR 4.9. Yes, we regard it as a hard target, at least internally.
I guess the question comes from the EUR 4.8 I think many had viewed as a hard target.
It is.
Yeah, of course. With the transformation cost being added on top. Are there any other-
That is because the life doesn't end in 2018. We are delivering. What we said three years from now, more or less when we said flat 2016, 2018. Honestly, I think it's crazy to make these kind of commitments, but that is how the market works. No one knows. You get wiser and wiser, we are on a transformational journey. If we did nothing, I would be happy to do it. It's not so difficult. If you don't change anything, of course you have much better predictability. If you change everything at the same time, it's actually pretty difficult to control fully. I hope you appreciate it a little bit that there's a difference from trying to fix your legacy, remediate a lot of things, build for the future, clean up the past at the same time.
Stay with a target two years ahead that has to be at the euro cent. I'm not asking for forgiveness or for more understanding that this is basically what is going on. We, of course, are trying to have these targets to have something to steer towards and something to guide towards. I think a few years from now, I think you will see many banks trying to transform. They will hit the same issue. I don't think many banks are full scale transformation-wise two, three years into the journey as we are, to be honest. Let's see.
Can I ask one question on capital? You remain without a buffer, and we see some of the peers now start to talk about potential Basel IV. It seemed to be off the table for a long time, now it seems to be coming back a little bit. What's your thinking there? How does that impact your capital planning and dividend policy? Not the policy per se, but capital planning.
We have included in the type of outlook we do, we have included our best estimate on how the different Basel IV proposal. Remembering you have a fundamental review of the trading book kicking in already 2020. You have the standardized approaches kicking in in 2021. They are included. Best estimate we have made is included in the plan. When we say there is a robust outlook, it is actually more or less based on a fully loaded 2021 capital situation.
You can have some, because we are entering a new, as part of the re-domiciliation project, we are moving from Sweden to ECB, and there can be some transitional thing we don't know about. That is actually when we say about the outlook, it's based on Basel IV, what we know and how that will impact us in 2021, and what type of dividend and capital capacity we are thinking about. That is how we have done it. It's actually more looking on 2021, where you have a full load. You have a capital flow that will start being phased in, but that will not really be restrictive for us before somewhat later. Of course, the other Basel IV proposals, all the standardized approaches, they are of course having pretty significant impact, depending on assumptions, but they do.
That is included in the plan.
Okay, fair enough. Thanks.
Can we go back to the telephone conference and ask for more questions?
Sure. We will now take our next question from Vivek Gautam from JP Morgan. Please go ahead.
Hi, good morning. Only one question from me. Intangible assets have built up quite significantly over the last two years due to the investments that you have done, and they now currently stand at EUR 4.1 billion. Can I reconfirm that you earlier said that it will peak in 2020? Where do you see that peaking in terms of billion amount? Also, if you can talk about the average amortization duration of the newly capitalized intangibles versus the old intangibles. Thank you.
I don't know where EUR 4 billion is coming from. The capitalized IT investments will peak in 2020 at a level around EUR 2.5 billion.
All right. I'm looking at your balance sheet disclosure where you have EUR 4,071 as intangible assets.
Yeah, we have goodwill there as well.
Yeah, forget goodwill. That's a constant, Morten, right?
Yeah.
Where we, I don't know how many years. That's not really interesting. The interesting part is the so-called intangibles, i.e. the capitalized IT investments.
Yeah.
They will grow to EUR 2.5 billion, and they are important. You should follow that. That is the estimate.
Yeah
the implications you will have in depreciation and amortization, and that was why I said that will peak in 2021, and we discussed earlier today the expected level in 2021. You more or less, and that will then be around the peak of depreciation and amortization according to the current plans. I think we have been pretty transparent on what you can expect going forward.
The goodwill we stress test every year, and you can see that in the annual report. We'll make sure that that value is correct.
Yeah. Any comments on the average amortization duration?
Yeah, well, the average. We are following. I'm not an accountant, but we are for sure in compliance with all the necessary accounting rules. I think the longest we have on some of the IT investments, what is that, 10?
17.
17? 15.
Yeah.
15 years probably for the core banking part.
If you look at the biggest project, core banking platform and some other, we have 15 years. Otherwise, it's five or 10 roughly.
Between five and 15.
Yes.
Yeah. Okay, thank you.
Next question, please.
From Mediobanca. We will take our next question from Riccardo Rovere. Please go ahead.
Yes, good morning. Good morning to everybody. Thanks for taking my questions. I have two, if I may. The first one is on the loan book. If I think about the conference call over the past 18 months or more, we have talked a lot, or you talked a lot about transformation, digitalization, remote channels. Fine. When we move out of the cloud, we get back to the real world, what I notice is that the loan book of Nordea was EUR 341 billion at the end of 2015, and now we are just below EUR 315 billion. If I look at your closest peers in the area, they had a completely divergent trend in the loan book.
My question here is why have you, it looks like you have systematically lost market share, but I don't recall any particular comment on any particular lingering risk in the area, first. Should we expect this divergent trend with the rest of the industry to continue over the next two years? You can digitalize what you want, but if the loan book doesn't grow, the bank will go nowhere, basically. This is my first question. The second question I have is on the cost. Again, sorry to get back to that, but I think there is a bit of confusion here. You state EUR 4.9 billion is the starting point at the end of this year. This excludes Luminor, EUR 75 million.
From one of your slides, you say that the transformational savings amount to EUR 900 million, but if I remember correctly, if I got it correctly during the call, you stated that transformation costs will continue for an amount, if I understood it correctly, of EUR 600 million. I'm still short of EUR 300 million, which I don't understand where those come from. Is this inflation or maybe within the EUR 600 million you do not account restructuring costs related to reduction of employees and so on? Can you shed a little bit of light on this because maybe this is one of the reasons why the stock is down 4.5%?
You know much more about why this stock is down than I do. If I can ask you two very good questions. The first one was on lending, if we exclude the reverse repo part of it, then if we look on the different lending books, the mortgage book have been increasing more or less year-after-year, quarter-after-quarter, also since end of 2015. We have discussed that, it will continue to do that. Uncollateralized consumer lending is more or less stable. On corporate, yes, it's down, I think we have mentioned several times that we deliberately are de-risking, which is mainly happening in the corporate book. Yes, corporate book is down from end of 2015 to now, that's by design. It's a choice, we don't regret it. I think that will start to change.
Has nothing to do with digital. I absolutely agree with you. Nothing. It's a risk appetite decision. I think that what I said is that digital will help us going forward in a healthy and sustainable growth, maybe slightly higher than historically on mortgages and on consumer finance. There you are on that, and I think we agree. On the cost picture. Gross 900 out, EUR 100 million net approximately. The remaining part is, as we discussed, depreciation up with slightly more than EUR 300 million, underlying cost rate of slightly more than EUR 300 million, around EUR 700. Then we, as we started the meeting with saying, we do still a lot of reinvestments in certain of our capabilities in the data area, in the technology area. We are doing new investments. In the next four years, we will do new investments there.
In certain areas, we will do new net investments, it's not only what we have done, and there's a cost effect of that. That is why you can say it's not more, but that is because transformation continues. It also continues after 2021, unfortunately. That's how banking is developing.
I think the simple math is that we bring it down by 900, then we have the cost pressure of some EUR 700 million. Also in 2021, we will have transformational costs. If you use EUR 100 as a number, then you have a net down by EUR 100. That's the easy way to bridge it.
Okay. That is a bit clearer. If I may, a third question, sorry. On NII, if I remember correctly, in the last quarter, you mentioned EUR 25 million one-off. The starting point should have been EUR 1.2 billion. You had one day more this quarter, but again, Nordea fell short of EUR 15 million NII in this quarter. Is there any other one-off in this quarter that may have affected your NII?
I don't know if we should call it one-offs, but I think that treasury probably was, according to our own expectations, slightly lower, like EUR 20 million in this quarter. We had actually also, remembering we had this funding agreement with PKO Bank as part of the Polish deal, and there's a step-up clause which has started, and we got a quite significantly extraordinary prepayment, meaning that we got around EUR 5 million less income from that, as expected. So in the magnitude of 25, I think can be explained by that plus treasury.
All right. Thank you very much. Thanks.
Next question, please.
Question comes from Amal Shah from Redburn. Please go ahead.
Hi there. Good morning. Just a follow-up from a previous question. You said the intangible build will peak in 2020 at EUR 2.5 billion. Is that a gross or a net number?
That's a total number, and it includes everything.
Okay. That will also include the amortizations within the intangibles. What is the number X amortizations?
I don't understand the question. The capitalized amount of the intangibles, which is capitalized investments, will peak in 2020 at EUR 2.5 billion, including core banking and all other things that are capitalized. That is why the highest level, according to the plan of depreciation and amortization, will be in 2021. We have indicated the number around EUR 500+ million. That's it.
In other words, the other way of putting it is you're incurring EUR 150 million per year transformation cost on the P&L over the next, say, 4 years.
Yes.
Just related to that, how much is on top of the EUR 150 that is not on the P&L?
That is what I have said. We are at around EUR 1.5, EUR 1.6 in capitalized EUR 1.7, yeah, it increases all the time. EUR 1.7 now, and that will go to EUR 2.5, and they will be relatively linear, so you can extrapolate for that. That is what is not coming on the P&L.
I think you're mixing up things here a little bit. The transformation cost, that's basically cost for lowering the long-term cost of the bank, i.e., to lower the number of employees and then other things.
Transformation cost-
Yes.
These transformation cost has nothing to do with the other discussion.
No.
Transformation cost is because we have big gross movements in our labor force. That's transformation cost, and a few other small things. The intangibles is all the IT investments we're doing, where we're supposed to capitalize. That is how it is, and I think we have been pretty clear on the numbers here.
Okay. Can I then assume it's around EUR 100 million a quarter, since that's what it was between third quarter and second quarter?
Yeah. They will go down because, as I said,
Okay, fine
The gross investment spend per year will go down. We have also said that peaked in 2017. It will be somewhat lower, around EUR 150 million lower in 2018. It will be, again, lower into 2019, and so on. You more or less have all the numbers you need now, I think, to do the math.
Okay. Thank you. Thank you. Next question, please.
Tim Barrow from Deutsche Bank. Your line is open.
Hello. Thank you. I think most of my questions have been answered, if you could just elaborate a little bit on the sort of net 4,000 of your own employees, then I think that's the at least number that you're going to get rid of. I know there's probably going to be conversations going on with unions and so forth. Could you give us an idea of, this is about 12.5% of your current FTE base. Could you give us a little bit of an idea of sort of where that is in terms of sort of front office and back office, and what kind of divisions that is since it's quite a big amount of your current employee base that you're net getting rid of? Thanks.
I think if we take it in a kind of a business area dimension, I think personal banking followed by CBB, you have a big part of the 4,000 there. It's back to, again, to the discussion we had about moving from less physical meetings to more remote meetings. That will free up a lot of productivity so you can serve the same amount of customers with significantly less people. They will somewhat do the same in CBB with the big business banking segment of around 500,000 customers. Quite a lot of front middle office type of people can be released as part of that because also there will be less, you can say sales process related work, i.e. middle office type of work will be replaced by automated processes.
The other big part of this will come from other type of operations, or other type of processes, mainly into the credit processes, where we have 1,300 people working now in credit processes. There will be effects in the finance organization. There will be effects in the people organization. There will be effects in the group operations type of areas like, you can call it also first line compliance and other remediation work. There will also be significant reductions there. I think that's more or less where you will find the more than 4,000.
Excellent. That's very clear. Thank you.
Thank you. Next question, please.
Will come from Jacob Kruse from Autonomous. Please go ahead.
Thank you. My questions have been asked. Thank you very much.
Okay.
Now move to Adrian Diki from Royal Bank of Canada.
Hi there. Just two clarifications, please. One on the NII outlook for 2018 and one on capital. For the outlook, my understanding from what you said earlier was that you expect flat margins, lower wholesale cost of funding to offset the increase in resolution fund, which you estimate at EUR 105 million. The NII development to come from whatever volume growth which you expect to be in line with GDP, or should I understand that you're still expecting some further rebalancing, at least into the first couple of quarters of 2018? The second question on capital. You're obviously accruing for EUR 0.66 now, are above the high end of your management buffer and expect no IFRS 9 next year. Yet you mentioned that you're not planning for a sort of a full impact of Basel IV.
Are you now comfortable to remain at that sort of higher than management buffer target until you get that impact in 2020 or even beyond? Thank you.
On the first question. Sorry, now I forgot the first question.
The NII outlook.
Oh, yeah. That was the NII. I think we have more or less described the overall ambition is to grow with the market. Whether or not we will, as I said, there are still effects, not least in CBB. I think that will take still some time. Whether or not we will fully be able to grow with the market in 2018 will depend, I think, mainly on the expected somewhat more growth along with the market or slightly better in personal banking and in wholesale. I don't dare judge on that. Yes, a positive volume effect, whether or not it will be exactly what the market or not on a combined level, I don't know. But it will at least be a positive effect. That's my clear expectation. The other question was on dividend. I don't think we have that much more to add.
I think the way we describe it is that looking into Basel effects estimated to hit in the period, I think we are saying that we have a very robust expectations that we will be able to continue our progressive dividend policy. I don't think we will commit anywhere closer, other than we will be able to meet that with high certainty, I believe. Including Basel.
Perfect.
Including re-domiciliation, including SREP.
Perfect. Thank you.
Next question, please.
Next question from Johan Ekblom from UBS. Please go ahead.
Thank you. Can you just follow up on the last question on capital? You said you're planning for fully loaded Basel IV, no matter what the actual final proposal ends up being. Within the time period, you will most likely also re-domicile. What assumption have you made on SIFI buffers by 2021, and is that part of offsetting potential other regulatory pressures?
We have followed the discussion in Finland. We have in our estimates been very conservative on how it will look, the different elements of your capital stack and the capital requirements. That is taking into account the newly received SREP, the discussions we have had with Sweden and ECB. Our own, of course, assessment of how FRTB and Basel IV impact in 2024, how it will hit us. I think we have been pretty conservative. As I said, we have only entered the initial discussions. Around re-domiciliation, being too specific on a year-by-year basis on how exactly our management buffer will develop, I will refrain from now.
The key thing I can say is that I firmly believe that if we look on where we will be in 2021 and where we will be during the years, this will allow us, with high certainty, to continue to deliver on our dividend policy. Based on the fact that we have not concluded all discussions, I don't think we can be much firmer than that as of now.
Okay, thank you.
Next question, please.
It appears there are no questions at this time. I would like to turn the conference back over to Rodney for any additional or closing remarks.
Thank you very much. It's been a lengthy time here, but I hope you have all your questions answered, and then there will be a new opportunity tomorrow at 9:00 a.m. CET where there's a webcasted conference where we'll go through even more details on this program. Thanks very much for coming, and see you soon. Thank you.