Good morning, and a warm welcome to this press conference, where we will present Nordea's 3rd Quarter 2017 Result. My name is Rod Nalveen. I'm heading up the Investor Relations. We will start with a presentation by our Group CEO and President, Mr. Casper von Kooskull.
Then before your journalist 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 and A session with Torsten and me. So, Casper, please?
Thank you very much, Rodney. And also on my behalf, welcome to this Q3 results review. It feels almost like this was yesterday when I saw you all. Time runs when you're having fun, as they say. When I look at quarter, if I look at just kind of a summary overall the quarter, I have to say that, and I've said that before, is that it's probably the first time of my 7 years at Nordea where we actually see pretty stable macro environment with synchronized growth in all of our 4 home markets.
So 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. And 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, and we also have grown in those segments lower than the market in general. And also in this macro environment, with stable macro, I'm somewhat surprised that the corporate demand is actually quite subdued, maybe reflecting something about the also the macro risks or geopolitical risks that are out there.
But overall, a stable quarter also for us. Our operating profit is up 8% from last quarter. It's down from last year. But if I look at the 1st 9 months, our performance on operating profit level is the same as last year. So all in all, a good start or a good 9 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. And 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 quarters. So very good news on that side. And I think what I've always said here before is that when I look at our capital and capital generation, I'm very proud because the capital generation stays very solid. We have a core Tier 1 today at 19 0.2%, where our capital requirements have actually gone down.
So with the buffer today at 180 basis points, it is already below our set management targets, which we have said at 50 to 150. Capital generation, I think, also at this point of the cycle is enormously quarter after quarter where we have actually said that we are investing heavily to 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.
But 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. And in that next phase, 3 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 3 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, we'll be at 4.9 $1,000,000,000 in cost next year.
And by 'twenty one, we will be below 4.8 1,000,000,000 dollars 4,800,000,000 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. So 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 2 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 visavislastyear, 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.
So 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 1st 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 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, and it's a good start, as I say. And 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 have we are very comfortable. Credit quality, I already mentioned, continues to improve, and 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 I would kick in. And 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.
Then 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, plus 3%, mainly driven by lower funding costs in the commercial and business banking, pretty, again, stable, unchanged. And where we have had lower NII is in our wholesale bank, but 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. And of course, those are segments where actually the margins are quite high, but of course, the risk has been higher. So in a way, what we have been doing is derisking the bank over the last many quarters.
And I think that's something that, as I say, also is reflected in the credit quality, so moving in the right direction. Fees and commissions. As I said, year on year, we are up on fees and commissions. We have seasonally lower transaction levels in the Q3. The summer months were actually quite good, but in September, I think it was less active than we had expected.
And hence, when we look at the Q3, it's somewhat down from Q2. 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. So 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 3 quarters of 2017, probably driven a lot by also the compliance and regulatory preparation for MiFID II.
Our long term estimate on asset to our long term estimate on asset under management stays that we do believe that we will have 4% to 5% growth on that side. But in the coming quarters, you will probably see somewhat lower than that. But our medium to long term target is still a 4% to 5% growth in asset under management. And 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 3 year period, I think it's a very, 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. I mean, if you use the VIX index as a benchmark, when you look at the 3 quarters we've had in 'seventeen, very stable business but at a lower level because of that low volatility that we see in the marketplace. And of course, this fair value is the one that has probably the biggest impact on total income. But our position there, relative position, if anything, is being strengthened given kind of 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 have said. Still, cost in local currencies, if I look at the 9 months of 2017, is actually up around 5%. And I have said that we will bring that to 3% to 5% growth in all of 'seventeen. So you can clearly see that we have kind of turned the corner and actually are bringing costs down.
When I look at the cost components of that growth, it really is in 3 elements where we have increased costs, and that has been very much by design, building a stronger, more agile bank. 1, compliance and operational risk, very big investments. I think it's important that a bank in an environment like this and also going forward has is kind of best in class in this area, risk and compliance. Then 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.
So 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.
And 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. So I think I'm very comfortable where we are today and hence can say with pretty good confidence that don't expect these loss levels to or expect these loss levels to maintain at the levels that we have today. And 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 Q1 where you have not improved that or increased that? But this is actually, as I said, the fact that some of our Pillar 2 requirements have moved into Pillar 1, so mathematical.
And that means also that our capital requirement has gone down, and hence, our capital buffer has increased to 180 basis points, which I said. So very solid number, very comfortable with that and again demonstrates one thing that is very kind of characteristic to Nordea. We generate capital quarter after quarter. So stability in generation of capital is the key. Then 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 kind of 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 coming becoming the first point of entry to millions of our customers. We have almost 1,000,000 loggings per day today in the Nordic region and millions of customers using the mobile really as the first entry point. And hence, we are designing everything first for the mobile and then, of course, we have an omnichannel 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 1st bank here in the Nordics. So now Apple Pay has entered the Nordics together with Nordea and actually allows us Samsung Pay, we had done before. So 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, Siro in Finland, Swish here in Sweden, Vipps in Norway and Mobile Pay in Denmark, again, all in place.
The mobile platforms have all been freshed 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. So very exciting. And those mobile platforms will then allow online face to face meetings, chat and so on and so on. So mobile will be at the core. And maybe the last announcement that we have done is that we announced cooperation with Think, which is really, I think, the poster child for PSD2.
It's a personal financial manager, a aggregator of information and data that we can use in PSD2 2 world. And we have also made an investment in Tynq and are now a shareholder in Tynq. Again, a very exciting way of making that mobile and banking experience much more live to our customers. In Norway, we have launched a chat box, Nova, which is now in use, and that will, of course, be something that we will be rolling out in other markets. And 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 20 fourseven kind of ability to manage their savings and investments using our savings and investments, competencies and processes and our portfolio of attractive products, we have actually created Nora, which is really our robo advisor. We are launching that now in the Q4 here in Sweden, and then we will roll that out in the other countries. So these are examples on how the digital tools will actually allow better customer, certainly satisfaction, but also more availability. The bank becomes available 20 fourseven anywhere, anytime.
And to me, this is only the start. This is what you will see also going forward. But 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. And 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 being much more presence in on both sustainable and responsible advice, investment and finance. And the green bond area is one area where we have now taken a lead. We have actually facilitated the issuance for both Volkswagen and Munifin here in the quarter. And when you look at the our position today in this market, we have taken a lead position here in the Nordic. We also organized the largest probably 1st and largest responsible finance seminars here with more than 200 participants here in Stockholm, very well received, and it's something where we want to take this forward also with not only our clients, but our employees and so on.
And we have also launched a community engagement program internally where we will give our employees an opportunity to spend 2 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 and have more than 30,000 Nordea people use their time to mentoring, to help and teach entrepreneurs, young 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 and A, come down from a lower level to the top 5 today advisers in the region and actually has strengthened also our positions in our debt capital market business and, of course, kept our absolute lead position also in our equities and ECM businesses. So being a leader in debt, equity and also green bond sustainability is something that is very important for us going forward, and we will invest and make sure that we keep that number one 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 we are 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 1 of the largest banks in Baltics by merging our Baltic business with that of DNB and creating Luminor. As of the 1st October, Luminor is operating as one bank in the Baltic region.
Very exciting bank with a balance sheet of €15,000,000,000 and 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 redomobilization decision. It's a decision. It's, of course, a proposal to our shareholders.
I remind you that this is not done yet. We will have an AGM where the shareholders will vote on this. But 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 4 home markets. We're not leaving Sweden. We are committing and are committed to all of our 4 home markets. We are a bank, a Nordic bank operating in 4 home markets, and this move means that we will be supervised by ECB, either 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 4 home markets. We are fully committed to our customers in all our 4 countries, and frankly, nothing will change, particularly here in Sweden.
We are have the same responsibility in terms of a taxpayer here. We actually are increasing our resolution fee payments in the coming few years, and 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 4 home markets. And 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. So it's the right move to make.
Then 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 2 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. And now I would say that in the next 3, 4 year period, we really go into an execution mode in trying starting to shape the bank in a new way. And 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, and that's the thing that will happen not only for Nordea, for this industry as a whole. And this 3, 4 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 1 bank rather than 4 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.
So 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. So when I look at kind of 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 SEK 600,000,000 to SEK 700,000,000 extra cost that is kicking in because of those investments, both in terms of running cost and depreciations that we did. We knew that, and that was actually by design. What we have now been spending really is the last 4, 5 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.
And 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's actually operating in a new way, which I just said, more common, more centralized expertise and also near shoring 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 €900,000,000 almost €1,000,000,000 It's a big number, but it's well planned and it's well identified, which we will do.
That, of course, means that we will be less people. On a net basis, we'll be at least 6,000 less on a net basis because we will also be recruiting people. There are new competencies that we need. And of those 6,000, roughly 2,000 will be actually consultants and maybe the rest then internal. But that's a big number.
We take that responsibility with huge care. We have very committed people, and we will do this in a responsible and way where we will try to help people, also retrain people and also people find jobs either internally, externally to make sure that, that is done as responsibly and as well as can be done. Take that very seriously, and I we are committed to do it in the right responsible way. What this will then lead to that when we look at kind of 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 think I do not expect a bank to grow more than GDP. So GDP growth is something where which I think is reasonable.
On the cost side, for this year, we will stay within that 3% to 5% cost, excluding any transformation costs that we will have. But 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. We will have 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 redomiciling decision gives me comfort on that side. And in terms of our return target, we'll 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. So 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 because I want to invite one of our very dear FinTech clients to the stage, somebody who is a serial entrepreneur, CEO of Okapi, Finance International, exciting, very exciting. Giselle Miapo, please come on stage. What you have done is something that we all look at with admiration. But can you kind of tell a little bit about, please, Mokarpi Finance? Somebody changed the
Yes. Thank you, Kasper. Thank you for inviting me. Okapi Finance is a 5 years 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 145,000,000. Of course, this sounds really huge, But with OcAPI being a mobile solution, easy to access and deploy, that is definitely achievable.
SEK 145,000,000 We have SEK 11,000,000. So I think that's kind of how did you come up with this idea? Can you?
Yes, of course. The idea with Okapi started with the passion I feel to financially 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 that.
And I mean, with that challenge, I mean, what's been your biggest single challenge? What has kind of been the obstacles that you have to navigate by getting where you are now?
If I will mention, my biggest challenge have really been to get 2 different worlds 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.
And when you look at kind of banks and banks as your financial partners, what do you expect from a bank that you work with? Because you need partners here.
Yes, 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. And for me, a bank is a good, is a very important partner. And if I will really say an ideal partner, bank partner for me is a partner who 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. And 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. Yes.
But this, I think, is the future. I mean, we talk about our transformation, but I think something that Okapi is doing is something that there's many some others, but I think this is unique. And when you talk about more than 100,000,000 customers, I can only look at that with envy. But good luck with that.
Thank you.
But I
think it's something that we should all kind of follow because this is the future.
Thank you.
You're not too bad as a journalist,
I'm right,
but please stay as CEO.
I got that.
We have room for some 2, 3 questions before we split up. Magnus, followed by Andreas and then
Peter. Okay. My name is Andersson at ABG. I just it's been a very long journey, obviously. You're taking restructuring charges now in 2009, 2011, 2014, 2015 and you're taking another 5 years of so called transformation costs to get the cost level down to where you were basically in 20 10, if I exclude for the Baltics.
So my question is, in 4 years' time, and a lot can happen in 4 years, we know that. And I'm just wondering what we actually get. Your cost income ratio has diverged quite significantly relative to the Nordic banking sector since Nordea was formed back in 2,001. And 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 and that you will be 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. So transformation costs are part of those targets. So when you look at the numbers I will show you going forward, those are absolute numbers and there is that's it.
I mean, there's not of course, when you change, there will be cost, but we will take them as part of our normal cost. So that's a change. The second thing, what you are where will we get? We'll probably get with this projection. We'll get probably to a cost income of lower 40s, right, 44% cost income for the group.
But this is not about cost income. It is about the platform, the competitiveness. So you cannot it's kind of 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. And I think I would argue that what we have done for the last 2 years and what we particularly will do in the next 3 years is unique, and I think we can take a leadership role in how a future bank operates. I don't want to start speculating how the competitive scene will look in 2021, but I can tell you that I feel pretty comfortable in how that will look like.
And if I then have a cost income at the level of competitors that are not transformed, I feel extremely good. But it is also about something that we haven't done. We have not and I said that 2 years ago, we have not created 1 Nordea, and now we are. Now we have, and now we are doing it. And so it's both the efficiency and cost side, But for me, it's much more capability.
And those capabilities will be exciting, very exciting.
Okay. But you're essentially keeping the cost at the 2016 level lower than 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 mean, I think our financial projections are, I would say, relatively modest, and I think I'd rather keep it that way. But of course, when you have looked at some, there are not many because there are not many that have done what we do, then of course, there's very clear evidence that what you now say is has actually happened. But 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.
But let's take that when it comes. We do one thing at a time. But that's that, of course, is the that's the aim if you look at what I just said.
Hi. It's Andreas Hokanson for 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 it's customer satisfaction, it's not always a quantity, but it is actually also, I mean, how you 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 your and this is about creating tools to actually improve availability vis a vis customers, tools that you actually can spend more time with customers. So of course, I recognize transformation is always challenging.
That needs leadership to achieve. But I think people always say one business model and then you cut costs. This is not about this by transforming. And it's, of course, a leadership challenge. But this whole point and all the investments we've made, we haven't made we haven't invested SEK900,000,000 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 had got a lot of new regulation as well that has been quite cumbersome for customers with KYC and other regulation. But I think as we move kind of through this transformation, the whole point is about only one target, customer satisfaction and becoming closer to the clients. And 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.
So Peter and then John.
Yes. Hi, Peter Kessel from SEB. A follow-up question on 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.
And is that something that do you think that will continue on the back of that?
No, I don't think so. It shouldn't. That's certainly not part of the I think our income growth probably as a I mean, there may be a number of reasons. One, we have also derisked the bank. We have actually reduced our 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. So we are repositioning ourselves. So that's kind of when you do the repositioning, then that and then I do believe that we have lost some given some of the transformation that particularly that we've done in the last few years that may have impacted, I mean, in particularly some of the investments, some of the buildup in risk and compliance that has taken away some of the focus.
So 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 and then to the earlier question, the longer term, of course, my ambition is completely different, but I think that's too early to start kind of doing projections on that. But of course, that's the aim. But 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.
And as I said, they've been done mostly by design.
Then 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 what how much has the long term cost level increased on the back of that?
I think I just showed the long term cost kind of what the buildup has been. And why that? I mean, it's not I wouldn't say the plans that we had, we are not but I think as we went through that, we actually did more than we originally maybe wanted to do and not wanted, expected to do. But 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, then those investments were more than justified. So 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. And the cost kind of, let's say, increase that we actually created was the one that I showed.
We have one final question from Jan, and then we move on.
If we look at the transformation program and the cuts over a few years. And then in the P and L today, I think you have something like SEK 500,000,000 in project so SEK119,000,000 in the Q3 and we annualized that. So I guess, we end up at the SEK 500,000,000 level. So is it right to think about first the €500,000,000 should fall out and then the €900,000,000 that you present today is over and above those €500,000,000 in project costs that you've booked or that you're booking now. And then if that's right, if we should take €900,000,000 plus €500,000,000
I think maybe you take that in the No,
I think yes, happy to. I think the question is really, you talk about SEK4.8 billion in cost base
in 2021. Below?
Yes, below. Yes. So the question is really how far below do you aim because previously Nordea has been discussing about SEK4.8 billion for 2018. And now we have project costs coming out and we have
But you're looking at 2 different banks. I mean, this is not about a financial model that we're looking at a completely different bank. We have been 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. So that's why I'm just saying we look to mechanically. You need to look at a bank that what is the bank that you and what is that bank's cost base.
And you're looking at a completely different bank that has transformed. And that's the way you need to look at it.
But what is driving the cost up then until 2021 apart from inflation, obviously? Do you see anything else that should drive the cost?
Depreciation. Depreciation. And running costs for the IT systems.
But depreciation doesn't explain several 100,000,000 does it or?
We showed it
We showed it
before that it's roughly half of the EUR 600,000,000 to EUR 700,000,000 to EUR 700,000,000 to
EUR 700,000,000 to EUR 700,000,000 to EUR 700,000,000 to EUR 700,000,000 to EUR 700,000,000 to presentation tomorrow at 8 a. M. U. K. Time, 9 a.
M. CET, where we will webcast the presentation with Kasper and Torsten, then we'll go through all the details in this program. So we're happy to invite you there. Thank you very much.
Good morning, yes.
Yes, tomorrow. So thanks very much for coming. Those journalists who would like to have interviews with Casper, please follow Peter and Magnus. And the rest of you are most welcome to continue with the number crunching session with Torsten and me. Okay.
Telephone conference telephone conference joining us, so there would be opportunities to ask questions on the phone. But if we start first with the audience in here. Please, Niklas.
Thank you. Niklas Magnus, 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 cost in 2018 versus 2016. I think you communicated that last time in conjunction with Q2 and then also reiterated that after the decision to move the domicile to Finland.
Well, I don't think as such anything have happened. So if we just take the number part, so the original target 2016, 2018 discussion, the starting point is €4,800,000,000 Then we have the Luminar transaction that is going to be that has been closed, meaning that you can say there's a further around €75,000,000 going out and there's a LSP tool LSP I'm sorry, that's our internal. The redomiciliation cost added on top. So, I would say the new flat base is around 4.775, something like that, to be very specific actually. That will be the renewed target.
That target we will meet. Then 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 4 years in the magnitude of €600,000,000 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. So, we have changed the approach, so we now take it as part of running cost. We will frontload somewhat this next wave of transformation and 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 €100,000,000 to €150,000,000 which will be close to the annual level for the next years. And that's why we come to the around €4,900,000,000 so yes, €4,900,000,000 for 20 18. So it is actually on top of €4,775,000,000 Luminar plus V Domitulation.
So I think it's there's no change to the original 'sixteen, 'eighteen target. Of course, it's the change you can challenge us on is that we are now adding transformation costs, but 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 number is much higher, and we want to do it pretty quickly. So, that's the reason why we get this transformation cost effect in Q4.
Yes. 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 and you've 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' implications, the project implications was finally decided. So, it would have 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. So, I think in all fairness, it would have been difficult to be very specific, I. E, the €600,000,000 is not a number I've just invented. It's, of course, a bottom up generated number and has not been ready before now.
Okay. And 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 past over the if you look back on the past few years, it's been significantly lower than that.
Do you expect lending volumes to pick up? Or is it more like asset light revenues or can you give us some color on where you see that growth coming from?
Yes. So I think that as Casper alluded to, we have been through as part of transformation, there has always been an element of a derisking process. So 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. And 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 an offering vis a vis peers in the personal banking and CBP space. The last 2 years, we have invested around €300,000,000 in building digital platform capabilities. It's unfortunately very expensive because you need to secure that you can release new products, release new capabilities, team up with partners and then 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 3, 4 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. We have closed 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.
So 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. So 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 CPB. Exactly how much, you never know, right?
So that will also be less than dynamics, but 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. Our customer the target customer portfolio, we are close. In CBB, we still have some way to go, but we have come much further. So 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 the I think we will see some positive effects there. So long story, volume, everything else equal, I think we are through the worst and 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 of €4,900,000, please remember that Luminor is not included there. So you should have Luminor as an equity method. So the cost base is now everything excluded. So and obviously, there will be a revenue impact, which we will come back with as well.
But so 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 consider that you're not really growing your Swedish mortgage book in the 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 Pacific exposure would be fairly low even if the housing market were to come down in Sweden. At the same time, this is like the most profitable market you have in personal banking. You have a ROCAR in Sweden of 17% in the quarter. That's the best profitability in the group. So that probably means that you're lowering your profitability on a group level if you don't grow this part of the business.
But what's your view there? Going forward?
Well, I think in general, you can say looking across all the markets, including Sweden, that with first of all, we don't have market share targets. But 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. And 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. And therefore, again, I don't think anything will prevent us to grow with the market. Then we have had in certain markets, at certain point in time, also in Sweden, on commercial real estate, we have actually had somewhat of a derisking approach to it and that to kind of course always argue. So we have not grown as much as we could. But 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. So, it's more a risk appetite seen in also a longer perspective discussion rather than a capability driven discussion.
I appreciate that. I was more referring to residential mortgages, but 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 then 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 derisking mode in general. So, we might have been pretty tough relatively on prices. I'm not saying that we will now certainly swing around and be very flexible, but I think the from a portfolio point of view and from a strategic point of view, I think we have come a long way now in derisking.
So we are more or less where we want to be now. So 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 be why are you growing 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 can we have restored that gap to peers on credible growth.
You cannot only look at the losses on mortgages isolated. As you know, if there would be a sharp house price correction, there would obviously be second line loss or second derivative losses. So it's never good for bank to have a sharp house price correction. So we think we also have a systemic responsibility. Then I mean 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.
I mean, 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. So you think to look at it through the cycle?
Okay. Thanks.
I think it's Jan, followed by Andreas, yes, and then we'll see. Sorry.
Yes. Going back to the cost question, obviously. Did you say that the SEK 4,900,000,000 for next year, that was excluding Luminor and that was SEK 70,000,000 or so?
SEK 75,000,000.
SEK75 1,000,000. SEK75 1,000,000. Yes. And then the project cost that I mentioned, how should we see them? They were now SEK119 1,000,000 or so in the quarter.
They will come down.
They will come down from here on. And that is because of the completion of the IT projects and also the ramp up of reg and compliance.
We have to the group projects we alluded to is mainly the ones that hits the P and L has mainly been relating to what I would call somewhat remediation activities. So 2 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 and L. We have more than peaked there. So 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, which that is permanent employees, when you have within the last 2.5 years, more than 5 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 transformation, we are not done.
We will also continue to reinvest quite a lot. So we will continue and that will also hit P and L. We will continue to invest in certain capabilities, I mean, front capabilities in data technology. And that will never I mean, that will that is the journey that Old Banks, I think, will eventually be on. And then, of course, to the €900,000,000 is basically gradually and carefully taking down the old way of doing banking, both vis a vis the customer, either whole physical distribution network and the whole backbone of Nordea.
But 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.
And just clarification there around the net reduction in staff that you expected, the 4,000 that you're discussing, was that the net end of the day?
At least.
At least 4,000 net and 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. So that is that will happen soon. So that is more or less equal. The reduction of consultants back to group projects and change activity level is somewhat front loaded. So, the 2,000 less consultants will be somewhat more front loaded, also supporting somewhat the development from 2017 to 2018.
But just a follow-up on what you just said there, that it's front loaded. And would that start in 2018? Because I thought that the decommission of the projects are starting to happen a bit later or
No, but so 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. Then we have other programs running that are multiyear exercises. Some of them will end in 2018, some in 2019 and some in 2021.
2021 is a co banking replacement system for the bank, you can say. Then 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's why we will still have a relatively high investment level. We will have probably we will have about 900,000,000 in 2017.
We will have somewhat less in 2018 and somewhat less again in 2019. So it is like that. That means that I think the annual investment spend has peaked in 2017, most are 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.
So 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's a run cost effect on the investments we are doing that ought to come. That is why you need a pretty big gross effect to take down cost to the level we're talking about, below 4.8. Percent. And the reason why we say transformation cost now is that the journey will continue.
I mean, 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, then we also came from somewhat behind, right? I think we have catch up on a number of areas like compliance, resilient and digital. And now we still have the legacy to fix and that is a longer journey. But we are also 2, 3 years into it.
It's Andreas from Exane again. Just two shorter questions. Just you say roughly SEK 75,000,000 falls out of the Baltic cost. Is it roughly SEK 200,000,000 on revenues?
We will give you more details later on. We don't have all the details, but please remember that we don't take out all the costs from the Nordic operation because we'll keep some IT costs going on.
We cannot fully because we will it's a little complex, but 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. So it's that's why you cannot take the old Baltic Banking numbers and just
But if it's 75 out of 100 roughly, is that the same relationship roughly on revenues?
No, because it's too different. I can't recall that. But I think it will actually be a bigger effect on income. But we will do good reconciliation as part of Q4.
Because when we reach to IT, we will also get paid from Luminor.
There's no correlation. It's 2 different arrangements. So you cannot use that.
Then 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 as I recall it, that's a single customer effect.
But in retail,
it's a big target. Yes, but retail
We have corporate customers there as well, but we don't see anything in Norway in general, but we always have so you should not read in a new trend, definitely not.
We are not completely clean always on
We call it household, but then I mean, if you have a small business,
I don't think
we have
a general idea. I don't think we have a general idea. And your household in the same business areas also.
Okay. Thanks.
I think we should invite the telephone conference now before moving on. So do we have any questions from the telephone conference?
We will take our first question from Mateo Okhotra from Danske Bank. Please go ahead.
Yes, good morning. Looking Slide 20, where you present the underlying cost pressure, Is it so that it's fifty-fifty between underlying cost drift and depreciation and amortization? And also, how much is the amortization part in that depreciation and amortization?
I have no idea. Is the answer.
Are we going to get those figures tomorrow maybe?
We can support you with more numbers tomorrow, definitely.
Okay, good. And to follow-up also on that, this depreciation and amortization, we should see as an increase to the SEK 250,000,000 that you report at the moment. So the figure in the P and L roughly or actually last year 230 would go down or would go up then to roughly €550,000,000 Is that the correct
way to describe it?
Something like that, yes. That's correct.
Also, if I may, finally, on the cost cuts and the staff reductions. If you're kind of 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 costs should go staff costs should come down by maybe not 20%, but at least 15%? Or am I missing something here?
Now consultants are not reported on the staff costs. But yes, everything is equal. You would see both staff costs and consultants costs coming down.
Great. Thanks a lot.
Any more questions on 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 a follow-up on the housing market development in Sweden and in Norway and Europe. But the country, could you give shed some light on the differences and what you currently see and what you expect? And 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 volumes that you assumed?
And how do you take into take this move those moves in the market into account?
No, but I don't think 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, is the main growth is in residential mortgages and the historical loan loss levels in these segments and in these markets are very low. And 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. And there you can 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 have 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. And 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. And I don't know the 4%, but I mean, we have set at par with the market kind of and that's, I think, the best we can say for now.
But so far you don't see any shift in customer sentiment. And would you say the situation is similar in the 2 countries in terms of the dynamics just volume wise?
I mean, 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. So 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. Then 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. So it's more back to normal also in Oslo. Oslo. In the rest of Norway, it's stable.
Then what we also see in the commercial real estate segment. So what are
the fundamental measures potentially for next year in both countries. Do you expect any changes from there? So in Sweden, there was some FSA proposal. And in Norway, I think, the government wanted to enhance gross measure. Would you say that those are going in different directions?
No. We expect both markets to be relatively calm next year. So if you look at the nominal GDP growth, that's the best assumption we can give. And you should also be aware that in
Sweden, next year On the flow, I understand there 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 2 things on the inflow side. 1 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's no reason to believe that we will not get back to the kind of 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.
And then 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 €5,000,000 €6,000,000 of our customers that are not, you can say, the core relationship customers. So there is a belief looking forward that there will also be an improved distribution of, you can say, relatively basic investment products. So putting all of this together, I mean, 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.
So it's a matter of time with how fast we can do this, but that's how we see that part of it.
Okay. Thank you very much.
So any more questions from the telephone conference?
We will now take our next question from Natasha Blackman from Societe Generale.
Good morning. I have 2 funding related questions, please. The first is, could you provide an update on your debt funding plans? I think you mentioned previously that you could look to issue an AT1 potentially in the next year or so. And 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 we just deem installation etcetera. But 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.
Well, I think you can expect us to do a 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, are we will comply with the Swedish MREL rules, but 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. But as soon as we will, we will come back.
Okay. Thank you.
So can we move on then to the audience in the room and then we'll come back to the telephone conference? So Magnus, followed by Peter Kay.
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 near shoring 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's a lot of growth going on. And some of the growth going on is that both on consultants and non consultants, there is also a, you can say, a significant transfer expected from Nordic to nearshore, mainly Poland for now, could also be Baltic. So absolutely, and it's a magnitude of 1,000 technology employees and 500 operations at least in the near term plans. So that's quite a lot compared to the fact that we are with the size of the near showing we have now. So that's expected to continue.
It's not really into the net numbers. This is more a effect of it's actually easier get 1,000 new technology employees in Poland and they're also cheap, of course. So that is, of course, also supporting the 2018 and onwards cost development.
And the headcount in the group, is it peaking now then and going down from 'eighteen?
Yes.
Okay.
And just on the income side, there hasn't been much discussion about that so far. But just on NII for 2018, if you assume you will get the resolution fund fee in the mid of your communicated interval, let's say SEK 105,000,000, do you think you will be able to grow NII year on year in 2018 or 2017?
I don't think we will be able to grow. I don't think I don't expect margins 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, we'll be have slightly more by volume than we have seen the last couple of years. So 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?
And that's like for like including Baltics, of course? Yes. Okay. Thank you.
Peter Fold by Jens.
Yes. So first of all, following up a bit on income and NII. Treasury NII has continued to decline, peaked in Q4 '16, 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. And I think if there's I know we don't expect anything to really happen on rates. I think so you, of course, have a time effect. So 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. So of course, we also have the opportunity to do more risk, but we don't want to. So there will be a gradual decline. I think we is it in a level of €100,000,000 or In that magnitude, yes. €100,000,000 a quarter, right?
So it will be probably a better level to assume. I think we have been somewhat above looking back.
Okay. So you expect roughly $100,000,000 going forward, and I think you're at SEK 115,000,000 in the quarter?
Yes, something like that.
Yes, that's including some other as well. So treasury is it's largely unchanged from today's levels.
Okay. So but you increased the level of the risk level roughly, I think, 6 or 12 months ago within treasury. At the time, I think it peaked as well. But you're expecting it to remain at these low levels going forward?
We have, of course, we have a very flexible mandate. But I think that in general, we have not seen any reason to increase risk in the current environment. So we have a very low utilization of limits in treasury, and I think we will but we never know, right? That's a whole idea by having them that you, from time to time, can take decisions. But on a general note, I don't think you should expect us to make any big bets there.
Okay. Then just on Denmark, I think you're commenting that competition is tougher in the Danish markets 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. But 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?
No, but I don't think you should underestimate the fact that we have been through a period of general markets or public opinion or that is burdening not only especially new customers or customers considering where to go. So it mainly impacts your inflow, not really your outflow. Our existing customers are relatively loyal. The good thing is about that kind of info, we can relatively quickly change with the kind of perception. So I think a lot of the customer satisfaction indexes you have is the way you ask everyone, right?
You ask the full population. So 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 or the way we implemented in Denmark, both on the SME side and partly on the household side. We are too 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. So 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. So 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.
So I think they're doing all the right things. But then, of course, changing perception among customers considering to be a customer, it takes a little time. But there's the first evidence of that what we are doing is working. So 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. And then 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? How many I don't think you really disclosed how many branches you have today.
Could you just
I think we have 520, 30 kind of branches today.
And to what level do you expect that to go over, coming in soon?
So 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've discussed before. There's not that much. There's some cost in taking down a branch. But remembering, some of the branches we are talking about reducing are basically a remote meeting facility with a simple network line.
So, there is not a lot of people in branches anymore. There are some meeting rooms. So increasingly, of course, the reason for the big restructuring cost in personal banking because they take a big part of transformation cost is that they transform completely, right? So you will still be able to advise all your customers in a good way, but it will increasingly happen as a remote meeting. So, you don't need branches.
But instead of starting telling it, so what we have learned is that before you tell people you close the branch, then 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. And I think we have learned that first, show that very clearly and then you talk about reducing branches. But in the plan is that ultimately, we will have fewer branches, somewhat fewer. But it's not the biggest cost driver per se. The biggest cost driver is that you centralize advisers, you give them much better tools, so customers increasingly self-service themselves, both in personal banking and in CBB.
So, there's a much higher so the interaction stays constant, you can say, but there's a lot of productivity gains in this. And it's not so that is why you need far less people to service the same amount of customers in Personal Banking and CBP, not really because you have somewhat fewer branches.
Okay. But I think I remember Toppy mentioning in May that you sell savings products mainly through physical meetings. So I guess that would be
And that is why you will still have a significant amount of branches that increasingly will be meeting facility and 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. But the belief is, of course, that you increasingly will be able to do more of that, I could say, online. So Jens?
Yes. Just back on the 2018 cost and looking at your confidence in those numbers, is this now a hard target or hard cap? Or is there a risk that you will decide to do, I guess, front loading more, the cost of doing more investments?
Well, this is at least internally, it's a hard target. Then I mean, we don't give guarantees, of course, but it is internally, it's a hard target. And we have said that we believe that we can deliver 4.9%. We have also given you the underlying numbers. So the restated baseline is 4.775 approximately.
And then we have said that we need transformation cost in the magnitude of up 250,000,000 So we are around €4,900,000,000 So it depends a bit, is it €4,900,000 or can we be allowed a little flexibility around it? When you are doing all this transformation and you are doing redomiciliation and you are doing what have you, then I understand you do want to want us to be super specific about what will happen in the next 5 quarters. This is the best we can say that 4.9% and yes, we regard it as a hard target, at least internally.
I guess the question comes from the 4.8%, I I think many had to view it as a hard target. And then
And it is?
Yes, of course, by then, with the transformation costs being added on top. So are there any other
But that is because the life doesn't end in 2018. So we are delivering. What we said 3 years from now more or less when we said flat 2016 or 2018, honestly, I think it's crazy to make these kind of commitments, but that is how the market works because no one knows. So you get wiser and wiser and we are on a transformational journey. If we did nothing, I will be happy to do it.
Then it's not so difficult. So if you don't change anything, then of course, you have much better predictability. If you change everything and at the same time, it's actually pretty difficult to control fully. So 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 and then stay with a target 2 years ahead that has to be at the euro's end. So I'm not guiding for forgiveness or for more understanding that this is basically what is going on, right?
So we, of course, are trying to have these targets to have something to steer towards and something to guide towards. But 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 2, 3 years into the journey as we are, to be honest. But let's see.
Can I ask one question on capital? I mean, you remain without the buffer. 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? Well, not the policy per se, but capital planning?
No, but we have included in the kind of type of outlook we do, we have included our best estimate on how the different Basel IV proposals, remembering you have 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. And then you can have some because we are entering a new as part of the redom installation project, we are moving from Sweden to ECB and there can be some transitional thing we don't know about, but 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.
So that is how we have done it. So it's actually more looking on 2021 where you have a full load, right? Then you have a capital flow that will start being phased in, but that will not really be restricted for us before somewhat later. But 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. But that is included in the plan.
Okay. 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 JPMorgan. Please go ahead.
Hi, good morning. Only one question from me. Intangible assets have built up quite significantly over the last 2 years due to the investments that you have done. And they now currently stand at $4,100,000,000 Can I reconfirm that you earlier said that it will peak in 2020? And where do you see that peaking in terms of $1,000,000,000 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 SEK 4,000,000,000 is coming from. The capitalized IT investments will peak in 2020 at a level around DKK2.5 billion.
I'm looking at your balance sheet disclosure where you have 4,071 as intangible assets.
Yes, we have goodwill there as well.
Yes, but forget goodwill, that's a constant model, right, where we oh, I don't know how many years. But that's not really interesting. The interesting part is the so called intangibles, I. E, the capitalized IT investments. They will grow to $2,500,000,000 and they are important.
So you should follow that. So that is the estimate and that is the implications you will have in depreciation and amortization and that was why I said that, that will peak in 2021 and we discussed earlier today the expected level in 2021. So you more or less and that will then be around the peak of depreciation and amortization according to the current plans. So 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. So we'll make sure that, that value is correct.
Yes. And any comments on the average amortization duration?
But yes, well, the average but that is we are following all kind of I'm not an accountant, but we are for sure in compliance with all the necessary accounting rules. And I think the longest we have on for the
probably for the
co banking part. If you look at the for the probably for the co banking part.
If you look at the biggest project, co banking platform and some other, we have 15 years. Otherwise, it's 5 or 10, roughly.
Between 5 15,
yes.
Yes. Okay. Thank you.
Next question please.
From Mediobanca, we will take our next question from Riccardo Rivera. Please go ahead.
Yes. Good morning. Good morning to everybody. Thanks for taking my questions. I have 2, 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. But when we move out of the cloud and we get back to the real world, what I notice is that the loan book of Nordea was €341,000,000,000 at the end of 2015. And now we are just below EUR 315,000,000,000. And if I look at your closest peers in the area, they had a completely divergent trend in the loan book.
So 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. And should we expect this divergent trend with the rest of the industry to continue over the next 2 years? Because you can digitalize what you want, but 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 4,900,000,000 is the starting point at the end of this year. This excludes Luminor EUR 75,000,000. From one of your slides you say that the transformational savings amount to BRL900,000,000. 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 €600,000,000 So I'm still short of €300,000,000 which I don't understand where those come from.
Is this inflation or maybe within the EUR 600,000,000 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 reason why the stock is down 4.5%.
You know much more about why the stock is down than I do. But if I can ask you 2 very good questions. So the first one was on lending. And 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, and it will continue to do that.
Consumer, on collateralized consumer lending is more or less stable. On corporate, yes, it's down. And I think we have mentioned several times that we deliberately are derisking, which is mainly happening in the corporate book. So yes, corporate book is down from end of 'fifteen to now and that's by design, it's a choice and 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.
So there you are on that, and I think we agree. On the cost picture, so gross $900,000,000 out, dollars 100,000,000 net approximately. So the remaining part is, as we discussed, depreciation up with slightly more than €300,000,000 underlying cost rate of slightly more than €300,000,000 around €700,000,000 And then we as we have also started or 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. So in the next 4 years, we will do new investments there.
In certain areas, we will do new net investments. So it's not only what we have done and there's a cost effect of that. So, 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 SEK 900,000,000 then we have the cost pressure of some SEK700,000,000. Then also in 2021, we will have transformational costs. And if you use SEK100,000,000 as a number, so then you have net down by 100. So that's the easy way to bridge it.
Okay. Okay. That is a bit clear. If I may a third question, sorry. On NII, if I remember correctly, in the last quarter, you mentioned €25,000,000 one off.
So the starting point should have been €1,200,000,000 then you had one day more this quarter. But again, but they are fell short of EUR 15,000,000 in this quarter. Is there any other one off in this quarter that you 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 €20,000,000 in this quarter. And then 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 close, which has started, and we got a quite significantly extraordinary prepayment, meaning that we got around £5,000,000 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. So you said the intangible build will peak in 2020 at €2,500,000,000 That's is that a growth or a net number?
That's a total number. And it includes everything.
Okay. So, but then that will also include the amortization within the intangibles. So what is the number X amortization?
I don't understand the question. The capitalized amount of intangible the intangibles, which is capitalized investments, will peak in 2020 at €2,500,000,000 including co 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 and we have indicated the number around 500 €1,000,000 plus and that's it.
Okay. So in other words, the other way of putting it is you're incurring CHF 150,000,000 per year transformation costs on the P and L over the next, say, 4 years.
Yes.
Now just related to that, how much is on top of the SEK 150,000,000 that is not on the P and L?
But that is what I have said. We are at around $1,600,000,000 $1,500,000,000 in capitalized. 1.7, yes, it increases all the time. 1.7 now and that will go to 2.5. So then you and they will be relatively linear.
So you can extrapolate for that. That is what is not coming on the P and L.
But I think you're mixing up things here a little bit. I mean, the transformation cost, I mean, that's basically cost for lowering the long term cost of the bank, I. E, to lower the number of employees and other things.
Transformation cost these transformation cost has nothing to do with the other discussion. So transformation cost is because we have big gross movements in our labor force. So that's transformation cost and a few other small things. The intangibles is all the IT investments we are doing where we are supposed to capitalize. So that is how it is.
And I think we have been pretty clear on the numbers here.
Okay. So can I then assume it's around €100,000,000 a quarter? So that's what it was in late between Q3 and Q2?
Yes. But they will go down because as I said, the gross investment spend per year will go down. We have also said that peaked in 2017, it will be somewhat lower, around €150,000,000 lower in 2018, it will be again lower into 2019 and so on. So you more or less have all the math all the numbers you need now I think to do the math.
Okay. Thank you.
Thank you. Next question please.
Tim Bergel from Deutsche Bank. Your line is open.
Hello. Thank you. Just I think most of my questions have been answered, but if you could just elaborate a little bit on the sort of net 4,000 of your own employees and 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. But 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 where that is in terms 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.
Yes. I think if we take it in a kind of business area dimension, I think personal banking followed by CPB, you have a lot of you have a big part of the $4,000 there. It's back to again the discussion we had about moving from less physical meetings to more remote meetings. And that will free up a lot of productivity, so you can serve the same amount of customers with significantly less people. They would somewhat do the same in CBB with the big business banking segment of around 500,000 customers.
So quite a lot of frontmiddle 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 process where we have 1300 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, that would also be significant reductions there. So 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.
It will come from Jacob Kruse from Autonomous. Please go ahead.
Thank you. My questions have
been asked. Thank you very much.
Okay. We'll now move to Adrian Cighi from Royal Bank of Canada.
Hi, there. Just two clarifications, please. 1 on the NII outlook for 2018 and one on capital. So for the outlook, my understanding from what you said earlier was that you expect flat margins, lower wholesale cost of funding to offset the increased end resolution fund, which you estimate at EUR 105,000,000 and then the NII development to come from whatever volume brought, would 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?
And then the second question on capital. You're obviously accruing for €0.66 now, are above the high end of your management buffer and expect no IFRS 9 next year. But yet you mentioned that you're now 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, yes. 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 at least in not least in CPB. I think that will take still some time.
So 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 hotel, and I don't dare judge on that. So yes, a positive volume effect. Whether or not it will be exactly with the market or not on a combined level, I don't know. But it will at least be a positive effect. That's my key expectation.
The other question was on dividend. I don't think we have that much more to add. I think what 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. But I don't think we will commit anywhere closer other than yes, we will be able to meet that with high certainty, I believe, including Basel, including redomiciliation, 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? I mean, you said you're planning for fully loaded Basel IV no matter sort of what the actual final proposal ends up being. But within the time period, you will most likely also retomisile. 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. So 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 2022, how it will hit us. I think we have been pretty conservative. But as I said, we have only entered the initial discussions.
So on round redomiciliation, 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 we 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. And I don't think we can 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.
There are no questions at this time. I would like to turn the conference back over to Seif Spicher for any additional or closing remarks.
Thank you very much. It's been a lengthy time here, but I hope you have all your answers questions answered. And then there would be a new opportunity tomorrow at 9 a. M. CET, where there's a webcasted conference, where we'll go through even more details on this program.
So thanks very much for coming, and see you soon. Thank you,