Good morning, everyone. Welcome to this press conference where we will present our first quarter results of 2017. This press conference is webcasted for an international audience. Therefore, it will be held in English. I would also like to say a warm welcome to those joining us online. Our President and CEO, Casper von Koskull, will present the results, and then we will open up for some short high-level questions. After that, we will invite the attending journalists to join us outside this room for one-on-ones with Casper. The Q&A session will follow for more detailed questions from the analysts, hosted by our COO, Torsten Hagen Jørgensen, and Head of IR, Rodney Alfvén. Should we start the presentation?
We start.
The floor is yours.
Also, warm welcome. Good to see you all here. I want to say one quarter has already gone again. We are well into 2017. Actually, we are one third into 2017, I think time moves fast. Actually, before I just jump into Q1, I wanted to maybe lay the scene as where are we actually focusing? What is actually happening? When we look ahead, it is better first to look back and say, what were our key focus areas in 2016 in terms of where we felt that the key deliveries needed to be? Okay. Of course, fundamentally, the thing we do is focus on customers. We are only here for one reason, that is customers. We look at this one. What were the focus areas in 2016? Risk and compliance, I told you that more than a year ago.
Simplification really as the core of our transformation to the bank that we want to be, a truly front-to-back digital bank. Digital deliveries, really building that customer interface with digital products, digital services, and of course, cost and capital efficiency, key for the industry that we are operating in. That was 2016. What is 2017? It's frankly the same. It is risk and compliance. It is simplification, really the big transformation that we are doing. It will be more digital. We did a lot of digital in 2016, but you didn't see that many digital deliveries in 2016. You will see a lot more deliveries in 2017. Cost and capital efficiency are at the core of how you run a bank. To me, customer satisfaction is something that I will put a specific emphasis in 2017.
Everything we do in the bank, all the new investments, the transformation, the core bank system replacement, digital, everything is done for customer satisfaction. I want to have a special specific focus on also short- and long-term customer satisfaction. It's something I cannot accept the fact that we do not have the customer satisfaction at the level where it should be. I look at those key critical elements that we will be focusing on, I also looked at what do I want to achieve? One, I think for any organization, particularly a financial institution operating in the environment we operate with relatively low growth, longer term, I think. Low rates longer term. Negative for us, of course, here in this region. The geopolitical risks that we're all facing over the coming years, resilience is key.
One of the things that you will see and we will talk about is how to further improve the resilience of this bank. We are probably one of the strongest, best capitalized, and profitable banks in the region, resilience, I think is key. Resilience today and resilience in the future. It's not only about resilience of the existing, it's renewal. We need to renew the bank. We are living in a world where there's a fundamental big shift, which is driven by digital, mobile, and really AI. AI then being big data, robotics, and everything else. It is about renewing. There, the simplification that we are doing, the core bank system replacement, and the whole digital deliveries is key. Same thing is also, of course, new payment strategies that are coming in. There is no business transformation unless you have a real cultural transformation.
Change the behavior of how a bank operates and works. Change the behavior of individuals, how you run it. It's all about people. It's about people, retraining, educating people, but it's also bringing in completely new talent into a bank that we haven't had before. A lot of change in that side. It's also about not only renewal, but frankly, doing things completely different. That's what I call reorientation. That is actually the future operating model. During 2017, you'll hear a lot more from us is that how will the bank actually look like, not only in 2017, 2018, but really in 2020, 2021, 2022, because it will look very different than it looks today. Those are the things that you will be hear about.
Yes, we are here about Q1, that's about numbers. I did want to put that there because that actually lays the ground what we are doing day in and day out. We are not managing the bank for the quarter. We are managing the bank to be a better bank for our customers, number one, and then, of course, delivering also. That is what delivers. When I look at the highlights of the quarter, first of all, I think it's a solid quarter. It's a good quarter, and frankly, quite undramatic. It's very much according to certainly my expectations. Revenues are up. There's a revenue momentum compared to last year. Predominantly driven by the commission line. Commission line driven by the whole savings platform and corporate advisory. Solid on NII, given that we have now turned a corner in terms of declining NII with the negative rates.
Solid on NII and also solid on fair value. Really the commission line is that shows. Costs are up, but costs are in line with what we are planning and have been planning, really driven by a very heavy investment program that we're going through, which is of course the transformation that I'm talking about. I still see that the cost in 2017 will be 2%-3% up from 2016. That's what we have said, and that's what I believe. When I look at longer term, I mean longer term into 2018, I'm still maintaining my ambition and projection that we will have cost in 2018 on the 2016 level. That's unchanged. Credit quality, really solid in my mind, unchanged, somewhat improved. If you look at the loan loss level, somewhat down from last year.
When I look at the coming quarters, I don't see a change there. I think we are operating at somewhat below the 10-year average, and I don't see a change. Good credit quality. Again important when I talk about resilience capital, our capital has again been improved. We are now at a 4.1% ratio of 18.8 % and solidly within our management buffer level. The numbers I will not go through. I usually don't do that. If I highlight two numbers, of course, the total income line plus 6% and then operating profit line plus 8%. That's why I feel that it's solid and it's good and it's in line with expectation. The capital line, I want to emphasize again.
On net margin, I said NII, we have now been able to curtail the decline in NII and also decline in the margin itself. That was really driven by the negative rate environment. The negative rate environment hasn't gone anywhere. The improvement is really driven by really the things we have been doing, repricing, business selection, what business we do and so on. Maybe the slight decline, if you can maybe see in the first quarter, is not really a decline underlying. That's mostly driven by resolution fees and deposit guarantee fees. The underlying margin and margin improvement, which I have been talking about, is coming through and will also continue, not at a huge rate, but it will improve. What we have said there is also happening. The fee commission line, I have already mentioned.
That really shows the momentum that we have been able to get into the business really since second half of last year. It does reflect, as I said, a lot of the savings platform we now have, again, a record level of asset under management at EUR 331 billion. That, of course, is a strong backbone for that commission line. Commission line also driven by corporate advisory business that we have across our businesses, which is also solid. Interesting fact, not that it's necessarily comparing apples to apples, but I think an interesting fact is that our asset under management is actually now as a number is bigger than our lending number. What it actually says is more what I've always said is about the change in both business mix and change in business model.
It is actually a thing that we have shown that we can transform and change the bank as the environment changes. It is a very much a more balanced and better balanced business, also reflecting the secular trends and secular and the environment where we operate. I'm not saying at the historical moment, it's just an interesting fact demonstrating change. You have always said, or I have always said that when I make a presentation, either a presentation like this or internal, particularly change is probably the biggest or not the biggest, it's the word that I use the most, because change is something that is constant. Net stable line. Now if you look at eight quarters in a row, it just demonstrate again that there's a solid underlying customer business driving this. Really it is a very stable, non-volatile business.
Really what actually gives some volatility within quarters is really the fair value adjustments, which is to me accounting. When you look at on an annual basis, it is actually very solid customer driven business with, in my mind, very high quality. Again, that I think the first quarter shows that that is continuing and it's coming very much the way I would have expected that. Cost, I already mentioned. Cost, maybe a top line number of +5 is, you could say, is that alarming? No, because if I look at particularly the investments in the core project that we have, that I would take that out and I would take out also the big investments we're doing risk and compliance. That number will be 2, and even the number 2 +2% would be mostly a reflection that we have different.
I'm calling first quarter and first quarter, I still maintain that our cost growth driven by the big investment we are doing will be 2%-3% on an annual basis in 2017. That investment that we're doing is continuing at a high level, I actually feel very good about doing those investments because we are creating a better bank, as I said. We are not only preparing, we are creating the future bank that is then truly digital front to back with that big core bank system replacement. We are making good progress in those investments. Credit quality. Loan losses at EUR 113 million, down from the fourth quarter. I already said the outlook looks good. The portfolio is solid. 75% of that number comes from that one segment, which is oil and offshore, which of course, has gone through a historical dramatic shift.
The progress there is good because we actually had nine restructurings in this segment that we were part of already, again, in Q1 2017. We did many last year, so we are working through that. Hence, when I also look forward, the portfolio per se will, of course, stay still at a level which is not pleasing me, but it will not actually impact our numbers going forward. I think that the overall credit situation also going forward will be within what I have said. In that sense, again, very pleasing. Very importantly for resilience, capital, and really the capital increased by 40 basis points in one quarter, again, says we generate capital. We are now 140 basis points above regulatory requirements.
I've said our management buffer is from 50 to 150, so we're within that, I think that makes me feel very good. It's really driven by profit net dividend. Remember, we are accruing as well. 40 basis points within one quarter shows really the capital generation machine that we have been not only this, only last year, but we've been really over the last 10 years and longer. Simplification program is not a, you heard me say that already last time, is not a PowerPoint. It's not a plan. It's not about talk. It is about a lot of deliveries. We have come a long way where we stand today. 2017 is a lot of deliveries, and it's really deliveries on all four of the platforms that a modern bank has.
The core banking platform, the payment platform, the data platform or group data platform, and customer and counterparty platform. That's basically a bank. Those are the four platforms, and we will have a modern, simplified, big deliveries in 2017, of course, continuing in 2018 into 2019. We always said 2016, 2017, 2018, into 2019 are the heavy deliveries, and 2017 is very critical, and we are delivering according to our own plans. Particularly post-summer period will be critical when we start really shifting a lot of the deposit and savings in Finland. That is shifting really the old bank onto the new platform. It's happening, I think it's exciting. It's also now in delivering, I said more deliveries on digital, but more deliveries that you can really tangibly see.
We want to be at the forefront of digital development, digital deliveries, We want to do it also with leading partners, leading international partners, leading regional partners or local partners. I don't really care. Quality partners to deliver more exciting products, services to our customers. That's really the key. The customer gets something that really serves their needs. A lot of this will be on mobile payments, the mobile is more and more a platform for banking, That's why this is so important. We launched Samsung Pay here in Sweden. We did Nordea Wallet, which we will have in all countries, which allows for contactless payments both locally and internationally. Then we also were the first one really to start peer-to-peer payments in Finland with Siirto. Other banks will also follow that, and then we really start having modern peer-to-peer payments in all four countries.
The digital deliveries, you can see that they will come more and more. It's not only about the consumer, us as individuals. It is also about new, exciting services to our corporate side. I take one example is just Nordea Trade Portal, which is really directed towards our SME customers, where you're part of a trade club. You get connections to more than 15,000 other players. It's a portal that gives you opportunity to look at how you can grow your business, country profiles, industry profiles, analysis, and so on. We have lots of registered users that's growing. This is something that gives value to our customers. Really helps them improve their businesses, and of course, helps us serve them in a better way and also helps us to attract new customers.
This Nordea Trade Portal is something that I think has had a fantastically exciting start, and also have the, as I said, the Nordea Trade Club as part of this is something that pleases me. Savings, I already mentioned 331 is the number, which is EUR 331 billion is the asset under management number. It's not only a number, it's also what the quality that you put behind it. We have now strengthening also the offering that we have in place. We have forged a partnership with global leaders, BlackRock, JP Morgan, Wellington, just to mention a few, and other, really strong funds that give more choice to our customers. Then also when looking at our own funds, we are getting awards, Morningstar Awards, really in all our markets, both for short-term performance, the one-year performance, but also longer-term performance.
Our own funds, external funds with key partners. Partnership, I think is key not only in the digital ways, partnership is key in everything because at the end of the day, it's about how do we best serve our customers. I do want to mention Wholesale Banking as well, because we have, again, shown that we are the leading platform in the Nordics. I ran Wholesale Banking myself, and I said, to be good in Wholesale Banking, you need to be, one, good in capital management, but you need to be a leader in what you're doing. You need to actually be able to show your relevance to your customers.
The only way you can show relevance or how you demonstrate relevance is that you are in a leading position in each of your markets because you then have your competence, then you have the scale to serve on equities, on bonds, and on loans, really key kind of metrics to that we actually shown that we actually lead in this region. Maybe the most, I don't know what I should use, words, exciting and scary at the same time change that is happening is open banking. I see this as an opportunity. What we have now done is we have launched a developer portal for open banking. Open banking, of course, is yes, it's driven by also regulatory changes or regulatory needs, PSD2. I see it also as an opportunity to be in the lead of, again, as I said, partnership.
What we have done really is one of the first ones to launch this developer portal. We have now around 600 pre-registrations on this portal that want to actually start testing on how to work with Nordea, on how to link with us. It is, of course, about you can do account aggregation, you can do payments, customer interface. This is something which is the future of banking, open banking. We want to be a leader. Yes, it is also a daunting thing because that completely can change the business models that we have all operated. If we want to be in the lead, then we also want to be first in actually doing these things. Of course, open banking is not only partners, but it is also for us to be able to be open and go out there to other platforms.
This is something that you will hear a lot more about, and I think pre-registration is there, but I think in summer we start testing. I have gone through some of the 600 pre-registrations. There are exciting names there. Very exciting local, regional, multinational, global names that actually registered on that portal. I want to maybe conclude with a few things. There is a lot of discussion about 10 years after the financial crisis. There is a lot of myths, I think that is out there. This is a very complex area. What is banks, are we posing a risk to society? There is risk in banking, there is risk in finance. I think we have broken the link between banking and the taxpayer, and I think that is not fully recognized.
There is lots of things that have happened, and I could spend an hour here to say all the different things. Just when you look at capital and the capital, because capital is key. We need strong, well-capitalized, and profitable banks, one, to serve the society, but also, one, to make sure that never again happens the fact that society and government and taxpayers pay for banks. I just highlight the last stress test that was done. Now we actually operate at higher. This was stress test at levels with were equal or worse than the '90s crisis that we had in Sweden and showed just the impact on what it had on Nordea. I also emphasize that over the last 10 years, which has been a volatile 10 years, both financial or in the financial crisis, we did not have a single negative quarter in this bank.
The lowest return on equity we had was in one quarter, and that was 8%. That is the stability of the bank because the business model, but also the capital that we have in place. I think the most important thing that actually escapes people is the fact that we have now shifted from a bailout way of resolving banks to bail-in for large banks like ours. Pre-crisis, we were one of the strongest banks in Europe, and we probably had bail-inable debt in less than 10%. With the new regimes in place, we will have closer to 40% bail-inable debt. I actually argue, and I say strongly, that link has been broken. I am not the only one who says that, but I am saying that.
That's why I think we get mixed old world and new world and not recognizing all the things that we have done, not we together. I'm very much for strong capital, well-capitalized, those needs need to be in place. I just want to highlight that because those are myths that are easily there and are thrown quite lightly when people analyze the situation. We have moved from the old world into the new world. Maybe it has not happened in every jurisdiction, but it certainly has happened here. The other myth, number 2, is that we, the banks, are excessively profitable. Am I happy with the result? Yes, I'm happy with the result. I think we have good, solid results. I also say that banks need to be well-capitalized, strong, but they need to be profitable.
The only way we can serve our customers is being profitable, investing into new technologies, and that requires profit. Are we excess profits? I'm actually sad to say to my shareholders that I'm still below average when I compare myself to other large blue-chip, for example. That's myth number 2. Myth number 3 is that we are under-taxed. I wish somebody would make the comparison of who actually pays corporate tax. The last 10 years, we have paid EUR 9 billion in corporate tax. I don't look at any social payments that, of course, we are big employer, social payments, et cetera. I look at just corporate tax, EUR 9 billion in 10 years. Just bring me somebody who has actually those numbers in this region.
I think we need to start talking about these issues much more openly, without emotion, in a pragmatic way, because I think the only way we can succeed as a society is that we have a functioning financial system, strong, well-capitalized banks, where, yes, we need to take our responsibility. I work a lot on our social element, how we behave, and how we will certainly behave also in the future. We work on that, and yes, if you look in the past, we all have room to improve. I just want to leave it there so that we can actually discuss that. It's something that we should discuss openly and without emotion in a pragmatic way. Now, I have the real pleasure to introduce you to a very dear colleague of mine, colleague of ours in Nordea, Sophia Vikander. Sophia, welcome.
It's great to have you here because Sophia is actually head of the Nordea Innovation Lab in our transaction banking. All of the exciting things that we do, I talked about the future. Sophia, tell me a little bit what are you doing in the Innovation Lab?
Yes. We've been around for one year, and we are 25 people, working in an Innovation Lab and in an incubator type of team, the team focusing on partnership collaboration. We are a part of a bigger community in Nordea with different innovation hubs. We focus mainly on transaction banking. Of course, we cooperate across the bank in order to look at all the customer solutions that we have and the different customer segments. The real thing we want to solve is to maximize the understanding of the customer, but also the benefits that we can bring as a bank, and also in the community that we are together with all the corporate customers. We work with new technology. We work with culture change in our way of approaching customers and cooperating with customers. Of course, we work with different partners.
We are present in several fintech hubs. You mentioned a few partnerships that we have. We continue to work with those, and spend a lot of time in order to understand where the industry is moving and where the different industries are actually coming together. Yeah.
Give me maybe an example, specifically from a customer. How does this benefit our customers?
Yeah. One example is Ticketmaster, as you see here. We ran a customer sprint with them. They came to us to discuss digitalization and how virtual reality technology could help them to bring new experiences to customers. Ticketmaster is, as I think most of you know, a part of the largest events company in the world. They run live events. The long-term goal for them was to look into how can we move our customer experience from being offline to online. We started up with them and discussed events. What is events all about? What is it that your customers are experiencing in those events? How can we move that into utilizing virtual reality technology? We looked at it from a concept perspective, but also really practical.
We set up a pop-up store or lab, where we tested or we let people test virtual reality, looking at different events. We interviewed them together with Ticketmaster, looked into what kind of events that their customers would like to participate in through virtual reality. How much they were willing to pay for that. How did that benefit Ticketmaster? They got the opportunity to, in a very short time period, explore how a new technology could help them reach a new customer segment, broaden the experience of their customers, discuss with us how that could work, also from a payment perspective. We looked at different solutions, developed them, prototyped them, and tested them within one week.
I will not really reveal all the findings, there were some really exciting and interesting findings that we came up with, we broadened the experience about each other's different industries.
Thank you.
Thank you.
I'm super excited about this. With that, now we have to go back to Q1, maybe we
Two, three questions, I think we have time for.
Absolutely
We need to go to the journalists.
Okay.
Okay. Shall we start then?
Yes. Hi. Peter, I think we have a cluster of three questions over there. Should we start with you? Yeah, you. Thank you.
Thanks. It's Andreas from Exane BNP Paribas. Just following up on that, you just had a board meeting recently.
Yes.
Could you tell us what's the move discussed there, and what was the decision? What did the board want to see before they make a decision that's there?
The board discussed it internal, but I think I've said it very clearly before, and I've also said it now in our Q1 report, is that, of course, we will do a very thorough, unemotional, pragmatic assessment of the best home base where to run a multinational bank operating in these four markets. We will try to do it as quickly as we can. I've said it before, my wish would be to be able to have that done and even decide something before summer. I can't say that if that would happen, but that's certainly my wish and my aim.
Thanks. Yeah. Just try to narrow it down a bit. Is it a given that you would stay with the domicile in Sweden if the Swedish government would back down completely on the latest proposal on the resolution fund fee, or would you consider moving anyway? Because we all know that in 6 months, there will be something new most likely.
If you put it in my shoes, you need to look at what is level playing field and make that assessment, and that's the assessment I'm making. I don't want to go into this, because then we're getting into this haggling, and I think it is all right. It's not me against the government. I think I have full respect for what they're doing, how they do it. I then need to assess, and there may be Swedish needs to do things, but I'm a very strong and a very important player in Sweden, but I'm not a multinational bank with a Swedish base.
Whatever we do, we will be important here. Whatever we do, we will serve our customers here, and whatever we do, this will be done in a way which has actually limit, actually say no impact on our employees and our customers. This is actually much more of an administrative thing, if you look at it from a kind of regulatory regime. We want to be, and we will be, a very strong contributor to the Swedish society wherever we play. This is not about trying to avoid our social and society responsibility. We will take that, and I think it was actually the Swedish TV said here that we were the second highest payer of corporate tax here in Sweden, certainly in 2014. I don't know if there's been a statistic 2015 and 2016. I don't think that will change.
I will contribute both to customer society and also going forward.
I'm going to ask you to stop there, and can I kindly ask you to save your question for the Annual General Meeting , because we actually need to move to agenda item next.
Thank you so much for coming.
Thank you.
Okay. We will continue now with the combined question session here in the room. Also we have room for questions from the telephone. We will start with the questions here in the room. I suggest then that John starts, followed by Andreas, Magnus, and Peter.
Thank you. [audio distortion] . Just following up on the previous question there. When you talk about predictability and level playing field, I guess there were a number of different factors that you have to consider in this potential decision to move the headquarter. If you look at the Finnish and the Danish market, from where you stand today, do you feel that Denmark or Finland meets those requirements more? I'm comparing Denmark and Finland, leaving Sweden out now. Would Denmark be the more predictable market and giving you that more level playing field than Finland? That's my first question. Thank you.
No, I don't think we are ready for that. As Casper said, we have now initiated thorough planning sessions. We are full steam ahead on doing the work, including the analysis required to decide. I think we have also been clear that in most realistically, it will be either Helsinki or Copenhagen, also due to practical matters, right? We want to stay kind of within our core markets. The operational issue about moving will be pretty insignificant as we have large-scale operations in both countries. I think it's premature to indicate if we have a preference. The thorough analysis will determine that.
Okay, the second question on the cost slide there, do you still expect the cost growth to come down in the second half as we discussed previously? I think one of the slides that you showed earlier with the project costs now, was it EUR 47 million or so in the first quarter, which will be down at QOQ. Do you expect that to come down now quarter by quarter as well? I think the more important one is if you think the group cost growth will fall in the second half. Thank you.
No, I mean, as we stick to the guidance, of course, as we have said, we are trying to front-load many of the project costs. I think we will see around mid-year a peak of this project portfolio. It will still be significant, but the project portfolio part will start coming down. You can say the effects of the ramp-up that happened in many of the line units on compliance, risk, et cetera, is also coming to an end. There will be a leveling off type of starting from around mid-year. Yes, it should start coming down. I have to say also that when we did the guidance of 2%-3%, the current domicile project, which has been initiated, you can say the work has been initiated, of course, there will be cost associated to that. We're not changing the guidance.
I just want to make it clear that there will be cost associated with that project that will be higher, that will come in mainly in second half of the year. We don't as such change our guidance, but obviously this is another interesting project. Everything else as such is, there's no new message really. The projects are running more or less according to plan. They are running as we discussed last quarter. No major changes on that, neither on individual projects or on the total portfolio.
Okay. Thank you so much.
Andreas. Thanks, Andreas from Exane again. Two questions. First one, a follow-up on costs. When you give the cost guidance of 2%-3%, does that consider that the Baltic operations will be falling out?
We have said that we expect to close that transaction in Q4, and then it will be one line, I would say. We then want to be at one line.
Quarter impact rather than-
No. Yes.
On asset quality, I see that there's a very sharp increase in energy-related impaired loans in the quarter. Goes from EUR 116 to EUR 314. Provisions don't increase that much. The coverage goes from 86% to 41% in the quarter. Could you tell us what's driving this big drop there?
Yes. It's basically been two major restructurings. We have talked about 10 debt restructurings this year. Now we have done seven already. We have one major to do in the second and third quarter. In the first quarter, we've done two of these three major ones, and that explains the reason why the impaired loans goes up. That also means that in this segment, you see that we, for the first time now, actually take specific provision. Previously, we have done collective to cover that. If you look at the whole energy sector, we are very well provisioned. You're absolutely right that in this quarter, you see the impaired loans going up for this reason.
When I looked at the energy sector, outside Nordic is almost as big as Norway, I haven't really paid attention. You saw the big increase in impaired loans happen outside the Nordic region.
Yes.
What's the nature of that portfolio? What energy exposure do you have that's not in Norway, really?
It's mainly Russia and Estonia.
Thanks.
Magnus, followed by Peter.
Yeah. Thank you. Magnus at ABG. Just on a couple of more detailed questions on the NII. First of all, on the funding cost that you mentioned this morning, that you thought you would be able to mitigate the resolution fund fee impact hereby by lower funding costs. If you can say something about where you are on your NSFR versus your target. Is there any element here that you will lower your total funding volume? Is there a mix shift versus deposits, expensive maturities, et cetera? That's the first one. Secondly, I note that Treasury and ALM, that you've been trying to guide down for, I think, at least three quarters in a row, remains very high, and now it looks sustainable. The question is this what we should expect going forward?
Just on the volumes, you previously have been talking about 1%-2%, if that's still a relevant number?
I forgot to write down. I was not aware. There was a number of components in that. Let me try to keep track on it. The first thing is that if we start on the volume side, it is probably still in that area. I think that mortgage book, more or less unchanged guidance. There will be some growth, mainly in Sweden, hopefully picking up a little bit in the other markets, but not much from the current levels. I think Wholesale Banking volume decline have come to an end, including Russia, which of course, the focus is to bring down further the loan portfolio. I think otherwise, Wholesale Banking is set for maybe flat. Then you have, again, the C&BB portfolio, which probably will be zero plus at best. Yeah, we are talking about relatively modest volume growth.
Looking on the funding cost in total, we are above our NSFR target.
Where are you?
We're above 100%. We are above our internal target. It looks good. We have seen now the majority of the old expensive funding being rolling off. We are set to see a period now of lower funding costs. It goes, of course, also with the fact that the loan-to-deposit gap is coming down. You don't have increasing funding needs. I think the core element of funding costs coming down, the euro amount of funding costs coming down is pretty clear this year, and most likely will continue into next year. I think that is what Rodney probably have alluded to as we more or less start having a view based on the current proposal, at least on what the MREL effect will be on our funding cost, you can say.
Which is an amount that should be seen in context of the development of funding cost. It's fair to say that there's some kind of utilization. We're talking about more or less the same amount.
MREL should not lead to higher funding costs.
No, not net, no. Exactly.
On the question on the group profit center, we're talking very minor things here.
Oh, yeah. Sorry. Yes, let me say on that one, because it's something we manage very dynamically in the way that, of course, you can say the treasury portfolio or the liquidity buffer have been managed with extremely low risk appetite, and will continue to do so. However, we also treat the treasury exposures in a way that when we are in the high end capital-wise, high end of our management buffer. There's a dynamic link that if you are in the high end, treasury is allowed to spend a bit more capital, and if you're on the low end, they are allowed to spend somewhat less capital.
You can say, as we have now moved into a territory of being in the higher end of our management buffer level, they will be allowed to use a bit more capital, and therefore the level of income you saw in Q1 is probably somewhat of a normalized level as they have spent more, explaining a little bit why they were able to maintain a pretty good result in Q1. As they now have more flexibility, you can say, I think it's easier for them to manage with some certainty around the level as they have this flex possibility now. We are still talking about very low-risk appetite type of portfolio. It's just to give the picture of the treasury income and the dynamics behind it.
Just finally on asset quality. You keep the guidance you have now. It's so while and then this quarter looks pretty much like the last one. The losses are very concentrated in one.
Super concentrated.
Shouldn't the loan loss level be able to drop after two, three quarters or so from this level?
If you look at it as of now, if anything, I think what we have discussed the last couple of quarters, we have talked about a concentration, and it just continues. We are down to a specific number of shipping, oil, and also related customers, and a very given number of farmers in Denmark. That is what it is. The rest is looking increasingly good. It is a super concentration, and that's why the story is the same. We will probably see some additional provision need for some of this concentrated portfolio in the next couple of quarters. Then, of course, no one knows. That's based on now, I think the certainty around the guidance is only increasing in concern as it spells out what we had expected.
Thank you.
Peter.
Yes. Hi, Peter Kessiakoff from SEB again. Just a follow-up on one of the last questions there in terms of funding costs. When do you expect to do an issuance of Tier 3? Until then, should we see funding costs gradually coming down, or is it having now refined as much of the older, expensive funding?
Yeah, the older expensive funding is out. Now, of course, it is this dynamic funding plan planning. When do you issue the first type of MREL-eligible? Remembering we have around, I think we have a nominal stock of EUR 40 billion of senior unsecured with an average maturity of four, five years. Then you have on MREL, you have until 2022. There's a good sufficiently long horizon. I'm sure all the investment banks in the world are telling us that we should do an issuance immediately after this. We prefer to keep the funding plan as something that we don't disclose as such. Obviously, we will find a good window to test within the foreseeable future. We have time, and it will happen in a very natural way as part of any way replacing senior unsecured for now.
That's why the cost is manageable because it's then a spread to whatever senior unsecured issuance we would have to do instead.
Just a small clarification just for myself of this. Excluding, say, Tier 3 notes and so on, funding costs 2017 over 2016, will they be down and how will this 2018 look over 2017? Are we talking flat?
No, 2017 over 2016, they will come clearly down because you are luring me into saying something about issue. I don't think we will do that much. We will probably test it sometime during 2017. You will start seeing some effect of that, but I think the net effect will be positive. In 2018, it will be more into the neutral type of scenario.
Just on the lending side, on margins in general, which were up in the quarter. Expectations going forward, what are your expectations there? It seems like most of the re-pricing is behind us. It's more volume growth that drives NII from here.
If you take the big portfolio, in the mortgage book, I don't think you should expect, we are on good levels now. I don't think you should expect that much more on NIM. I think actually, we have apparently been a leader. We are losing a little market share also on the mortgage book, which is not the target. The target is more or less to grow with the market. If anything, I hope that we will be slightly positively surprised on the volume next year. In Wholesale Banking, I think they're doing pretty well. If we look aside from Russia, I think if anything, we might have opportunities to improve the margins slightly there. On the C&BB side, you can say we have two big effects going on.
One is, of course, that we, both on the deposit side, start to charge more and more negative, and we are pretty successful with that, especially in Denmark. I think we will also take some initiatives on some repricing on certain portfolios, sub-portfolios within the C&BB space during this year. There might be positive effects from that. The deselection process running, however, it gives a mixed effect that is not always positive because some of the customers that go out have very low probability, i.e., there's a lot of capital tied to these customers. However, their margins are not necessarily lower than the average. Deselecting some of these customers does not as such improve margin. It's improved profitability, but not necessarily the margin. Net of all of that, I would assume flat to slightly increasing NIM for 2017.
Just one follow-up on something you said just now. In some markets, you're losing market share on mortgage side. Is there any-
We're basically losing market shares in all segments. I think what I'm trying to say, without shying away from the fact that we are mainly pursuing improving profitability, is that on the mortgage side, I think there's a limit to how much we would like to improve market shares. I think on the large corporate side, I think we have done all the deselection, so we are more set for, I think instead of going down now on the Nordic portfolios, I think it will be flat. That's a positive effect from coming from a constantly declining volume. On C&BB, I think the net effect is close to zero, probably. We are losing market shares there also, which is deliberately, of course.
Is there any particular market or segment that you would say that's most concerning that you're losing market share?
I would not say concerning. I think there is a remembering that your mortgage is the hook product among your relationship customers. You first talking about personal banking. I think there is a limit to how much you want to lose your core customer franchise, and that goes with mortgages. Having constantly losing market shares within the mortgage space is not optimal, necessarily. I think that is also why now we will probably have a period of not being so aggressive as we have been on the repricing on the mortgage side. We will see if we can align to somewhat more of a market growth. Now we will do an experiment. We will see whether the phone conference will work or not. Please, operator, open up for questions from the telephone.
Thank you. Our first question comes from the analyst line.
Hi, good morning, and thanks for the presentation and taking my questions. I have two. The first one is on the assets under management levels and the flows that you're seeing. There are still some institutional outflows but at a lower pace than the previous quarter. Can we say that this is turning the corner? What measure are you currently taking to offset this? Still on the asset management business, I can see there is some shift in the asset mix more towards fixed income than equity. Do you think this is temporarily because there is some more cautiousness around clients, or is this a change in the offering? Thanks.
I think on the net flow side, I think we have tried to describe the dynamics we are now expecting as we had the soft closure on the Stable Return families or the Stable Return Funds in Q3, which was visible in Q4. I think the positive side in Q1 is that we are back on net inflow. That actually includes, if you look on what is now defined as institutional, there are two major components. One is what we call wholesale distribution. That part is actually now back in positive, which is very good. This demonstrates that a Stable Return Fund was the key product, of course, in that distribution, but not the only one. There are other products related to this multi-asset family of funds that are now picking up in growth.
We have a relatively good inflow there coming from negative in Q4. Traditionally you do have on Nordic and international institution clients is a bit more volatile, but there is no trend in that. There was some outflow here, and sometimes we have big inflow. The institutional portfolios goes with big tickets, individual tickets, and therefore you have more volatility. I think the more positive one was the total distribution, again now have net positive inflow. The other source or other big distribution channels are producing good inflow also. Meaning that when we have said earlier that we would have this period where we kind of, you can say, recalibrate a little bit the growth picture as we had this very fantastic growth last year in one particular fund family.
It will probably be more distributed now between products, and we are looking into a pick-up in growth towards this around 4.45% annualized net inflow. I do not think that aside from the fact that this Stable Return product was an equity-related one, and the new products we are mainly selling are fixed income type of related. Aside from that, I do not think actually we have seen any major shift in the asset mix.
The second question. Sorry, can you hear me?
Yes.
Hi. It is on the IT transformation. If you could provide, please, an update on what you are currently doing. I think you are running a project in Finland. How is this taken by the team, and where you are running in terms of cost compared to your target?
The core banking replacement program, you're right. That runs within weeks on time and on cost budget. The big thing here is this suite of savings-related products that we will introduce in Finland in the autumn, which is a very important test because as you have been aware, what we have done up until now is basically building the foundational layer, as it's called, on which you put a module product per country. It's a big effort to put that in place, then putting a real product with real customers doing real transactions interfacing through the Nordea legacy, which will be around for the next four or five years while you are building the new. That's a real test, not about the product per se, the new platform per se, but more our ability to implement into our legacy.
A lot of planning is going in to make that a successful implementation in the autumn. Hopefully that will be done well. We will do a lot of time on evaluating how that went along. You calibrate, then you can say the factory of rolling out these modules, which will then accelerate in 2018 and 2019. That part of the IT transformation program, which is the single biggest one, is actually progressing as planned.
Is it fair to say that we can see some benefits in Finland then maybe in six months after the end of this implementation?
At least the learning from other banks that have done that is that while the significant back-end cost savings are very back-loaded, there are two elements that happens when you implement these modules, and we will relatively quickly after we have implemented them, we will know more about that. One is actually that it will be significantly easier to be innovative in front, you can say. The whole idea is that time to market will go down significantly, and it will be far easier to introduce new features on the product. I mean, changing way of calculating rate, changing way of how to interact with the bank around these products. That, of course, will be tested also as part of having implemented it.
The other learning from others that have done this is that there is front-line productivity gains because of middle office, because it's so much simpler and there's no manual interactions. Everything is fully digitalized until it hits the back office, until you have fully replaced. Yes, I think it's fair to say that six months after you have implemented this, you should be able to evaluate and see some of these results. What others have seen is NPS improving a lot, income start improving, and front middle office productivity starts improving. Remember, it's a relatively limited suite of products. We're talking about five relatively simple savings-related products that are introduced. It is tested now with employees and all kind of things. This is still a subset, of course, but the whole idea is that it's a real test now.
It's becoming reality now for this big program. Actually, the time from initiating to having a first real product out there, we should not brag too much, but it is actually pretty fast to have a real product out after basically two years. A long answer, but the short one is we will know more about what you asked about in six months after implementation.
Thank you very much. Very clear.
Next question, please, from the telephone.
Next question is from Johan Ekblom in Bank of America.
Thank you. Just a few follow-ups. If I can come back to the wealth management and the AUM flows. Do I understand you correctly then that there is still some sort of legacy impact in the current net inflows, and you are expecting to see a further pickup? Is that really just a reflection of the absence of outflows from the Stable Return Fund? That's the first question. Then second, if you can comment a little bit on the corporate activity in the Nordic region. I mean, we had a strong finish to last year, we had a decent Q1. How does it look so far in Q2? What are your expectations for the next couple of quarters?
On the net inflow, the AUM side, I think what you did see in Q4 was a lot of, you can call it, rebalancing among some of the key customers you can try around the Stable Return family. That has come to an end. From that perspective, the Stable Return is kind of zero now going forward. Then the other products in that kind of family have had an inflow, and we expect that that will continue and potentially even increase as we, of course, now invest in finding even more products that we can put into, especially this wholesale distribution, where we have built a very strong brand and a very good possibility for launching new products. That's the reason why we expect that after a few quarters here, we'll be back up on a 4%, 5% annualized inflow.
I think it's also fair to say that on the corporate activity level, which has been really not that strong in the Nordic as such, that there is a sense of improved sentiment slightly. That's also the reason why I say that even though we are not as such pursuing growth in the corporate space, I think if anything, that we might see a slightly more positive market there. We have not really, you can say, taken full advantage of it now, but it's a little bit what I allude to on the wholesale side. I think that they have very strong relationships, and our customers are, if anything, slightly more positive, it seems. The same goes for the core customers in the C&BB space.
too early to call out fully, I think, but maybe slightly more positive sentiment among our corporate customers, I think in the next couple of quarters.
Thank you.
Next question, please.
Thank you. As a reminder, to ask a question, please press star one, and our next question is from Matti Ahokas in Danske Bank.
Hi. Yes, good morning. Two questions, please. In the Q4 teleconference, of course, when you said that the two countries where you expect the most repricing is in Denmark and Norway, now when I listen to you sound clearly more bearish. Is this a question that, or a function of increased competition or higher appetite for volume growth, or what? The second question is just clarification. You said that 75% of the loan losses were from the oil and offshore segment. Is that from growth losses? Because when I look at the oil and offshore segment, it's around 50% of the loan losses, at least the net loan losses in the first quarter.
No, I think we have seen that. The repricing we did year-end, not least in Norway, are spilling out. You see a clear repricing impact in Norway. I think that if you look on NIM for a try to do it on a Norwegian basis, 2016 versus 2017, that is where you will see the biggest improvement. I'm just saying that for now, I think we will hold a little bit how much more we will do, which is, as I said, indirectly something to do with the competitive situation as we do see quite significant impact in Norway also, for example, on the market side and on the volume and market share, as I said. I think also Denmark have shown that, not least within the C&BB space.
This is the market where we have been able to further improve a lot on charging negative rates on the C&BB deposits and thereby contributing to our improved margin. I think it is spilling out. You're right, competition has been pretty tough in both countries, and as sentiment is not improving more than there is not a lot of underlying volume, of course, competition is there. I think it has spilled out more or less as we have assumed. We said also at that point in time, we didn't expect that much more in Sweden. What we were doing in Sweden is mainly on a subset of a portfolio in the C&BB space, I think. I don't think we have changed the guidance. The overall NIM will improve full year 2017, I think, compared to 2016. No doubt about that.
It seems to be until further, I did somewhat front-load the price. On the credit quality thing, please remember that we do also have oil and offshore exposures within Wholesale Banking and C&BB. It's not only in that business unit, shipping, oil, and offshore. We have a combined effect of 75%.
Great. Thanks.
Are there any further questions on the telephone?
Just another question from Riccardo Rovere, Mediobanca.
Yes, good morning to you. Good morning to everybody. Just couple of questions from my side. With regard to the validation of the PD models from the Swedish FSA, is there any timeframe here? Would you be in the position to share with us what the impact should be and how you think your capital requirements should change on the back of this validation? Similar to that, if you have an idea of what could be the impact from IFRS 9. Thank you much.
Well, I thought we would have a call without any capital question. I thought we were just about to make it for the first time in I don't know how many quarters, but you saved us there. Yeah, I think on the implementation of into Pillar 1 on the PD/LGD, my expectations would be that we are hopefully ready to do that in sometime around Q3. That's a guesstimate, of course. I think that we hope to release the Pillar 2 add-on equivalent to around 50 basis points. I think that based on that, when we originally did the estimation on the add-on based on somewhat old exposures, so I think we have a little increase. So the real will be EUR 5 billion plus, i.e., around 70 basis points effect.
Net negative effect in Q3 from the implementation according to our estimates in the level of 20 basis points, which I think should be relatively manageable. On the IFRS 9, I think it's still too early to call out the final conclusions, but I think we can repeat what we have said before that there seems to be nothing indicating at this point in time that this will be a significant effect for Nordea. There will be some different effects, but the net effect, there will be provisioning effect and capital effect, but the net effect will be relatively insignificant. We expect to disclose more about this in the second quarter report. Any further questions from the telephone? Thanks.
Question from Ronit Ghose from Citi. Please go ahead.
Hi. Yeah, it's Ronit from Citi. I just wanted to follow up on the margin guidance and also specifically on Norway. Have I got it right when you're saying margins are up year-on-year, front-loaded? Sequentially from the Q1 NIM level, are you still guiding further NIM improvement from the Q1 level or more stability from here?
Yeah, I think you will see a minor improvement from the Q1 level, but not a lot. Meaning, of course, that the full year will be improving. Please remember that in Norway, the NIBOR movement is very important there. Norway was a disappointment in 2016 because NIBOR went up more than we expected. Now we've got the tailwind in the first quarter, so the actual mortgage margin increased by 30 basis points, very much due to the NIBOR movement. Therefore, that's something we could not control fully. If you look so far in April, the NIBOR has been rather stable if you compare with the average or the first quarter. It's very much related to the NIBOR movement.
Great. Just to follow up on Norway, please. I understand the margin point. Could you comment a bit more generically about Nordea's views on the Norwegian housing and mortgage market, please, particularly in light of regulatory change?
Yeah. I think we have been a bit concerned both about commercial real estate. There we have reduced the exposure by approximately 20% over the last two years. We've also lately becoming more concerned about the housing market. We have been a bit more selective. If you look at the market growth in Norway, we are growing at approximately half that rate because we are more selective. You saw, for instance, in Oslo region last year, it increased by 22%. That we don't think is sustainable, and that's something we are a bit concerned about. Therefore, we have been more selective, both on commercial real estate and now also more residential.
Great. Thank you.
Thanks. Next question, please.
Next question from Daniel Dochy in JP Morgan.
Hello, good morning, everyone. I've got two questions. The first one on capital. You're now at the top end of the 50-100 basis points. Just wondering if 150 basis points is sort of a hard upper limit in terms of how much capital you want to hold, or whether it's more about continuing the progressive dividend and whatever remains, just remains. Secondly, I realize this is perhaps a little bit premature, but particularly in Norway and in Sweden, you have a very substantial proportion of your household customers on floating rate mortgages. Is that something that is of concern to you and perhaps also to the respective local regulators? Thank you.
Yes. Things change over the quarters. Now we have a question of whether or not we will test 150 basis points management buffer. Isn't it fantastic. Well, I don't know. I don't think it's a hard target. We want really to increase our dividend year by year, that's the main target. Then I think it's a little premature. Let's see how 2017 spells out, let's discuss then whether or not we should have ability to force down the capital ratio into the target space. Remember, the 50 basis point is a hard one. The 150, I think we can be a bit more relaxed upon. On the floating rates, we are used to that in many of the markets, it changes. We are used to managing them, that we both use pricing dynamically and we of course use cash flow assessments.
I think that we have very good processes for assessing the risk of whatever type of product customer take. We mainly use pricing as a tool to direct it. We are not particularly, and I don't think we have seen a major change in any of the portfolio that makes us worries about that. The key thing is always to be, including in Norway, by the way, to be keen on having these good credit assessment, and credit granting processes. That's the key, and I think we have demonstrated that we are fairly good at that. Daniel, please remember that we've stress-tested all our customers between the 8% interest rate. We are very confident about the quality of the loan book.
You mentioned pricing and steering. Let's say compared to a year ago, are you pushing the businesses more towards fixed-rate mortgages at all, or is that not really something that you're doing at this stage?
As a general notion, yes. We are.
You are pushing customers towards fixed?
Yes.
In both geographies also?
Sorry?
In both regions, so that's Norway and Sweden. Am I missing anything else? Any other regions?
No, I think that's a general notion that you want to do that as a part of your customer-centric attitude, that the best general advice is, of course, to incentivize customers toward that in general. Then, of course, customers from time to time are happy to take a risk, you can say, and go shorter, go floating, et cetera. Our general approach to the advisory session and to the discussions we have with customers is typically towards, depending on, of course, on your economic capacity, but it's fixed and longer.
Can I just follow up on that? One of your peers earlier in the week mentioned that the margins on fixed-rate mortgages was about 20 basis points lower than the floating rate. Is that a number that you recognize? Secondly, do you think that is an acceptable margin hit to be taking from a risk management perspective? Thank you.
No, we don't see that kind of differences. We don't comment. You can say in general, margins are a touch lower on fixed because we also have lower costs related to that, and it's obviously higher safety to keep the customer for longer. It's not any material difference.
Okay, that's clear. Thank you very much.
Thanks. I think that was the last question from the telephone conference, thank you very much for calling in and for you who are here physically. You look all very pretty. Please don't hesitate to call either me, Pawel, or Andreas if you have any further questions. Those of you who are in London, you're most welcome for the breakfast at 8:00 A.M. tomorrow. See you all. Thank you.
Thank you for calling.