Good morning, everyone, and welcome to this press conference, where we will present our Q1 results of 2017. This press conference is webcasted for an international audience, so therefore, it will be held in English. And I would also like to say a warm welcome to those joining us online. Our President and CEO, Kasper von Kostkul, will present the results, and then we'll open up for some short high level questions. After that, we will invite 7 journalists to join us outside this room for 101s with Casper.
And the Q and A session will follow for more detailed questions from analysts hosted by our COO, Thorsten Hagen Jorgensen and Head of IR, Rodney Albion. So should we start the presentation?
We start it out. The floor is yours. Also warm welcome. Good to see you all here. I would say 1 quarter has already gone again.
So we're well into 'seventeen. Actually, we're onethree into 'seventeen. So I think time moves fast. I was actually before I just jump into Q1, I wanted to actually maybe lay the scene as what is actually where are we actually focusing? What's actually happening?
And when we look ahead, it's 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. Of course, fundamentally, the thing we do is focus on customers. We're only here for one reason, that's customers. But then we look at this and what are 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. So 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 the bank. And 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. But 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.
When I then look at those key critical elements that we will be focusing on, I also look at kind of what do I want to achieve. 1, 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. And the geopolitical risks that we're all facing over the coming years, resilience is key. So 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, but resilience, I think, is key.
Resilience today and resilience in the future. But it's not only about resilience over the existing, it's renewal. You 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. So it is about Renewal.
And there the simplification that we are doing, the core bank system replacement and the whole digit that delivers is key. Same thing is also, of course, new payment strategies that are coming in. And there is no business transformation unless you have a real cultural transformation. Change the behavior of how bank operating works, change the behavior of individuals, how you run it. And 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. So a lot of change in that side. And it's also about not only renewal, but frankly, doing things completely different. And that's what I call reorientation. That is actually the future operating model.
During 'seventeen, you'll hear a lot more from us is that how will the bank actually look like not only in 'seventeen, 'eighteen, but really in 'twenty, 'twenty one, 'twenty two because it will look very different than it looks today. So those are the things that you will be hearing about. Yes, we are hearing about Q1. That's about numbers, but I did want to put that there because that actually lays the ground what we are doing day in and day. And we are not managing the bank for the quarter.
We are managing the bank to be a better bank for our customers, number 1, 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, 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 the corner in terms of declining NII with the negative rates. So solid on NII and also solid on fair value. But 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 are going through, which is, of course, the transformation that I'm talking about.
I still see that the cost in 2017 will be 2% to 3% up from 2016. That's what we have said, and that's what I believe. And then when I look at longer term, I mean longer term into 'eighteen, I'm still maintaining my ambition and projection that we will have cost in 'eighteen on the 'sixteen level. So that's unchanged. Credit quality, really solid in my mind, unchanged, somewhat improved.
If you look at loan loss level, somewhat down from last year. And also when I look at the coming quarters, I don't see a change there. So I think we are operating at somewhat below the 10 year average, and I don't see a change. So good credit quality. And of course, again, important when I talk about resilience capital, our capital has again been improved.
We have now had a core Tier 1 ratio of 18.8% and solidly within kind of our management buffer level. The numbers, I will not go through. I usually don't do that. But if I highlight two numbers, of course, the total income line, plus 6% and then operating profit line, plus 8%. So that's why I feel that it's solid and it's good and it's in line with expectation.
And then of the 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. And of course, the negative rate environment hasn't gone anywhere. So the improvement is really driven by really the things we have been doing, re pricing, business selection, what business we do and so on.
And maybe the slight kind of decline, if you can maybe see in Q1, there's not really a decline underlying. That's mostly driven by resolution fees and deposit guarantee fees. But 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. So 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 kind of the second half of last year.
And it does reflect, as I said, a lot of the savings platform. We now have again a record level of asset under management at 331,000,000,000 euros And that, of course, is a strong backbone for that commission line. Of course, commission line also driven by corporate advisory business that we have across our businesses, which is also solid. Interesting kind of fact, not that it's necessarily compelling apples to apples, but I think an interesting fact is that our asset under management is actually now in a number as a number is bigger than our lending number. What it actually actually says is more on what Ado 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. So it is a very much a more balanced and better balanced business, also reflecting the kind of the secular trends and secular and the environment where we operate. But it's I'm not saying a historical moment, it's just an interesting fact demonstrating change. And we have always said or I have always said that when I make a presentation, either a presentation like this, so 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. The net favorable line, I now we look at really if you look at 8 quarters in a row, it just demonstrate again that there's a solid underlying customer business driving this.
And really, it is a very stable, nonvolatile business. Really, what actually gives some volatility within quarters is really the fair value adjustments, which is to me accounting. But when you look at on an annual basis, it is actually very solid customer driven business with, in my mind, very high quality. And again, that I think the Q1 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 kind of a top line number of plus 5 percent is you could say is that alarming? No, because if I look at particularly the investments in the core project that we have, I would take that out and that would take out also the big investments we do in risk and compliance, that number will be 2%. And even the number 2 plus 2% would be mostly a reflection that we have different. I mean, we are calling Q1 on Q1. I still maintain that our cost growth driven by the big investment we are doing will be 2% to 3% on an annual basis in 2017.
That investment that we're doing is continuing at a high level, and 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. And we are doing good progress in those investments. Credit quality, low losses at EUR113,000,000 down from the 4th quarter. I already said the outlook looks good.
The portfolio is solid. 75% of actually that number comes from that one segment, which is oil and offshore, which, of course, has gone through a dramatic historical dramatic shift. We actually had 9 but the progress there is good because we actually had 9 kind of restructurings in this segment that we were part of already again in the Q1 of 'seventeen. We did many last year, so we are kind of working through that. And then We did many last year, so we are kind of working through that.
And hence, when I also look forward, the portfolio, per se, will, of course, stay still at a level which I'm which is not pleasing me, but it will not actually impact our numbers going forward. So I think that the overall credit situation also going forward will be within what I have said. So in that sense, again, very pleasing. And very importantly for resilience capital and really the capital increased by 40 basis points in 1 quarter, again, since we generate capital. We are now 140 basis points above kind of regulatory requirements.
As said, our management buffer is from 50 basis points to 150 basis points. So we're within that. And I think that makes me feel very good. It's really driven by profit, net dividend. Remember, we are accruing as well.
So 40 basis points within 1 quarter shows really the capital generation machine that we have been, not only this only last year, but we've been really last over the last 10 years and longer. Simplification program is not a and you heard me say that already last time, it's not a PowerPoint. It's not a plan. It's not a bad talk. It is about a lot of deliveries.
We have come a long way where we stand today. 17 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. So that's basically a bank. Those are the 4 platforms. And we will have a modern, simplified, big deliveries in 2017, of course, continuing in 2018 into 2019.
But we always said 'sixteen, 'seventeen, 'eighteen into 'nineteen are the heavy deliveries and 'seventeen 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 whole bank onto the new platform. It's happening. I know that I think it's exciting.
But it's also now in delivering, I said, more deliveries on digital, the more deliveries that you can really tangibly see. We want to be at the forefront of digital development, digital deliveries, and we want to do it also with leading partners, leading international partners, leading regional partners or local partners. I don't know if you'd like to hear, but the 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, but the mobile is more and more a platform for banking. And that's why this is so important. We launched Samsung Pay here in Sweden. We did a Nordia wallet, which we will have in all countries, which allows for contactless payments, both locally and internationally. And then we also we're the first one really to start peer to peer payments in Finland with Sirto.
Other banks will also follow that. And then we really have a start having more than peer to peer payments in all four countries. So digital deliveries, you can see that they will come more and more. But it's not only about the consumer, us as individuals. It is also about new exciting services to our corporate side.
I think 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 profile country profiles, industry profiles analysis and so on. And we have lots of digital users that's growing. And 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. So this Nordea trade portal is something that I think has had a fantastic exciting start and also have the as I said, the lobby and trade club as part of this is something that pleases me. Savings, I already mentioned SEK 331,000,000 is the number, which is 3.31,000,000 is the asset under management number. But 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 partnership with global leaders, BlackRock, JPMorgan, Wellington, just to mention a few, and Hanpek, really strong funds that give more choice to our customers. And then also when looking look at our own funds, we are getting awards, Morningstar awards really in all our markets, both for short term performance, the 1 year performance, but also longer term performance. So 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, 1, good in capital management, but you need to be a learner in what you're doing.
You need to actually be able to show your relevance to your customers. And the only way you can show relevant or how you demonstrate relevance is that you are in a leading position in each of the markets because you then have your competence and 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 know it's actually your work exciting, exciting and scary at the same time. Change that is happening is open banking.
I see this as an opportunity. So 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 regulatory changes or regulatory needs, PSD2. But I see it also as an opportunity to be in the lead of, again, as I said, partnership. So what we have done really is one of the first one to launch this developer portal.
We have now around 600 pre registrations that are on this portal that want to actually start testing on how to work with Nordea and 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. And we want to be a leader. Yes, it's also a daunting thing because that's completely can change the business models that we will all operate.
But if we want to be in the lead, then we also want to be first in actually doing these things. And of course, Open Banking is not only partners, but it's also for us to be able to be open and go out there to other platforms. So this is something that you will hear a lot more about. And I think preregistration is there, but I think in summer, we start testing. And you should 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's a lot of discussion about 10 years after the financial crisis And a lot of myths, I think, that is that are out there. This is a very complex area. What is banks?
Are we posing a risk to society? Is there there's a risk in banking. There's risk in finance. But I think we have broken the link between banking and the taxpayer. And I think that is not fully recognized.
There's lots of things that have happened, and I could spend an hour here to say all the different things. But 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'll just highlight that of the last stress test that was done, now we actually operate at higher. And this was stressed as at levels which 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 emphasized that over the last 10 years, which has been a volatile 10 years post 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 1 quarter and that was 8%. That's 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. Free crisis, we were one of the strongest banks in Europe and we probably had bail in about that in less than 10%.
With the new regimes in place, we will have closer to 40% 40% tailing of all that. I actually argue, and I say strongly, that link has been broken. Not the only one who says that, but I'm saying that. And 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, we together. And I'm very much for strong capital, well capital that you have those needs that need to be in place.
But 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. Namely have not happened in every jurisdiction, and 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'll 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. But are we excess profits?
I'm actually sad to say to my shareholders that I'm still below average when I compare myself to large blue chip, for example. So that's net number 2. Net number 3 is that we are under taxed. I would wish somebody would make the comparison of who actually pays corporate tax. In the last 10 years, we have paid EUR 9,000,000,000 in corporate tax.
I don't look at any social payments that, of course, we have big employer social payments, etcetera, etcetera. Look at just corporate tax, dollars 9,000,000,000 in 10 years. So it's pretty somebody who has actually those numbers in this region. So I think there's a lot and I think we need to start talking about these issues much more openly. Without emotion, in a pragmatic way, because I think we need the only way we can succeed as a society that we have a functioning financial system, strong well capitalized banks where we 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 have we all have room to improve. But I just want to leave it there so that we can actually discuss that. It's something that we should discuss openly and emotionally in an infragmatic way.
Now I have the real pleasure to introduce you to a very dear colleague of mine, colleague of ours in Nordea, Sofia Vikanda. And Sofia, welcome. It's great to have you here because Sofia is actually Head of the Nordea Innovation Lab in our transaction banking and all of the exciting things that we do, I talked about the future. Sofia, tell me a little bit what you're doing in what are you doing in the innovation level?
Yes. We are we've been around for 1 year, and we are 25 people working in an innovation lab and in incubator type of team and the team focusing on partnership collaboration. And we are a part of a bigger community in Ria with different innovation hubs. We focus mainly on transaction banking, but of course, we incorporate cross banks in order to look at all the customer solutions that we have and the different customer segments. And I mean, 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, change in our way of approaching customers and corporate with customers. And of course, we work with different partners. We are present in several Fintech hubs, and we you mentioned a few partnerships that we have, and 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.
Can you give me maybe an example, particularly from a customer? How does this benefit our customers?
Yes. 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 event company in the world.
They run live events. And the long term goal for them was to look into how can we move our customer experience from being offline to online? So we started up with them and discussed events. What is event all about? What is it that your customers are experiencing in those events?
And how can we move that into utilizing virtual reality technology. We looked at it from a concept perspective, but also really practical. So 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 and looked into what kind of events that their customers would like to participate in through virtual reality and how much they were willing to pay for that. So 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 1 week. I will not really know the findings, but there were some really exciting and interesting findings that we came up with, and we broadened the experience about each other's different industries.
Thank you, Norman. Thank you. I'm super excited about this. With that, maybe I yes, now we have to go back to, yes, Q1. So maybe we 2
or 3 questions, I think, we have time. Yes, I think. Okay. Should we start there?
Peter Ickesov from SEB. Just coming back to some of the myths and the discussions that you had relating to, well, not being addressed, but then also in connection with the government's proposal of raising the resolution, please. Could you just give a bit of a clarification? What do you need
to see for from the government to decide
to not to move? And because if we go back a couple of years ago during AGM last year, for instance, one impact that you would get from the legal change that you made is that your resolution fees will go up by roughly or up to SEK 200,000,000 in 2019. Does the government need to back down on that impact as well for you to decide not to move? Just my first question. I think the way I look at this is it's not us versus the government.
I mean the government needs to do what they want to what they need to do. They need to run their policies, And I fully respect that. That goes without saying. What I need to do is and I think people tend to forget that we are a multinational bank that has a home base in Sweden. We are a Swedish, Finnish, Norwegian, Danish bank.
And what we are looking at is really three things, right? And we're looking at number 1 is that we can operate as a bank. Now we can do that. We have done that. We can operate in an environment where there's a level playing field.
I don't actually care how if it's high or low as long as it's level playing field because I think the levels of payments, etcetera, I think there may be good reasons or bad reasons, but that's not for me to decide. As long as there's level playing field that I can play and compete with the same rules domestically, regionally and versus international competitors. That's number 2. And then my 3rd, at least, maybe not requirement number, I wish is that it's predictable. And I don't think it's for me to negotiate or haggle, let's say, if you put it that way, that if I get this, I get that.
I'm looking at that totality, how do I run the bank where I can serve my customers, serve society and of course serve my shareholders in the best way, whether it's 1 bank, level playing field and predictability. And that's the assessment I would always, always, always make. I think you have to remember, if I'm our 4 core markets are members of the single market. We operate in the single market. There's a vision of a single market.
And then I think with a single rule base, I mean, that's something the European kind of vision of a single market. I'm operating in the most open liberal four markets of the single market. And then I think I should be operating with a common set of rules and level playing field. And that's all I'm assessing. And I think it would be wrong to pinpoint things here, I think, levels, etcetera.
As long as it's fair and equal, then I'm happy. I think we
have a cluster of 3 questions over there. Should we start
with you? Yes. Thank you. I'm Itan Reyes from Exane BNP Paribas. Just following up on that.
You just had a board meeting recently. Can you tell us what's the move discussed there? And what was decision what did the board want to see before they make a decision to sell? I don't really discuss more discussion internally, 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, undemotional, pragmatic assessment of the best home base where to run a multinational bank operating in these four markets. And we will try to do it as quickly as we can.
And I've said it before, my wish would be to be able to have that done and even decide something before summer. But that's I can't say that if that would happen, but that's certainly my wish and my aim. Thanks. Yes. Just try to narrow it down a bit.
Is it given that you would stay with the domicile in Sweden if the Swedish government would back down completely on proposal on the Resolution Fund III? Or would you consider moving anyway? Because we will know that in 6 months, there will be something new in those projects. I think you need to look at I mean, 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 field, but then we're getting into this haggling.
And I think it is all right. It's not up me against the government. I think full respect to what they're doing and how they do it, I then need to assess. And then maybe Swedish needs to do things. But I'm a very strong and a very important player in Sweden, but I'm on 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 limited actually, we 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.
So this is not about trying to avoid our social and society responsibility. We will take that. And I think we again I think it was actually the Swedish TV said here is that we were the 2nd highest mayor of corporate tax here in Sweden, certainly in 2014. I don't know if there's been a statistic 2015 or 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 Sachin Pavinonenzen because we actually need to move from agenda generators?
Thank you so much for coming. Thank you. Okay. So we will continue now with the combined question session here in the room. And then also we have room for questions from the telephone.
But we will start with the questions here in the room. So I suggest then that Jan starts, followed by Andreas, Magnus and Peter. Thank you. No worries, Andreas. So just following up on the previous question there.
When you talk about predictability and level playing field, and I guess there are a number of different factors that you have to consider in this potential decision to move the headquarter. So if you look at the Finnish and the Danish market, from where you stand today, do you feel that Denmark or Finland meet those requirements more. So I'm comparing Denmark and Finland, not leaving Sweden out now. So what then might be the more predictable market and giving you a more level playing field than Finland? So that's my first question.
Thank you. No, but I don't think we are ready for that. As Caso said, we have now initiated a thorough planning session, right? So 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?
So 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. So I think it's premature to indicate if we have a preference. The analysis, thorough analysis will determine that. Okay.
And the second question on the cost side there. Do you still expect the cost growth to come down in the second half as we discussed previously? And I think one of the slides that you showed earlier with the project costs now, was it EUR 47,000,000 or so in the Q1? It should be down at your own Q. Do you expect that to come down now quarter by quarter as well?
So I think the more important one is if you think the group cost growth will fall in the second half. No. But I mean, as we stick to the guidance and of course, as we have said, we are trying to frontload many of the project costs. And I think we will see around midyear a peak of this project portfolio. It will still be significant, but it will start the project portfolio part will start coming down.
And the year, you can say, the effects of the ramp up that happened in many of the line units on compliance risk, etcetera, is also coming to an end. So there will be a leveling off type of starting from around midyear. So yes, it should start coming down. I have to say also that when we did the guidance of 2% to 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.
However, I just want to make it clear that, that will be cost associated with that project. That will be higher. That will come in mainly in second half of the year. But I mean, 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. So no major changes on that, neither on the individual projects or on the total portfolio. Okay. Thanks 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% to 3%, is that considered that the Baltic operations will be falling out? Yes. We have said that, that will be we expect to close that transaction in Q4, and then it will be one line, I would say. We didn't want to update one line, yes. 4th quarter impact, yes, rather than Yes, yes.
Then on asset quality, I see that there's a very sharp increase in energy related impaired loans in the quarter, goes from 116,000,000 to 314,000,000 But 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 2 major restructuring.
We have talked about 10 risk debt restructuring this year. Now we have done 7 already. We have 1 major to do in the second and third quarter. But in the Q1, we're down 2 of these 3 major ones, and that explains the reason why the impaired loans goes up. And that also means that in this segment, you see that we, for the first time, now actually take specific provision.
Previously, we have done collectively to cover that. So if you look at the whole energy sector, we are very well positioned, but you're absolutely right that in this quarter, you see the impaired loans going up for this reason. And then also, when I looked at the energy sector, outside Nordic is almost as big as Norway, and I haven't really paid attention. And you saw the big increase in impaired loans happen outside the Nordic region. 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. Magnus, followed by Peter. Yes. Magnus at ABG.
Just on a couple more detailed questions on the NII. First of all, on of all, on the funding costs that you mentioned this morning that you thought you would be able to mitigate the resolution fund fee impact here on year by lower funding costs. If you can say something about where you are on your MSFR 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, etcetera? That's the first one.
And secondly, I note that Treasury and AI that you've been trying to guide down for, I think, at least 3 quarters in a row remains very high, and now it looks sustainable. Now the question is, is this what you should expect going forward? Finally, just on the volumes, you previously have been talking about 1%, 2 percent, if that's still the relevant number. I think I forgot to write down. I was not aware.
There was a number of confidence in that. Let me just try to keep track on it. The first thing is that if we start on the volume side, yes, I mean, it is probably still in that area, right? So I think that mortgage book more or less unchanged guidance. So 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. But I think otherwise, Wholesale Banking is set for maybe flat. And then you have again the CPP portfolio, which probably will be 0 plus at best. So yes, we are talking about where there's some modest volume growth. So looking on the funding cost in total, we are above our NSFR target.
Where are you? We are about 100%. And we have our internal target. So it looks good. We have seen now the majority of the old expensive funding being rolling off.
So we are set to see a period now of lower funding costs. And it goes, of course, also with the fact that the loan to deposit gap is coming down. So you don't have an increasing funding need. So I think the core elements of funding cost coming down, I mean, the euro amount of funding costs coming down is pretty clear this year and most likely will continue into next year. And 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 kind of should be seen in context of the development of funding cost.
It's fair to say that there's some kind of neutralization. So it's all about more than the same amount. And that should not lead to higher funding costs. No, not net, no exception. And on the question on the group corporate center, we're talking very, very minor things here.
Yes, sorry, if I may say on that one because that is because no, but 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. Treasury is a there's a dynamic link that if you're on 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 some more less capital. So you can say as we have now moved into a territory of being in the higher end of our management portfolio, they will be allowed to use a little more capital and therefore the level of income we saw in Q1 is probably somewhat of a normalized level as they have spent more of explaining a little bit why they were able to maintain a pretty good result in Q1.
And as they now have more flexibility, you can say, I think it's easier for them to manage, but sometimes around the level as they have this flex possibility now without taking a lot of and we are still talking about very low risk appetite type of portfolio. So it's just to give the picture of the treasury income and the dynamics behind it. And just finally, on asset quality, you keep the guidance you have now just a while and this quarter looks pretty much like the last one. The losses are very concentrated in mind. But supercutter shouldn't the loan loss level be able to drop after 2, 3 quarters or so on this one?
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 continued, right? So we are down to specific number of shipping oil and also related to customers and I mean a very given number of farmers in Denmark, I mean that is what it is. And the rest is looking increasingly good. So 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. And then of course, no one knows, right? But that's based on now, I think the certainty around the guidance is only increasing in terms of as it spells out what we had expected. Thank you. Peter?
Yes. Peter Kessel from SV 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, 3%? And until then, should we see funding costs gradually coming down?
Or is it how we now refine that much of the older expensive funding? Yes. The older expensive funding is out. So now, of course, it is this dynamic funding plan planning. So when do you issue the first type of MREL eligible?
Remembering we have around I think we have a nominal stock of SEK 40,000,000,000 of senior unsecured with an average maturity of 4, 5 years, right? So over the next and then you have on MREL, you have until 2022, right? So 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 issue immediately after this. And we prefer to keep the funding plan as something that we don't disclose as such.
But obviously, we will find a good window to just within a foreseeable future. But we have time, and it will happen in a very natural way as part of any way replacing senior unsecured with for now. So it's and that's why the cost is manageable because it's then a spread to whatever senior unsecuritizations we would have to do instead. But just a small clarification just for myself at least. Excluding, say, notes and so on, funding costs SEK 17,000,000 over SEK 16,000,000,000 will maybe be down?
And how would this SEK 18 look over SEK 17,000,000? Are we talking flat then? No. I mean, 2017 or 2016, they will come clearly down because yes, you are learning me interesting something about this. I don't think we will do that much, but we will probably test sometimes during 2017, right?
So you will start to see some effect of that, but I think the net effect will be positive. And then in 2018, it will be more into the neutral type of scenario. Then just on the revenue 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 B pricing is behind us. It's more volume growth that drives NII from here.
Yes. I mean, if you take the big portfolio, I mean, the mortgage book, I don't think you should expect I mean, 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. I mean, we are losing a little market share also on the market, which is not the target is more or less to grow with the market.
So if anything, I hope that we will be positively slightly positively surprised on the volume action. In wholesale Banking, I think they're doing pretty well. If we look aside from Russia, I think if anything, then we might have opportunities to improve the margins partly there. And on the CPP side, you can say we have 2 big effects going on. One is, of course, that we both on the deposit side charge more and more negative, and we are pretty successful with that procedure in Denmark.
I think we will also take some initiatives on some repricing on certain portfolios, sub portfolios within the CBD space during this year. So there might be positive effects from that. The deselection process warning, however, is it gives a mix effect that it's not always positive because some of the customers that goes out have very low probability, I. E, they have a lot of there's a lot of capital tied to these customers. However, their margins are not necessarily lower than the average.
So deselecting some of these customers does not as such improve margin. It's improved profitability, but not necessarily the margin. So net of all of that, I would assume flat, slightly increasing NIM for 'seventeen. Then 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. And 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 the instead of going down now on the Nordic portfolios, I think it will be flat. So that's a positive effect from coming from a constantly declining volume.
And on CPP, I think the net effect is close to 0 probably, right? So and we are losing market shares there also, which is deliberately, of course. But is there any particular market or segment that you would say that's most concerning that you're losing market share? But I'll say concerning. I think there is a remembering that the your mortgage is the hookah among your relationship customers, you're first hoping about personal banking.
So I think there is a limit to how much you want to lose your core customer franchise and that goes with mortgages. So having constantly reducing market shares within the mortgage space is not a I think it's not optimal necessarily. So if anything and I think that is also why now we will probably have a period of not being so aggressive as we I think we have been on the repricing on the market side. We will see if we can align to somewhat more of a market growth. So now we will do an experiment.
We will see whether the phone conference will work or not. So please, operator, open up for questions from the telephone.
Thank you. Our first question comes from Louise Miller from
Hi, good morning and thanks for the presentation and taking my questions. I have 2. 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?
Or and what measure are you currently taking to offset this? And 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 cautious risk around clients? Or is this changes in the offering that you're providing? Thanks.
I think on the net flow side, I think we're trying to describe the dynamics we are now expecting as we have the soft closure on the stable return family or the stable return front in Q3, which was really support in Q4. I think the positive side in Q1 is that we are back on net inflow. And that actually includes if you look on what is now defined as institutional, that's who made that competence. The one is what we call wholesale distribution. And that part is actually now back in positive, is very good.
So this demonstrates that a stable return front was the key product, of course, in that distribution, but not the only one. So there are other products related to this multi asset family of funds that are now picking up in growth. So we have a relatively good inflow there coming from negative in Q4. And then you have traditionally, you do have on Nordic and international institution clients is a bit more volatile, but there's no trend in that, yes, 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. So I think the more positive one was the total distribution again now have net positive inflow. And then 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're looking into a pickup in growth towards this around 4%, 5% annualized net income.
I don't think that aside from the fact that this stable return product was an equity related one and the new products we're mainly saving are fixed income type of related. But aside from that, I don't think actually we have seen any major shift in the asset mix.
The second question sorry, can you hear me? Yes. Hi. So it's on the IT transformation. If you could provide, please, an update on where you're currently what you're currently doing?
I think you're running a project in Finland. How is this taken by the team? And where you're running in terms of costs compared to your target?
The core banking replacement program, you're right, that runs within weeks on time and on cost budget. And 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. And it's a PK for us to put that in place and then putting a real product with real customers doing real transactions interfacing to the Nokia legacy, which will be around for the next 4 or 5 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. So a lot of planning is going in to make that a successful implementation in the autumn.
So 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 2019. So that part of the IT Transformation program, which is the single biggest one, is actually progressing as planned.
And is it fair to say that we can see some benefits in Finland then maybe in 6 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 2 elements that happens when you implement these modules. And we will relatively quickly after we have implemented, we will know more about that. But one is actually that it will be significantly easier to be innovative in front you can see. The whole idea is that time for market will go down significantly and it will be far easier to introduce new features on the product. I mean, changing way of calculating way, changing way of how to interact with the bank around these products.
And 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 frontline productivity gains because of middle office because it's so much simpler. There's no manual interactions. Everything is fully digitalized until it hits the back office until you have fully replaced. So yes, I think it's fair to say that 6 months after you have implemented this, you should be able to evaluate and see some of these results.
So what others have seen is NPS improving a lot, income start improving and front middle office productivity starts improving. But remember, it's a relatively limited suite of products. We're talking about 5 relatively simple savings related products that are introduced. So it is tested now with employees and all kind of things. So this is still a subset, of course.
But the whole idea is that it's a real test now. So it's becoming reality now for this big program. And actually, the time from initiating to having a first real product out there, I have we should not brag too much, but it is actually pretty fast
to have a
real product out after basically 2 years. So my long, long answer, but the short one is we will know more about what you asked about in 6 months after implementation.
Thank you very much.
Next question please from the telephone.
Next question is from Johan Ekblom in Bank of America.
Just a few follow ups. If I can come back to the Wealth Management and the AUM flows. Do I understand you correct then that there is still some sort of legacy impact in the current net income numbers and you are expecting to see a further pickup. And is that really just a reflection of the absence of outflows from the stable return fund? So that's the first question.
And then second, if you can comment a little bit on the corporate activity in the Nordic region. I mean, we had a strong finish last year, we had a decent Q1. How does it look so far in Q2? Or what are your expectations for the next couple of quarters? Yes.
On the net inflows or 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. So from that perspective, the stable return is kind of 0 now going forward. And then the other products in that kind of family is now 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. So that's the reason why we expect that we, after a few quarters here, will 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. And 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, we might see a slightly more positive market We have not really, you can say, taken fully advantage of it now. But it's a little back to what I had to do too 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 CPP space.
So 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. So next question, please.
And our next question is from Matti Aholtas in Danske Bank.
Hi, yes, good morning. Two questions, please. In the Q4 teleconference, of course, you said that the 2 countries were expecting The most repricing is Denmark and Norway. And now when I listen to you, you sound clearly more bearish. Is this a question that or a function of increased competition or how you're advertising for volume growth or what?
And the second question is just a 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 now 50% of the loan losses, at least the net loan losses in the first quarter. No.
But I think we have seen that. I mean, the repricing we did year end, not least in Norway, I mean, are spelling out. So you see a clearly clear repricing impact in Norway. And I think that so if you look on NIB 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 mortgage side and on the volume and market share, as I said.
And I think also Denmark have shown that not least within the CBP space, I mean, this is the market where we have been able to further improve a lot on charging negative rates on the CPP deposits and thereby contributing to an improved margin. So I think it is building out. But you're right, I mean competition has been pretty tough in both countries. And as sentiment is not improving more than there is not a lot underlying volume, then of course competition is there. So I think it has allowed more or less as we have assumed.
We said also at that point in time, we didn't expect that much more in Sweden. So what we will do in Sweden is mainly on a subset of a portfolio in the CPP space, I think. So I don't think we have changed the guidance. The overall NIB will improve full year 2017, I think, compared to '16, no doubt about that. But it seems to be until further, I did somewhat front load the price program.
And on the credit quality thing, please remember that we do also have oil in offshore exposures within Wholesale Banking and CPD. So it's not only in the business unit shipping oil in offshore. So we have a combined effect of 75%. Great. Thanks.
So are there any further questions on the telephone?
There's another question from Riccardo Rovere, Mediobanca.
Just a couple of questions time frame here? Would you be in the position to share with us what the impact should be and how you think your capital requirement should change on the back of this validation?
And similar to that, if you
have an idea of what could be the impact from IFRS 9? Thank you very much. I thought we would have a call without any capital question. I thought we were just about to make it for the first time and I don't know how many quarters, but you saved us there. Yes, I think on the implementation of into Pillar 1 on the PDGF, I mean, my expectations would be that we are hopefully ready to do that in sometimes around Q3.
I think that and that's a guesstimate, of course. I think that we hope to release the Pillar 2 add on equivalent to around 50 basis points. And I think that based on that, when we originally did the estimation on the add on based on somewhat over exposures, so I think we have a little increase. So the real year will be €5,000,000,000 plus, I. E.
Around 70 basis points effect. So net negative effect in Q3 from the implementation according to our estimates in the level of 20 basis points, which I mean is I think is should be relatively manageable. And 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 NIVEA. 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. And we expect to disclose more about this in the Q2 report.
So any further questions from the telephone?
Thanks. Question is from Ronny Gossen, Citi. Please go ahead.
Hi. Yes, it's Ronald from Citi.
I just wanted to follow-up on
the margin guidance and also specifically
on Norway.
So have I got it right when you're saying margins are up year on year, front loaded? So sequentially, from the Q1 NIM level, should we still expect are you still guiding further NIM improvement in the
Q1 level or more stability from here?
Yes. No,
I think you will see a minor improvement from the Q1 level, but not a lot. But meaning, of course, that this in the full year, it will be improving. Please remember that in Norway, the NIBOR movement is very important there. I mean Norway was a disappointment in 2016 whereas NIBOR went up more than we expected. Now we've got the tailwind in the Q1, so the actual mortgage margin increased by 13 basis points, very much due to the NIBOR movement.
So therefore, I mean, that's something we could not control fully. So but if you look at so far in April, the NIBOR has been rather stable if you compare with the average or the Q1. So but it's very much related to the NIBOR movement.
Great. And just a follow-up on Norway, please. I understand the margin point. Could you comment a bit more generically about your views Nordea's views on the Norwegian housing and mortgage market, please, particularly in light of regulatory change?
Yes. I think we have been a bit concerned both about commercial real estate. We have reduced the exposure by approximately 20% over the last 2 years. And we've also, largely, becoming more concerned about the housing market. So we have been a bit more selective.
So if you look at the market growth in Norway, we are growing at approximately half that rate because we are more selective. And you saw, for instance, in Oslo region last year, it increased by 22%. And that we don't think is sustainable, and that's something we are a bit concerned about. So therefore, we have been more selective both on commercial real estate and now also more residential. Great.
Thank you. Next question please.
Next question from Daniel Dossoy in JPMorgan.
Hello and good morning everyone. I've got 2 questions. The first one on capital. You're now at the top end of the 50 to 100 basis points. So just wondering if 150 basis points is sort of the hard upper limit in terms of how much capital you want to hold or whether it's more about it continuing the progressive dividend and whatever remains just remains?
And then secondly, and I realize this is perhaps a little bit premature, but particularly in Norway and in Sweden, you have a very substantial portion 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?
Yes. Things changed over the quarter. So now we have a question of whether or not we will check the 100 and 50 basis points management of our business. Isn't it fantastic? Well, I don't know.
I mean, I don't think it's a hard target, right? We want really to increase our dividend year by year, and that's the main target. And then I think it's a little premature. Let's see how 2017 spells out and let's discuss then whether or not we should or have ability to force down the capital ratio into the target space. But remember, the 50 basis points is a hard one.
The 150 basis points, I think, we can be a bit more relaxed upon. On the floating rate, I mean, we are used to that in many of the markets and it changes. So we are used to managing them, but we both use pricing dynamically and we, of course, use cash flow assessments. And I think that we have very good processes for assessing the risk of whatever type of product customers take. We mainly use pricing as a tool to direct it.
So we are not particularly and I don't think we have seen a major change in any of the portfolio that makes us worried 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 great granting processes. That's the key, and I think we have demonstrated that we are fairly good at that. And Daniel, please remember that we stressed that all our customers in Sweden were 8% interest rate. So we are very, very confident about the quality of
the loan book. You mentioned pricing and steering. Let's say compared to a year ago, are you sort of pushing the business 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 cost on it?
Towards fixed, yes.
In both geographies also?
Sorry?
In both regions, so that's Norway and Sweden. And am I missing anything else, any other regions?
No. But I think that's a general notion, right, 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. And then, of course, customers from time to time are happy to take a risk, you can say, and go shorter, go floating, etcetera. But I mean, our general approach to the advisory session and to the discussions we have because it's 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 longer fixings on fixed rate mortgages was about 20 basis points lower than the floating rate. Is that a number that you recognize? And secondly, do you think that is an acceptable sort of margin hit to be taking to from a risk management perspective?
Thank you.
No, we don't see that kind of differences. We don't comment. But you can say, in general, margins are attached over on fixed because we also have lower costs related to that. And it's obviously higher safety to keep the customer for longer. But 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. So thank you very much for calling in and for you who are here physically. You look all very pretty. And please don't hesitate to call either me, Pavel or Andreas if you have any further questions.
And those of you who are in London are most welcome for the breakfast at 8 am tomorrow. See you all. Thank you. Thank you.
Thank you for calling.