Good day, welcome to the Q4 2016 Nordea Bank AB international telephone conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rodney Alfvén. Please go ahead.
Thank you, operator, welcome to all of you who has called into this telephone conference. We will open up with a very short opening remark. Then we assume that you have read the report and have all the relevant data, we suggest that we go straight through into the Q&A. With that today, we have our Deputy CEO and Group COO, Torsten Hagen Jørgensen. Then we have also our Chief Credit Risk Officer, Ari Kaperi. We are prepared to answer all of your questions and hopefully in a good way. Torsten, can you just do some opening remark, please?
Thank you. Yes. A few key highlights from, I think mainly from the Q4. Happy to see that we delivered on the NII outlook we gave earlier 2016, that we Q4 over Q4 were able to deliver on a small increase. I think it's driven by strong repricing, it looks also looking into 2017 or into this year as that will continue. Some further increases in net interest income, primarily driven from mortgage margins, partly from corporate margins, from the relatively low volume we have alluded to for some quarters now. Very proud to see that we continue to deliver on fee and commission income. It's more or less the usual suspects driving it.
Despite the lower net inflow numbers, I think looking into 2017 also here that we have a good solid base for believing that we will continue to see good stable growth in fee and commission income coming from many different areas, including, as you mentioned, in life also in 2017. Costs, we delivered on the external target. However, I think it's fair to say that the underlying cost development is somewhat higher than we had anticipated a year ago. However, I think we realized during the year that the many good activities we are doing are requiring us to do somewhat more in 2016 and in 2017 than expected. However, we are still very confident that we will be able to deliver on the guidance on the 1% CAGR or the flat 2016 to 2018 costs. I think we're also confident in the asset quality picture.
It came within the 60 basis points long-term average with 15 basis points. I think our outlook is very stable and nothing on an overall level directing us any way to change that. Last on the financial side, but not least, of course, we had a strong finish on the capital side, both on profit and on the RWA development. It allows us to meet our dividend policy and our capital policy, including our ambition to go for a management buffer target of between 75 and 100. Now being at 100, I think we managed to achieve a capital buildup even with an increased Article 3 buffer, a management buffer of 100, so some distance to the 50, and then delivering on the dividend policy.
I think also meaning that everything else equals, I think we are starting the year with a somewhat more stable capital situation than was the case beginning of last year. On the more overall picture of where the group is developing, I think we have seen very good progress in all the different transformational programs we are running. One has almost been concluded, which was the legal structure program or the branchification that are close to being concluded. We have seen enormously good progress in the IT remediation and the compliance remediation program that are expected to be closed by the end of 2017. We have seen the strategic program, the simplification program progressing well, and we would hope to see some first real proof of that during the first half year, where we will have a first product out on the new platform.
All in all, I think a solid and strong result in many different dimensions. With that, I think we will take some questions.
Yes. Operator, you can please open the line for questions.
Thank you. To ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function has been switched off to allow your signal to reach our equipment. Again, to ask a question, please press star one. We will now take a first question from Matti Ahokas from Danske Bank. Please go ahead.
Yes, good afternoon. It's Matti Ahokas here from Danske Bank. Two questions on the asset quality side, please. Rodney mentioned on the press conference this morning that the reason why you had the reversals on the loan losses in Denmark was mainly the mortgage market and the residential mortgages. Is there a model you're using, or is this a function of rising house prices, or could you elaborate a bit more on that? The second question is also on asset quality. You're saying that you expect a stable asset quality going forward. I was just wondering that if there was of the Q4 losses, predominantly they were 90% oil and offshore. How does this fit into the picture going into 2017?
One could think that the oil and offshore losses would decrease, are you assuming that the other losses would increase or what's the kind of logic behind this guidance? Thanks.
Okay, starting from your question related to Denmark and our collective provisions. The decreased collective provisions were due to our collective provisioning model. The parameters in that model is mostly ratings migration, or in this case, scoring migration and also the flow to defaulted exposures. In that way, there is no automatic input coming from the house prices, for example. In that way, we are talking about the real improvement in the quality of our customers in that segment. It was not a major reduction, what we are talking about. Of course, a very promising signal that things are improving also in that loan book. What happens in the future, I would not dare to calculate this to continue on a same pace or even decreasing or accelerating pace in terms of a reduction of collective provisions.
We have to wait and see how this goes. Promising, encouraging signal as such. All in all, this outlook guidance you referred to is based on our own opinion, how do we see this mostly oil and offshore portfolio development and the quality there. It's true that the oil price, of course, it has picked up. Signals these major oil companies in terms of their investments are so that perhaps we should see not any more reduced investments, rather flattening out investments, perhaps gradually increasing investments. When we're talking about the offshore portfolio, that is coming last in the value chain, so to say. These investments these oil companies are starting to do for their production. They are first coming to the land-based production, and this offshore is later in the cycle.
Thereby still we have a high-risk cases in our offshore portfolio. We have still some relatively big ones, big customers, which are now in the process of being restructured in terms of their balance sheet and financings. The point of these restructuring is that they will buy time to see that these investments are also coming on their side. Before we see what is the outcome of these bigger restructurings which are facing few of our clients, only then we can perhaps change our guidance. There are no signals that other parts of our portfolio would start to deteriorate, but we have to remember that now, as you see, if 90% of our current loan losses came from oil and offshore, it means that we had hardly any losses in other parts of the portfolio. We are a big bank.
We have a very big portfolio. I don't dare to expect that nothing will happen in other parts in the coming quarters, so that there's always something. This was perhaps exceptional quarter in terms of those losses. Putting this all together, we have repeated our guidance that in the next quarters we expect roughly this level to continue.
In conclusion, offshore losses are down, but the other losses would increase. That would end up in unchanged, kind of roughly, loan losses.
You can say also in that way, but then again, we don't expect that these offshore losses would rapidly come down, but of course, little by little.
Very good. Thanks a lot then. Congrats on the new job, Ari.
Okay, thanks.
We will now take our next question from Omar Keenan from Deutsche Bank. Please go ahead.
Hi, good afternoon. Thanks very much for taking the questions. I first have a question on the Core Banking Program. When do you think we can start to see the benefits of actual net cost reductions coming into the numbers? Can we see that from 2019? I see that you've reiterated your guidance for cost income to go into the low 40s from 2021. Could you give us a sense as to what proportion from revenues and costs will get us there? My second question is on asset repricing. I can see that this is the first quarter that we no longer have deposit margin headwind in the numbers. Can you give us a summary of which of your key markets are repricing on assets and how quickly? Thank you.
Yeah. On the Core Banking Program, I think it's a very good question, which we are also very occupied with understanding fully. You can say we will know much more when we have executed on the first real product on the platform here during the first half of the year. That is actually what 2017 is very much about, to evaluate the outcome of that. Especially, you can say, on the income side. How popular will this be for customers? Because the idea is, of course, that it allows it to be much simpler for customers, and it allows us to quickly adjust parameters and thereby, features around the offering. That will be one very important evaluation on what type of income effects we can expect going forward.
The other interesting part is, of course, as we start operating new products on the platform, the speed with which we can decommission old process systems, et cetera. Of course, we have an overall business case that are somewhat backloaded because the full cost benefit is relying on typically that you can take broader clusters of system and processes out and fully decommission them, while some of the income benefits can be realized more as we go along. The CBP program or the Core Banking Program per se is probably seeing income effects earlier, and then it will, of course, have certain cost benefits as we go along. The full cost effect will be somewhat backloaded. On the asset repricing side, you're right.
I think that if we look ahead at least, I think we, in general, expect margins to come up in basically all the markets, in basically all the segments on the asset side and basically also maybe excluding Finland on the deposit margin side. There will be variations, of course, on the magnitude of this. I think that as we alluded to last quarter, the Norwegian market I think has to improve as profitability is too low in Norway. I still think on the mortgage side that we will see continued mortgage spread improvements in Sweden and in Denmark. On the corporate side, it's a bit more mixed picture, and we have some portfolio effects still kicking in. While we are improving asset pricing for many customers, we also see a higher growth in higher quality type of customers.
everything else equal, I think we basically in all the markets expect to see small improvements in corporate margins. That will be the high-level overview.
Great. Thank you.
We will now take our next question from Willis Palermo from Goldman Sachs.
Hi, good afternoon, thanks for taking my question as well. I have two. The first one is on net interest income as well. Going forward, I was just wondering what you expect in term of a rate hike timing in Norway and in Sweden, how much do you think customers can absorb in term of passing on the rate hike before seeing any negative impact on consumption? The second question is on asset management and fee overall. I heard your previous comments on confidence regarding fee growth going forward, could you please give me a bit more granularity in term of what kind of growth you would expect from which fee line? Related to that, the second part of my question regard the asset management itself.
What kind of growth do you expect in terms of AUM, if you could break down the net new money growth and performance for those? Also, you mentioned some new products and continuous improvement of your distribution network. Could you maybe give some examples of what is new and also what more you can do on that side? Thanks.
Thank you. It's of course a long list, I will try to give a little guidance, maybe not in all the details you were looking for, let's see how it goes. First of all, I think that from our planning perspective and the way we currently manage the different business areas, we assume unchanged rates. Your view is as good as mine, as good as what you can look in Nordea Markets outlook. Basically, no one is allowed to use it in their planning. We have a repricing strategy that as such independent of whatever rate outlook that is out there. To your point on sensitivity, of course, that is increasingly an issue. I think that we have pressure on higher capital in basically all of the markets.
We have had competition issues or level playing field issues that have increased the sensitivity, you can say, if you were off market on pricing. I think we generally are testing this all the time as we are not managing according to market shares. I think we have come close to a situation where if we are much more hard on increasing prices than our competitors, we do see an increased sensitivity from a competition point of view or we will lose volume. That's also why I think the margin improvements we're talking about are there, I think they are not significant, that will call for, you can say, new capital actions and other things. With the outlook on capital, however, where you have pending proposals out there I will be surprised if there's not a wish for all banks to continue to improve margins.
We have a number of market and segments and products that are not with the much higher capital requirements we have seen the last 12 to 18 months. They are not at acceptable levels. That would be a wish to continue this. On the fee side, I think we are generally relatively positive. We look through asset management, I think we had a very strong performance in 2016 that, of course, helps us a lot in at least the first half of 2017. I think also that despite the soft closure of one of our strongest performing fund families, I still think we have a very strong pipeline there. I think that will be ramped up further now, of course.
We should see a few quarters, I think, with somewhat lower net inflow, and then we will probably come back to a more normalized level as we have discussed earlier, of the level of 4% or 5%. Market performance, no one knows, of course. In general, I would say we have relatively good investment performance vis-a-vis benchmark on many of our products. Asset management fees should still constitute a good, stable source of growth. Not the same high levels maybe as we have seen specifically in 2016. We also see a very strong corporate advisory pipeline, so we had a strong 2016. I expect that what we can see now, we will have a strong 2017. In our response to the pressure on NII, we are in certain segments and markets responding with other measures than the spread but also by fees.
We have piloted, you can say, an account fee in Finland, and we are now trying to roll that out for real now here by 1st of January. We will, especially in the SME segments across the markets, we will test different type of fees also, instead of just doing it on the margin. We should also expect, you can say, more account or transaction-based etc. type of fees are probably improving. I think also the drag we had in 2016 from interchange fees and from the sale of our merchant businesses so on will be out of the numbers. Everything else equals, I think that on basic across the different type of fee lines, we should see a good, stable growth in 2017.
Thank you very much.
No. I think that was it.
We will now take our next question from Jan Walter from Credit Suisse.
Yes. Hi, Jan Walter here, Credit Suisse. Thanks for taking my question. First on the NII, I think it benefited in the second half and all through 2016 from positioning and perhaps bond repurchases. In the guidance that Nordea is talking about today, NII growth or increase in 2017 vis-a-vis 2016. Have you assumed there that the treasury NII will remain unchanged or fall, or what's your underlying assumption or thinking around the treasury NII for the next year or so? Second question on lending growth. What kind of lending growth levels do you see in the coming 12 months, taking into account the company's actions on deselection, for example, in the corporate book? Thank you.
Yeah. I think what we discussed earlier today was on treasury NII that I think we had a small increase in cost of funds during 2016. I think we will see cost of funds coming down, and we will see treasury income coming slightly down compared to 2016. I think the net effect of treasury into 2017 will be neutral, plus, minus. We'll probably not have to change really the picture or the trend. On the volume side, I think we will see a more equal picture between the markets than we have seen before. I think the four mortgage markets will be in the area of 2%-3% growth, including Sweden and Norway. That has been somewhat higher, and I think maybe Denmark and Finland might come out slightly. I still think that the corporate volumes will be very much around zero growth net.
All in all, not that much volume, but some.
Okay. Just to follow up, I think you mentioned on the call, Torsten, the introduction of fees on bank accounts in Finland late in 2016 and mentioned that it could be rolled out to other countries. Could you elaborate a little bit on that, where that could happen, and if you believe that could have any meaningful effect on the fee line, please? Thank you.
Yeah. I think ultimately it can, of course, what we learned when we tested this, it is a very sensitive thing to do, at least when you start it out. I think the original scope for the account fee in Finland was much higher than the current scope. I think what we are now aiming for, which is probably more realistic, is around EUR 10 million-EUR 15 million annual effect for the account fees in Finland, in personal banking. Then I think we will look for the experiences there, and then we will probably test it. Remembering we are testing different type of measures in the different segments. Particularly in Denmark, we have tested charging negative rates on the deposits where we will now go from around 40% of SME deposits to probably around 60% of SME deposits being charged negative rates.
There are different measures in the different markets and it is, as was alluded to before, competition is there, and sensitivity is relatively high on some of these measures. You go about with some care to get the balance right. We will absolutely seek to do more of these kind of things.
Okay. Many thanks for clarifications.
We will now take our next question from Riccardo Rovere from Mediobanca. Please go ahead.
Good afternoon to everybody. Sorry if I ask questions that have already been answered during the press conference this morning in Stockholm. I have two. I want a couple of clarifications if possible. When you talk about possibility of repricing corporate and retail book, I've seen statements from Danish politicians according to which price hike should be made more comparable, should be justified, and so on. Do you think this could eventually limit your pricing power and the possibility to reprice? Do you see these kind of initiatives as possibly to be replicated in other countries? This is my third question. Second question I have, is it possible for you to provide a kind of sensitivity of your NII, if any, only to movements in the long part of the yield curve? Thanks.
Yeah. As we have discussed also in this call, the sensitivity on repricing is out there. I think that most politicians are caught between wanting to increase capital for banks and being tough on banks, at the same time, they want us to reduce prices. That's of course our job to convince customers and others that's a close to impossible equation. The good thing in Denmark is that we are not the market leader on mortgages. Let's see where the capital regulation ends. We have a market leader in Denmark that could be very exposed to increased capital requirements, and let's see how the dynamics plays out in Denmark. I think we until further have handled very well by increasing our prices without catching a lot of attention. We are firm on trying to get the repricing done even if it's unpopular.
The real test is, as we have said, that of course it is a trade-off between losing too much volume, and if you lose the wrong customers, you can say in your attempt to reprice. I think we have been fairly good at doing repricing in a clever way, and we will continue to try to do that. On the NII sensitivity, I would say as long as it's a steepening of the curve or it's mainly happening in the long end, it has very little direct implications on NII. Of course, we have certain long exposures, but it's a limited sensitivity.
Very clear.
It's only up to 12 months type of part of the curve that where we have the sensitivity.
Very clear. Thank you very much. Thanks.
We will now take our next question from Gabriel Bergin from Danske Bank.
Hi. Good afternoon, everybody, and thanks for taking my question as well. This is Gabriel Bergin from Credit Research in Danske Bank, you have to be clear. I have two questions. The first one concerns the leverage ratio, which I noticed increased by it looks like 40 basis points, which is pretty massive. It looks like it's mostly due to reduced assets of some is repo, but more than half of that looks like other assets. I was just wondering if you could give some clarity on what that constituted. First question.
Yeah. You're absolutely right that we are at 5.0. You can say a part of that, approximately 10 basis points comes from the fact that we have seasonally very low repos in the fourth quarter. You're also right that we have seen rising interest rates reducing the derivative exposures. We've also lowered some other assets, and that part of that is also more temporary, for instance, cash within the central banks. Not all of that you should view as long-term, but still a significant part of that has long-term implications.
We might be closer to this level than what we saw in Q3, for example, in the future.
You never know what will happen with the balance sheet, but realistically somewhere between third and fourth quarter.
Okay. Thanks. The other question, which I guess calls for some speculation, we'll see what you can give in terms of an answer. It relates to the new regulation related to the resolution that we've seen from mainly the EU with some clarity by the end of last year that the EU expects the national authorities to introduce these new senior non-preferred instruments in legislation before July of this year. In most of the Nordics, we also have some more clarity about the levels and structure of this MREL requirements. I note that there's a really strong market for these new instruments, and Santander today issued some of these new MREL that before the Spanish authorities have even introduced this legislation.
I was just wondering if you could give some indication on your strategy for complying with MREL, and if you maybe are looking to be an early participant in this senior non-preferred market that is before the next half-year, if possible.
Yeah. Our strategy first and foremost is to lobby around the MREL proposal pending. We expect to get some clarity within the next couple of months. For us, we still believe that there is a possibility to land this in a good way, and then, of course, we might be early out if it comes out like that and test a new type of product. We agree that it's good to start from the senior unsecured side. We still don't know exactly what size of shortfall we are talking about.
For having too detailed a strategy is obviously too premature. As we have said before, it might very well be that we will have a shortfall of a certain size. We're pretty confident looking on the pricing dynamics that the net cost of covering such a shortfall will be not really significant for Nordea. As we already have, you can say, quite a big senior unsecured issuance. As the spread there will probably be marginal or be relatively limited, and you will have all senior unsecured where pricing is to be seen, of course. MREL is, from a lobbying point of view, we are very active, but from a financial point of view, this is not what I'm most concerned about.
Right. Just so I understand, you are waiting for Nordic authorities to put down their foot before taking any drastic action. Is that right?
Yes.
Thank you.
I don't think we need to take drastic actions. That's more my point there.
No. Okay. Thanks so much.
As a reminder, to ask a question, please press star one on your telephone keypad. We will now take our next question from Anton Kryachok from UBS. Please go ahead.
Good afternoon. Thank you for the presentation. Just a couple of follow-ups, please. Firstly, coming back to your guidance on net interest income during the press conference, you've talked about stable development that you're expecting in 2017. I just wanted to get a little bit more clarity behind it. Just to be clear, you are expecting net lending growth, and you are expecting the continuation of margin expansion trend that we've seen in the last four quarters or so? Secondly, just to come back on your progressive DPS aspirations. Clearly, you've delivered this year, but the pace of the increase was somewhat lower than in previous years. Looking 12 months ahead, is it your aspiration to have DPS growing faster than the 2% that we had this year? Thank you.
Thank you. I think I can reiterate that I do believe we will see NIM improving in 2017. I do think we will see, as I said, I think we will see the mortgage book growing basically from 2%-3% in each of the markets. I think we will see some corporate volume growth but in some markets probably very close to zero, net corporate volume growth probably zero plus type of growth in it. Yes, I think I hope I can confirm both of your assumptions there. Then on dividend, it's a good question. I don't know if it's a good answer, but I think at this very early point of time in the year, I will just refer to our dividend policy.
I think I would also like to add that I was happy to see that we, contrary to many obstacles and beliefs, we were able to deliver on that in 2016. Let's see what will happen in 2017.
Okay, thank you. We'll have to wait and see then.
Ladies and gentlemen, as a reminder to ask a question, please press star one on your telephone keypad. We have no further questions at this time.
Okay. Thanks very much. If you'd like to have some bilateral conversations, me and Pavel will be open for another hour. Then we enter a flight to London. Then you can call us after 7:00 P.M. CET tonight. Feel free, and those of you who are based in London, feel very welcome to the breakfast presentation at Langham Hotel tomorrow morning at 8:00 A.M. Thanks very much for now.
Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.