Day, and welcome to the Q3 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 Alphen. Please go ahead, sir.
Thank you, operator, and thank you all of you for calling in for this telephone conference. We will start with a very brief introduction of our group COO, Thorsten Heggen Jorgensen, and then that will be followed by Q and A. So you can please start to prepare for that already now. But and we also in the room here, we have Adi Kapiri, who is Head of our Chief or Chief Risk Officer. So Torsten, please?
Yes. Thank you. And I will do short, just a few comments to the highlights as outlined in the investor presentation. So we saw pretty strong income. And as we have discussed earlier, we were looking forward to see some kind of improvement in trend on the NII, and I think we saw exactly that.
So an improvement in NII from Q2.
And we
are looking into a continued improvement in NII. We are also happy to see that one of the fee type of incomes that we have built a lot of trust in, the corporate advisory services type of fees, are continuing to showing a very strong trend, remembering that's an important part of our corporate strategy and our corporate selection and deselection strategy. So attribute to the capabilities we are building. And the same goes for the asset management numbers with an all time high inflow of €9,600,000,000 or equivalent to a 13% annualized inflow, which is, of course, is an extraordinary level. And even excluding some of the strongest performing type of funds, we are still at very strong and stable inflow levels.
So I think a very solid income result even if we look aside from the fair value, which is also actually showing good stable development. Costs are also stable or even slightly down in reported numbers. We are reiterating our guidance despite the fact that we are reporting a one off in Q4. And the reason being that we see a chance to go directly for global standards when it comes to compliance and resilience, and that means an expansion of the original scope. So we are increasing and accelerating spend to become compliant and resilient in 2016 and into 2017.
However, it's important for us to reiterate that we do continue to expect flat cost 'eighteen versus 20 16, I. E, we will, during 2017, build and accelerate the efforts to reduce costs from 2017 to 2018. And we also continue to see very strong credit quality, individual loan losses at the lowest level, I think, in 5 years. When we adjust for the fact that we have taken out Baltic exposures, we also see impaired loans coming down basically in most dimensions, excluding Norway. So very good underlying credit quality.
Then of course, on the back of the final SREP and the release we gave earlier on 17.3% plus a minimum above of 50%. We are very happy to report that we came in on a quarter 1 level of 17.9 percent, I. E, an improvement since the 17.2 percent pro form a of 70 basis points. And final, but not least, we are happy to see how we are progressing on our business and cultural transformational journey, and very much supported by bringing in world class expertise, helping us driving this in a good, well orchestrated and efficient way towards, as I said, both global standards but also helping us direct the many resources and efforts we put into the journey. So with that, I would conclude the introduction and the tier for our Q and A.
Thank you, Thorsten. So operator, if you please could open up for Q and A, we are happy to take all kinds of questions.
Thank you. And we can now take our first question from Daniel Dole from JPMorgan. Please go ahead. Your line is open.
Hi, good afternoon. Kaan Daniel Doradoi, JPMorgan. Could I just ask 2 questions on capital, please? The first one is, just to confirm something you mentioned in the press conference, you mentioned risk weighted assets flat out to 2018. Just wanted to confirm whether that's flat from current levels, so the SEK 136,000,000,000 and also whether that includes the increase in corporate risk weights once your models are approved?
And secondly, you also spoke about the closing of a capital hedge in Norway. Can you just elaborate a little bit on this in terms of how much this freed up in terms of risk weighted assets in the quarter? And also what kind of volatility we should expect to see going forward in CET1, the sensitivity to corona movement would be really helpful here? Thank you.
Yes. Yes, I think we said that based on current level of REA, we have a pretty flattish outlook looking ahead. And this is based on, you can say, before any regulatory or model change. So if we, for example, get approval of implementing the risk weight elements, then that will not be included. And of course, the pending parcel proposals, however, they will be implemented.
So the kind of the calibrations that probably will go going on for the couple of years on taking down Pillar 2 and replace it with Pillar 1 is not included in this forecast. So this is a forecast that builds on our very moderate volume forecast, including the business deselection strategy we are operating with. So hopefully that clarifies the first question. And on the second one, we have historically been born with a, you can say, an unhedged NOC position that was not with our REA, you can say, on the capital side. And that we have been hedging up until recently.
We have been awaiting getting the exemption that you are or at least you can seek. According to EPA rules, you can seek that and we have not been given it. But we as part of our capital, you can say remediation efforts, we have decided to close that hedge and find somewhat other ways of mitigating the volatility. But we might see or do see currently slightly higher NOK related Core Tier 1 volatility as we only have a part hedge on our NOG position.
I hope that was
answered to your question.
Any kind of sensitivity you could give? So for example, a 10 percent movement in Norwegian krona?
No, I don't think we will give that because we are looking into ways to even though we have taken away this and that gives everything else equal a higher volatility, we are seeking other ways to reduce it somewhat. But what I can say is that I think we have shown historically that our overall core Tier 1 volatility is in the range of 20, 25 basis points. And we do expect that to increase somewhat, partly due to this, but more actually due to all the XVAs we have. So I think we should expect a slightly higher quarter 1 volatility than the 20, 25 basis point level going forward.
Okay. Can I also just follow-up? Because I think you mentioned also that or Casper mentioned there was an ambition to get the management buffer closer to the middle of the range paid to about 100 basis points. Can I just ask what kind of time frame that you're looking at here in terms of achieving that? Thank you.
Yes.
But I think he is alluding to the fact that we have basically already when we introduced the 50 basis points to 150 basis points when we were asked, we were saying that the you can say the target shown the what was in the level of 75 basis points to 100 basis points. And then, of course, based on the environment you are in, you can kind of deviate somewhat. But that is the has been and is still the target area. And then of course, we have had a situation with, you can say, somewhat a mover target on the capital requirements, and we have had we do look into slightly higher Core Tier 1 volatility. So we will seek to get into this target area.
And I will not give any specific timing on it, but that's a clear ambition to get into that area.
Okay. But with regards to the full year dividend, it's the 50 basis points that we should be focused on?
Yes. But I don't think we can comment much closer. As you know, we will now await the result of the Q4, and then we will decide in January. I don't think you should expect to hear much more specific on dividend before that.
Okay. Understood. Thank you very much.
And we can now take our next question from Jan Wolter from Credit Suisse. Please go ahead. Your line is open.
Yes. Jan Wolter here at Credit Suisse. Thanks for taking my questions. So fast on the cost side there, on the cost progression, I think the company guided previously for below 1% CAGR 16% to 18 And do we now expect cost growth to be above 1% in 2017? And then that's not the SE sharper for 2018.
Is that the way we should look at it when we try to see the cost growth year over year in 2017 2018, please?
Yes. I think it's a pretty fair assessment. I think, how we were just to be clear. And this is not a change of guidance, but I think we have said a CAGR of 1%. You phrase it as below.
I think we have never said that, but I think we have unchanged 2018 guidance, you can say. So you are right in your assessment on above 1 maybe in 2017 and then a sharper decrease from 2017 to 2018, which I think we have guided somewhat for already last quarter. And I think that has not materially changed. But if anything, yes, in that direction.
Okay. And on the life insurance company, normally upstreamed, I think, SEK 400,000,000 here in the quarter. And is it fair to say that the current solvency level after the dividend, 155% or so, is that what Nordea is aiming for? So DSS Capital then over that level would be upstream as dividend to NordeaIB?
Yes. First of all, the current solvency ratio is 157%, and that's in the very much in the upper end of the range we said of 140% to 160%. And I think 2 dimensions are important. First of all, I think we continue to see very strong growth, profit growth in our Life operations. And secondly, I think also we work very well with capital optimization and volatility handling Solvency II ratio volatility management.
So we are, of course, expecting to see continued good underlying growth in the solvency ratio and, if anything, a reduced volatility, which should give us possibility to maneuver and be flexible within the 140% to 160% range.
Thank you. Final question from my side. If we just look in principle at Nordea being domiciled in another European member state in just conceptually, would that mean the Nordic regulators have no or very little excuse me saying around the capitalization of each branch in Nordea? Or how do you see that situation in principle? How would the, in your view, Nordic regulators active if the company were to be domiciled outside Sweden?
Thank you.
It's an interesting question, and I will try to answer it in a slightly different way. We have a pretty well functioning college as of today, which includes Nordic regulators and ECB. And our clear expectation is that, that college will continue to work more or less the same way also after rectification. And we expect to hear more about how they will make that work. So you can say we already have a pretty well established model for a supervisor.
We call it containing Nordic and European supervisors.
Okay. Many thanks. Very clear.
And we can now take our next question from Anton Kreychuk from UBS. Please go ahead. Your line is open.
Good afternoon and thank you for taking my questions. Just two questions please. The first one on costs. If the Swedish payroll tax comes in from 2018 in the region of, let's say, €40,000,000 to €50,000,000 do you think you will be able to mitigate this within your existing cost guidance for 2018, which is flat versus 2016, please? And the second question, more of a follow-up on the comments you've made around net interest income outlook for next year during the press conference.
So you sounded pretty optimistic on the margin side, but less so on volumes. And I just wanted to get your thinking and probably more color around how you expect volume development to play out in 2017? And how much volume shrinkage you expect to get from deselection of clients, etcetera, and whether you think volumes in absolute terms still go up next year? Thank you so much.
Thank you. Yes, I think as we said on the payroll tax in Sweden, the good thing is that it's now clear that it is for Sweden payroll only. The uncertainty is on the level, you can say. And I mean, there is a range discussed, and I think it's slightly premature to discuss whether or not that would lead to a change of guidance. So I think I will refrain from speculating more on that one for now at least.
We will be back, of course, when we know more. On the NII outlook, you're right. I feel relatively maybe not optimistic, but I feel very confident that we will continue to see a NIM improvement into 2017. And you also write in your assessment that I think, if anything, we are slightly more concerned about the volume. We have been pretty concerned for a while.
I think if anything, we will see mortgage growth coming slightly down, not materially but slightly down compared to the growth we have seen. And I think we will continue and in certain areas, you can say accelerate deselection by repricing initiatives and by this acceleration of SMB customers. And as there is very little market demand, especially on the corporate side, that leads us to this assessment that the volume effect if 2017, if anything, might be slightly lower than we thought before. But the combination would still mean that we expect NII to improve 2017 over 2016.
I'm sorry. And when you say that it is slightly lower than you said before, it's still in a positive territory, right? In absolute terms?
Yes. I think it will be a net positive, but a low number, a very low number. And of course, as we have seen, we will continue to see even if it might become I mean the mortgage growth might come slightly down. You will, of course, continue to have the mix effect also in 2017 is our best guess.
Thank you. That's very clear.
And we can now take our next question from Omar Keanan from Deutsche Bank. Please go ahead. Your line is open.
Good afternoon. Thank you very much for taking the question. I had some revenue on your lending repricing measures and how you're managing for the current interest rate environment. Understand we have Danish mortgages coming next quarter. But if you could just give us a brief update of what's happened in Finland, which seems to be better and Denmark, I think, which was worse.
But also Norway, I think there was some perhaps jumping of the gun with mortgage rate pricing. So could you give us some color on how that's going to be fixed? And then my second question was on trading. I guess it was quite a good trading quarter for Q3. What kind of things do you want or what kind of sort of trading backdrop do you want in Q4 to kind of maintain that €400,000,000 a quarter level?
Thank you.
Yes. No, you are right that we have a number of repricing measures ongoing. And I think that you were alluding to the Danish one on mortgages that I think is well known. We have and if we just stay on the mortgage side for a moment, then it's true that we in Norway have increased margins with around 10 basis points on mortgages. I think there is a limit to how much more can be done in Sweden and Finland.
If you then stay on the household side, we have introduced 1st in Finland deposit account fees. And we will pilot we will use that as a pilot to see how customers react. Potentially, the financial impact can be quite substantial, but of course, it all depends on the sensitivity of this among our customers. And if that is successful, we might do more of these kind of measures, which of course will not show up under NII but on fees. And on the corporate side, it's more a you can say, as we have said, a more bottom up approach.
We will look for all kind of opportunities to use repricing whether or not it's charging negative rates or it is expanding lending margins to drive the deselection that is ongoing. I hope that gave some additional flavor for now on the NII side and on the repricing side. And on trading, yes, but I think that I mean, I don't think I have that much to add. I mean, we have I think we have demonstrated and conveyed in this quarter that we feel that we have quite a stable net fair value line with a lot of stable customer business being the core. And then we have had some, you can call it, type of one off positive effect pertaining to treasury, unlisted position type of revaluation of total of around SEK 70,000,000 And that, of course, might not be repeated, but the underlying looks stable.
I think that is what we can say
that. Can I just follow-up on the NII? I guess the piece of the puzzle that has been left out is the wholesale bank, which has been kind of a bit of meaningful NI headwind compared to the previous year and also last quarter. I understand some of that has been Russia. But I mean what can be done to improve the NII performance in Wholesale Banking?
No, but I think actually in many of the core markets, we are seeing a slight improvement on margins. Then of course, we have Russia is of course with much higher margins than in the Nordic. Of course, you have a mix effect from the development in Russia. But actually on the Nordic level, it's stable to slightly improving margins on the CIB side.
What you saw in this quarter also in Wholesale Banking was that the repo lending was seasonally lower. I mean, you have less activity during the summer months. So therefore, it's a seasonally lower repo lending. Then in CIB, we reduced our exposure to Danish corporate mortgages for pricing reasons. It didn't meet our expectations there.
But as Torsten says, the margin is stable and the business is stable as well. So it's not anything wrong.
Okay, great.
Thank you
very much.
And we'll now take our next question from Matti Akhag from Bank of Danske Bank. Please go ahead. Your line is open.
Yes, good afternoon. Matti Akhag, Danske Bank here. Two questions. Firstly, together with the Q2 report, Thorsten, in the conference call, mentioned that there's a mentioned that there's a number of internal measures or levers that you could do to boost the core Tier 1 ratio. Obviously, it looks now like the market risk has clearly been 1 and then the life dividend.
Should we expect that you could use more of these in the future? Are there potentially further other things that you could use to boost up the value for Tier 1 ratio if needed? And the second question is regarding the SREP requirement. I think you have the 20 basis point charge due to the franchise vacation project. How likely or is it possible that this charge might be reversed in 20
17? Yes. You are right that we have pulled some of the levers I was alluding to in the Q2 in connection with Q2. And we are constantly looking for, you can say, more measures to enhance profitability, of which some will also mean an improvement in Cohortia 1. So I think that over giving us some time, we will find more measures.
We constantly work on that at least. But I don't think we can be much more specific. But just yes, I think there are more to be done, more type of optimization transactions to be looked into, and we are doing that as we speak. But I don't think we can come much closer on timing. On Airstrip, you are right that, that is a 20 basis points add on operational risk add on related to the Branchification project.
And yes, I think you're also right that this is an obvious add on for us to address not necessarily awaiting the SREP for 2017 as we are trying to, you can say, decompose the 20 basis points add on into the different milestones in the Brentification project. And you can say that we are hitting a number of milestones by end of year, and we would, of course, argue that, that is thereby also reducing significantly operational risk pertaining to the project. So of course, I'm very careful not guaranteeing anything, and this will, of course, have to involve a dialogue with the FSA. So but this is an obvious area for us to look into, yes, and potentially, it could have an impact in 'seventeen.
Great. That was very clear.
And we can now take our next question from Willis Palermo from Goldman Sachs. Please go ahead. Your line is open.
Hi, good morning. Thanks for taking my question. I have 3. The first one is on fees. The net new money was very strong this quarter.
And I was wondering if you could help me to understand what would be the sustainability of the level of net new money that you think would be achievable going forward? And also to what extent both the strong AUM performance and flows would translate into additional fees in the coming quarter? The second question is on asset quality. Understood the guidance for this year of 16 bps of loan loss provision and I was wondering if you could give me a guidance for next year in terms of where you stand in your discussion with companies and restructuring. If you think this the end will come in the next quarter or if it will go through 2017 in full as well?
And the last one is related to the question you just answered on the add on in capital. I was hoping if you could remind me what would be what are the other add ons that you currently have in your capital? And also where you stand in terms of closing the gap of compliance that you mentioned in the report, if this is coming soon and if it's related as well to the removal of the other add on that you carry currently? Thanks.
Yes. If I start with the fees, I think actually that the outlook is relatively stable. If we start with maybe the most significant one, I. E, the savings and investment related or asset management related fees, then of course, the very significant increase we have had in inflow and AUM over the last couple of quarters will translate into higher income in the next couple of quarters. I think even if we assume that the very strong performing funds that we have done a soft closure on, even if they will not they will mean a reduction of inflow.
I still think that we are seeing an underlying inflow in the level of 6%, 7%. I think also we have good performance. So that all looks pretty stable and we should expect more. I think also we have we do see continued evidence of our strength within the Corporate Advisory business, and we are winning ManyMentate. We are doing a lot of good business.
And of course, I think we have seen some of the negative effects from the merchant acquiring deal we did last year and then the subdued card and lending fee type of growth and whether or not that will translate into 2017, but at least it's from a lower level. So I would say in general, I think the fee outlook is pretty solid from where we are now. And if I then just take the Capital One and leaving this quality to Ari, Yes, we have quite a number of add ons. One of the more significant ones, we have 2 that actually pertain to the decision last year on governance. One is a specific governance add on of more than 80 basis points.
And you are right that many of the efforts we're doing currently in stepping up to actually not only meeting local but also global standards hopefully will translate into a that we eventually can take away this governance add on. However, I don't think we should expect that to happen in 'seventeen. I think that the regulators or the supervisors will want to see implementation and want to have a good due time to follow-up, inspect and make new conclusions before we can see any relief there. We have one other add on that relates to the fact that we as part of this governance add on, we were also asked to reverse a provisioning effect we had. We have been allowed to do originally a provisioning initiative with an effect of, I think, around 30, 35 basis points.
And that will also be as we are allowed to now do all kind of applications, we will, of course, also seek to argue that this add on could be discussed. And whether or not that is realistic in 'seventeen or 'eighteen, I don't dare judging, but at least we will try. So you can say the operational risk add on, on LSP of 'twenty and the provision add on around 35 is absolutely something we have in scope for, you can say, shorter term discussions with our FSAs.
And if I then continue on this asset quality or credit loss out of the quarters of 2017. First of all, I think that it's you're right while saying that it looks like that within 'sixteen, we will end up within this 16 basis points, which is the guidance we have given. So that now it looks quite likely, but that will be the outcome. So we will be within. When it comes to '17, 1 year guidance, it's something I can't give you because 1 year is such a long period of time.
And as we all know, these type of issues are so dependent also what is happening in the external marketplace. And I don't think that it's meaningful to start to give very specific guidance. What I can say that the way we have guided also previously is that the outlook for the coming quarters when we are talking about visibility we have for 1 to 2 coming quarters looks that we will also be within the 16 basis points, meaning in the beginning of next year. But that would be as far as I can go right now because then it's too uncertain to see what could happen in the second half or perhaps even in the Q2 of next year. Of course, now as you have seen that we have started to increase collective provisions to provide for this kind of uncertainty and higher risk in our offshore and oil related portfolios.
That is, of course, one issue, which we will continue to do if this difficult situation continues in those segments. But then before we are able to start to release something, if these individual provisions are not materializing, then we have to take time and be also cautious in that way so because these impacts are quite long term for this oil and offshore type of businesses.
Yes. Thanks. That's helpful. If I can just continue on that point, could you maybe give me a sense of the number of clients that you think about could still see difficulties coming on? Are we talking about less than half a quarter?
And also the magnitude, do you think about some large ticket to be in trouble or some multiple small ticket coming in the next year?
Yes. And then we are talking about this Oil and Offshore segment. What we expected to happen this year was that I think that we discussed in the beginning of the year that towards the end of the year, during the second half, we may start to see this kind of individual defaults in these portfolios if the market is not improving. Actually, that has not happened so far. So that currently, fortunately, in Q3, we had only one this kind of individual loss case in offshore portfolio.
And earlier, we have had 2 individual cases in this oil and gas and oil services portfolio so that we are not yet seeing any kind of individual provisions. And that is exactly also the reason that because we still feel that the risk is there. It's just about the timing when they start to materialize, and that is the background for these collective provisions we now added because the situation has not improved. These especially if we start to see difficulties in these drilling companies, they are quite large individual clients. We don't have so many of those.
We are dealing with best ones, and that means that they are relatively big individual exposures. And then that is, of course, the risk we are now providing for. So that if there would be in the coming quarters 1 or 2, there's kind of bigger defaults in that portfolio, then we it is prudent to start to prepare for that. I don't know whether they will come and what would be the magnitude, but of course, these are the levels we think that we could see on a quarterly level individual losses if they start to hit. There are not so many companies what we are talking about.
And of course, every single one of those companies are now going through some kind of restructuring process. And it's a quite this type of sensitive issue, so that either have a successful restructuring or then we don't have a successful restructuring. And in the latter case, then there is individual impairment and a loss. So far, all of those restructuring cases we have been we have had in our portfolio, they have been successful. But there are still a few cases which are pending where we don't have this kind of completion yet, and then you never know how they end up.
But we are not talking about many customers in terms of numbers. And then with these collective provisions, we are now building up, and it's very likely that we will continue to do that in Q4 unless there is start to be discontinue individual losses. I think that we don't see any kind of pickups in the quarterly losses in the coming quarters.
And we can now take our next question from Yasai Tian from Citi. Please go ahead. Your line is open.
Thank you. It's Yasai from Citi. I have a few questions. The first is on net interest income. I'd like to understand what is the potential impact from the higher resolution fee for 2017 on net interest income?
And to what extent are you able to offset this impact with repricing? And then secondly, along that line is when you when I look at the net interest income for this quarter, mainly it's because of the lower volume in Wholesale Banking. And I know there are a lot of efficiencies in the Wholesale Banking sector. I was thinking, going forward, how should we think about volume progression in Wholesale Banking in light of the Russia situation and also when you try to be selective in the client? And lastly, a specific question on the Denmark net interest income.
How much additional net interest income do you expect to come from mortgage repricing in Denmark? Thank you.
Yes. I think that we expect to see the increase in resolution and deposit guarantee fees, the increase will be in the magnitude of €90,000,000 €90,000,000 2016 2017 over 16,000,000, and that will hit NII, of course. And of course, you can say that the mitigation efforts have started and have been accelerated far before this is hitting us. And of course, we have known for a while that this will happen. So you can say it's already embedded in all the repricing efforts we are doing.
And as we are also saying, of course, we are starting to charge now type of customers, I mean, whether or not it's SME charging deposits or it's charging household customers' deposit account fees and so on. So we need to move with some kind of piloting and testing on customer behavior. Of course, there's a limit to high degree of sensitivity. So of course, the good thing about resolution fees is that it hits everyone. So of course, we can expect that ultimately, the sort of kind of a different cost will have to be transferred to customers one way or another.
So that is, of course, a material effect that has been known and have been planned for, you can say. And in our IQ3, I mean, the volume effects in the underlying I mean, if you exclude repos and derivative movements, which is hard to have any view on, then you can say the underlying development in wholesale banking is that we want to see a reduction of volume a controlled reduction of volume in Russia. Now in Q3, we did see a somewhat faster reduction in volumes in Russia than we had expected. We are welcoming it from a risk perspective. But of course, NII wise, it is costly as margins are pretty high in Russia.
But we will continue to reduce volumes in Russia. I think that in many ways in CIB and in shipping, we more or less have the portfolio we want. And if customers these customers that we now have that we like to have, if they have a need for more credit, then we will grant them that. But we don't see a material need for now. So the expectations are also moderate.
But of course, that will I think much of the deselection my point is much of the deselection has been done in Hotel Banking. So if there is an increased demand, then we will meet it. And finally, I think we have said that the effect
was of
the market repricing in Denmark would have an annualized effect of €25,000,000 And I think that number probably is coming somewhat down due to the fact that customers are moving into longer maturities, which was also how the repricing was designed. You can say that it was incentivizing customers to seek longer maturities.
Thank you for that. Can I just ask another question on the cost side? Norway has implemented a payroll tax, I think, starting from 2017. Do you mind also giving us guidance to what is the impact from the Norway payroll tax?
Yes. I think our initial estimation is in the level of €10,000,000 to €15,000,000 in additional cost pertaining to the legal payroll tax.
And if I may,
when it comes to taxes, given that we will have then also a higher tax in Sweden, so our guidance for the tax 2017 is slightly lower than 24%, including all the known changes that we know.
Okay. Thank you.
And we can now take our next question from Jeff Dawes from SG. Please go ahead. Your line is open.
Yes. Hi. Good afternoon. Jeff Dawes here from SocGen. I've got two questions.
First question is the largest part of your corporate portfolio is the real estate segment. You saw quite a material drop in non performing loans quarter on quarter in that segment. Can you give us a bit of color on what is driving that? Whether it's in specific countries or anything to watch out for there and if that should continue? Second question, obviously, we're all aware of the ABN situation and the approach that was made.
Can you just talk to us generally about how you feel about your footprint in Northern Europe? Whether you think Nordea is lacking something? Or whether you think there's anything to be done there? Those are the 2 questions.
Yes. The commercial real estate portfolio and the quality of that, it's a big portfolio and we are, of course, thereby following very closely on what is happening there in terms of quality and also volumes and risk levels. We have set clear this type of risk appetite limits for that portfolio, and we are well within those that risk capitalized. I don't foresee any kind of deterioration of the quality as such. There are always in the digital portfolio, there may be 1 or 2 individual cases, which are impacting on the numbers because they it is such a big portfolio as such this quarter.
I think that it was coming from Baltics, the impact which will be then, course, as you know, that not anymore included to Baltic portfolio in our loans and the risks going forward. So that the big core commercial real estate portfolios in Nordic countries, they are very healthy. And I don't believe that, that will change in the close future.
Yes. And on the geographical footprint, I think that we have had a strategy of we can say we have reduced our presence in Poland. We are looking to reduce our somewhat our contract, our foothold in Russia to be primarily a CIB business. We have done a structural solution in the Baltics. So we are keen on cementing and developing our position in the Nordic as the main strategy.
And I think the same way we should look kind of subsegment by subsegment. We have areas where we want to further improve our position. It can be related both to private banking. It can be related to certain type of subsegments where we want to improve our position in the different Nordic markets. But that is the current key focus.
Okay. And you're open to completely new markets if the opportunity presents itself, new geographies?
We are I don't know how to phrase it. I will not comment further on specifically, but I don't think we can comment mostly also. We are always, of course, following what is happening, but our core focus is cementing our position in the Nordic markets.
And we can now take our next question from Ed Firth from Macquarie. Please go ahead. Your line is open.
Yes. Hi, there. I guess it's a similar question to Jeff. So I don't know if you can help me or not. But I mean clearly your Chairman was reported reasonably extensively at the weekend saying that the ABN transaction was simply delayed until after the Dutch election or the discussions were delayed until after the Dutch election and that we should be thinking about that coming back in, in March next year once the elections clarify the sector.
So I know you don't want to comment, but it seems quite difficult to look at Nordea without looking at what is a pretty monumental transaction and was certainly a huge surprise to me. So I mean, I guess, you must surely be able to give us somewhat thinking about what the logic was, what other things you might be looking at, how the transaction might work, all the the multiple questions that surely anybody interested in buying Nordea stock would want to have an answer to.
Yes. But I think that 1st of all, I think that one of the issues you are referring to is I think he is somewhat misquoted. Now I'm not speaking, but as far as I have been told by our Chairman, he has been misquoted. So he got a question of what would happen after the election and he said everything can happen. And he was not trying to say that he would revert to anything.
And I think that quote has been put in a way that he more or less has said that we will revert to discussions after March. And I think that's something we need to assure he's corrected. I think it's a misunderstanding. So and I don't think I mean, I think that has been said. I mean, our CEO have made a statement and the Chairman have made a statement.
And that, I think, is what we will say for now as there is no discussions.
Okay. But sort of conceptually, when you're looking at transactions, which I guess every bank in the world is always looking at transactions, and I guess you must have a team of people who look at them same as everybody else. I mean, what is it that you're looking for at the moment that you feel you don't have?
I would answer you in a very different way, but hopefully with some meaning to it. I think that we have demonstrated the strength of the Nordea idea in especially 2 business areas. So we have shown that in wholesale banking and in wealth, I think we have demonstrated that our size and scale in the Nordic means that we have very strong platforms. So from a product and capability perspective, we have built very strong and competitive capabilities and platforms. And actually, we have also been pretty clear that when we talk about that type of corporate advisory business, asset management business, private banking, life, etcetera, etcetera.
We do actually have a wish to expand and grow. And in that perspective, you can say all kind of good distribution. Ever you get it, it could be interesting. And then I think also we have been pretty honest and said that when we talk about our retail banking or formally referred to as our retail banking franchise, we have still more to do to create this strong Nordic platform that would, you can say, allow us to scale up. But that is, of course, the ambition we have with the simplification project we are running and the core banking replacement program is that it's a 4 to 1 transformation.
So we will operate the 4 Nordic countries on 1 Nordic platform that will be far more resilient and far more efficient. So that is our strategy.
Okay. Okay. That's very helpful. Thanks so much.
And we can now take our next question from Kristina Kynenburg from Baeserix Leindus Bank. Please go ahead. Your line is open. Good afternoon. Hi, there.
My question is when will you publish financial figures for the newly founded Nordea Mortgage Bank PLC and the remaining entity Nordea Bank Finland Plc? Thank you.
That will be answered by our Head of Debt I or Mr. Andreas Larsen.
Yes. The new mortgage company in Finland, Oviya Mortgage Bank, that was now registered on 1st October. And financial information will be published in the beginning of November. So within it's expected within some weeks' time. Then we will publish that on the nordea.com.
Okay. And the remaining entity, will there also be figures to be published? Because there was a feature of the bank, Nordea Bank Finland and
Yes, that is correct. But the only new entity that has been created is the Nordea Mortgage Bank. And there, we will present new numbers. The other entities, they will remain keep the same reporting and reporting procedures as before, meaning that Nordea Bank Finland, they reported a half year report, and they will report the next time in the full year report for 2016. So there will not be any change procedure for instance, Nordea Bank Finland or for any other entities.
Okay. Thank you. And we can now take our next question from Riccardo Rovere from Mediobanca. Please go ahead. Your line is open.
Good afternoon to everybody. A couple of questions from my side. You have been talking quite frequently to your regulator over the past few quarters. I am interested in trying to understand what is the reaction of the Swedish FSA when they see that capital, capital ratios actually go up because of a lower denominator and not because of a higher denominator numerator, sorry. And the other question I have is let's say, when you look at statistics Sweden, the amount of mortgages in Sweden keeps going up.
Real estate prices kind of keep going up. Have Swedish FSA given up on trying to fight to cool down the real estate prices in Sweden or not? Or is it something that they should they want still to try to keep under control?
Yes. If I try to take the first one, we do have a very good and frequent dialogue with the Swedish FSA on everything. And we also typically discuss our Q reporting in advance, including our messages, our measures and so on. And there has absolutely been no reaction from Swedish FSA on our capital numbers. So I think that it's pretty straightforward what have happened in Q3 on the capital side, including on the REA side, remembering that the securitization transaction we did earlier was heavily disclosed and had a very good process, with Swedish FSA on that transaction.
So I think there's no particular discussion with the Swedish FSA on the capital ratio improvements.
If I just may if I
read you correctly, you were referring to that the capital requirement in terms of ratio is going up because of the lower denominator. I mean, that's simply the fact from that the Swedish regulator has a blessed for Pillar 2E requirements. And that is, of course, a capital add on. So when the denominator falls, obviously, the ratio goes up. But we also see an increased requirement in terms of capital.
Yes. But this is exactly the point. You during the press conference this morning, you stated that you expect your risk weighted assets to remain kind of flat from here to 20 18. Now I would suppose that somehow volumes will go up, okay, Because the loan growth is not 0. You're not growing much, but it is not 0.
So theoretically, risk weighted assets should go up.
Please understand what we have been saying on volume expectations. First of all, the majority of growth are coming from mortgages that in Sweden, yes, have a risk weight of 20 5%, I. E, lower than average, you can say, risk weight and for the other countries. So the majority of growth come from mortgages with pretty low risk weight. So there's a mix effect bringing down that are not requiring a lot of REA.
The deselection strategy very often attacks the lowest rated corporate customers. So the typical flow of corporate customers is high rated in and lower rated out. So there's also a mix effect there. And then there is very limited underlying volume demand in the Nordic, and we for sure are not seeking volume growth. So when we say flat, we mean flat, and there's no mystery in the flattish expectation.
It's a direct result of our strategy. And I don't think it's questioned anymore. We have had very good discussions with Swedish FSA on the REA initiatives we have formally been running and now we have made certain measures. And what we are doing now is not raising any questions from the Swedish FSA.
No, no. But I understand this. I'm sorry, and then I'll stop. I promise. But if at system level, we see all Swedish banks reducing risk weighted assets with growing volumes from the words you have just stated before, what I understand, you think that the capital requirement is going to go up.
Just to understand whether I got it right or not, because this is what has been happening over the past 3 years.
But I think that to Rotne's point before, I think as we have discussed in earlier calls, I think that Sweden are Sweden and Europe are going to get closer to each other. So there is a process leading up to the budget proposals of increasing the risk weights in Sweden to come closer to the European average and at the same time, of course, paving the way for potentially reducing some of the quite many Pillar 2 add ons that Nordea and other Swedish banks have compared to European banks. So this kind of harmonization exercise is, of course, running in the background. So I think it's and we have also, of course, as a result of the last SREP, of course, we will we are seeing our corporate risk rates coming up due to the SREP now to a level of around 46%, I think, for our corporate risk weight. So it is not so that corporate risk weights are not coming up due to the regulatory measures.
But I think it's part of the amortization process.
All right. And with regard to the real estate prices, what are your thoughts here?
I can take this one. So first of all, of course, we realized that the house prices, they have gone up in Sweden big time, and they are at a very high level. And in fact, that increases this type of risk we have in the housing market in terms of price development. But it doesn't mean that we feel that we have created more risks in our credit portfolio because we have not been aggressive in this market environment. You can see how our market share development, it has been on par or perhaps even lower than
some of our
peers, and we have a very prudent underwriting standards in this type of market environment. Our average LTV in Swedish mortgage book is 50%, 55% or something like that. So it is very healthy portfolio as such. We are not so worried about a direct credit risk in that portfolio. But then the regulator in New York asked that are regulators or authorities worried and have they taken any actions?
And there has been a lot of this type of macro prudential actions because of this, so that we have LTV caps, we have risk weighted floors, we have mandatory amortization schedules introduced in Sweden. And of course, all those are implemented to, of course, dampen the house price development. On the other side, there is very loose monetary policy with low interest rates, and there is a very high disconnection demand for houses, which are working the other way around. So that are these type of different type of forces. But there is a high focus in Sweden by authorities on this development, and that's associated by the bank so that it would be good that the house price development would stabilize.
And it there has been, from time to time, good signals that has started to happen. But of course, we it's very difficult to forecast that how this will continue.
So in the conscious of time, we need to end here. Thanks, everyone, for calling in and showing interest and having these discussions. We will enter a flight now in 45 minutes, and then we will arrive at 7 p. M. So please feel free to call before 4:15 or after 7 p.
M. CET. And then, of course, those of you who are based in London, you're most welcome to join our breakfast at the Langham Hotel at 8 a. M. U.
K. Time. So thanks, everyone, and keep in touch. Thank you.
Thank you. That concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.