Good day, and welcome to the Q3 2015 Nordea Bank AB International Teleconference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Romy Alveon. Please go ahead, sir.
Thank you all for calling in to this call about the Q3 report. In the room, we have Group President and CEO, Srikas van Cloussen and also Group CFO and incoming COO, Mr. Thorsten Hagen Jorgensen and Chief Risk Officer, Adi Kapyri and then me and Emma. So we would like to have an opening remark from Christian and then we will have lots of time for Q and A. Please,
Richard. Yes. Welcome, everyone. A few remarks on the Q3. The quarter started quite normal for Q3, a bit slow summer like and then it ended up completely different with some market turbulence we all know about with the volatility and market movements, which were not seen for several years.
And that, of course, meant that markets to a large extent were very difficult also that some customers held back and were sidelined. So a very unusual Q3. And in this environment, of course, our result was impacted on net fair value. The trading activity was somewhat lower, but in particular, of course, the low liquidity in the markets these days combined with the spreading out of credit spreads meant that we had some impact on our liquidity buffer, but also in our trading as we executed customer transactions. Commissions held up quite well in most areas.
Of course, the lower activity in Q3 is visible. But on the savings side, we see an underlying still momentum with good inflow. And of course, the assets under management are down due to the lower equity markets. And our net interest income, we are more as unchanged in local currencies and we see the trend during the year where the negative interest rates in particular Denmark and Sweden will impact deposit margins still and we also have some FX effects. Costs are in line with plan and we repeat our target and credit quality is also in line.
Actually, some improvement in credit quality during the quarter, which is also visible in the rear. All in all, a quarter which as I said is of course a bit lower than last year, but also remembering what happened which is holding up quite well. We are developing our core Tier 1 ratio to 16.3%. And we also give notice that the capital requirements from authorities have gone up. We show a waterfall in our slide where we show that including all the various buffers and mortgage flows and so on, including the threat add on, we have a capital requirement of 15.4%, which is, of course, not including our management buffer, which has to come on top.
So, we're talking about a minimum around 16%. We're also flagging that the capital requirements going forward have some uncertainty to it. 3 things have happened. The Basel Committee has been a bit more vocal about what's going to happen in the future on risk rates and floors, which suggests higher risk rates and it certainly also implies floors on certain areas most likely. SSM and ECB have been very clear on the same area, higher risk weights, not only Pillar 2, but also to some extent Pillar 1.
And then the Swedish FSA has been very clear saying we have to expect higher risk rates in our corporate portfolios going forward. All in all, increasing the uncertainty on exactly what the requirements capital requirements will be and when they will log in. I think I will stop here as the opening for the Q3 reward.
Thank you, Christian. And operator, we are now ready to take all kinds of questions.
Thank from Danske Bank. Please go ahead sir. Your line is open.
Yes, good afternoon. It's Matti Hauckas here from Danske. Two questions please. Christian, you mentioned these regulatory uncertainties, which have increased clearly. What likelihood is there that we will know something already by the end of this year regarding this?
Or will this be something that will just drag on until 2016, 2017? And the second question is regarding the Norwegian credit quality. It doesn't look like we've seen any kind of impact regarding the lower oil price and lower GDP prospects in Norway. Quite the contrary, the NPLs are actually down quarter on quarter. Is this just a lag?
Or and what do you what should we expect regarding Norway going forward? Thanks.
I think on the capital requirements, certainly start, I think it will drag along before we know for sure. And in addition to that, it will drag even further along before it gets implemented and phased in in all its details. But it's likely there will be some more clarity from the balance committee within the next 2, 3 months, maybe not on the detailed numbers, but at least the way to think the combination between clause and standardized and some risk weighted models will probably still be there. That's the most likely scenario. But when that is translated into actual numbers, so we can start to calculate it is quite uncertain.
I also think we have some clarity from SSM on how the SREP results come out through in Europe, which have only been in a few for a few banks, that will be clearer. And then also the view from SSM on risk weights will be clearer. And I even think that the Swedish FSA sometime during at least the next 6 months will be there. But as I said before, everything is quantified in a way that we can calculate. And in addition to that Phase 10, we're talking about pretty long time properly.
No, I have nothing further to add.
I can take this credit quality in Norway. So that yes, you're right. Currently that the credit quality is very good and solid. We have not seen any kind of signs of deterioration. And that is also our just kind of short term outlook.
Of course, talking about Norway, we have to talk about then the impacts of the oil price. And of course, over the time, it's fair to assume that this level of the oil price continues, 2016, 2017, we start to see some individual hits. But even if that would materialize this type of outlook, we don't see that the size of these individual hits would be very big ones so that they would not, so to say, rock the boat. So that our direct exposures to these segments which are impacted directly by oil price, I. E, oil and gas companies, oil services companies, offshore segment is relatively, 1st of all, limited.
All in all, we are talking about €6,000,000,000 total exposure. And then the number of customers, as we have even talked earlier in these calls, is very limited. We are talking about roughly 80, 90 customers so that we can assess the situation by customer base. Where we will see that the first hits would be some customers in oil services and then perhaps a little bit later some customers in offshore segment, but they would materialize towards end 2016 2017. Saying that we have a first loan loss provision, individual loan loss provision already this quarter actually in Oil Services, but it's a very small one and a small company.
So that it's fair to assume that if this type of market environment prevails, we will see somewhat increased levels in Norway, but we are not concerned that there would be any kind of material impact on our loss levels.
Have you started to take any collective provisions based on the weaker Norwegian macro or is that too early in your opinion?
We have already quite high collective provisions in our shipping and oil and offshore portfolio, and we have not started to use those or release those even if the situation in the shipping side, as we have seen has normalized. So that is what we have maintained just to cater especially for this worsening outlook for the offshore segment. We don't see any kind of need for starting to build up collective provisions for this oil and gas segment or to these oil services segments because they are so small in terms of size. And I said that we can take we can assess customer by customer base to the actual quality and then cover those losses by individual losses if needed.
Great. Thanks a lot.
We will now take our next question from Omar Kinan from Deutsche Bank.
Omar Keenan from Deutsche Bank. Thank you very much for taking the question. I had one question on net interest income, please. Just wondering if you could give us a little bit more outlook perhaps on the Q4. We saw that the group treasury was a headwind in Q3.
Do you expect that customer spreads margin development could be a bit more positive in Q4? Or do you think that a flat NII outlook is probably where we're at for the moment? And then my second question is on the regulatory developments that we talked about and your thinking about around that and the implications for the payout ratio. Do you think that, I guess, kind of we're getting more and more, I guess, a clearer picture on what's going to happen. Firstly, we'll have the fundamental review of the trading book, probably rules on op risk and then higher corporate risk weights to some extent.
Does that threaten the 75% payout ratio at all? Or do you think that the capital generation will be good enough to be able to maintain that payout ratio? Thanks.
Yes. I think to your first question on NII, I think we had a pretty stable development from Q2 to Q3 and from Q3 to Q4. I think it's a fair assessment. It's around stable to be expected. I know there seems to be no material changes to the development we have seen.
As we have indicated, then that will be very late this year. There will be further negative impact from the rate cuts in Norway. That is a risk related to even lower deposit margins in Sweden. There is a good underlying growth in mortgages in Sweden and Norway continuing to be. And we continue to see a slight improvement of deposit margins in Denmark.
But netting all of this out, it's fair to assume we're talking about relatively stable short term outlook for NII. Then on the regulatory development and I think you outlined very well and also the way you the order you mentioned the fundamental review, the op risk and the risk weight issues in that order, I think we will probably get some kind of clarity in that order. I think what is important to understand is, of course, that we maintain our ambitions. And while awaiting clarity on the regulatory requirements side, we are, of course, looking into the usual type of approaches like, first of all, we continue to work on lowering our quarter 1 volatility. We will establish good contingency measures, so we can operate with safety within our management buffer.
And finally, of course, we are revising what we have been doing already. We are revising our strategy of being very selective, improving profitability and improving capital efficiency by the business choices we make. And we are of course reviewing all of this in light of increased capital requirements. Our point is just that short term the uncertainty in general have increased. I think it will be not prudent to state anything else.
And in that light, you should see our statement relating to dividend.
Great. Thank you very much. And maybe just a quick follow-up question. We got a comment from the Bank of Finland, I think, through the press that it sounded like they were not in favor of the organizational changes for the bank subsidiaries to be turned to branches. Is there any risk that won't go ahead?
It is correct that we are in an important phase of the legal structure simplification project and there is now a good dialogue authorities. As you know, this requires that they can agree on the terms of which Nordea can be allowed to simplify its legal structure. And this project is still progressing. But of course, the final decision on this and the final terms related to going forward with these projects will not be fully narrowed probably before beginning of next year. And then of course, we will be back and communicate more around it.
Okay, great. Thank you very much.
We'll now take our next question from Daniel Doherty from JPMorgan. Please go ahead, sir. Your line is open.
Hi, good afternoon. Just two questions for me. The first one was on asset quality and the second one just some clarification on costs. On asset Just wanted to clarify, Ari, in terms of your thinking around the group loan losses going forward, does the normalized sort of 16 basis points remain valid guidance? Can we expect the improving situation in Denmark that you alluded to during the press conference to offset rising losses in the oil book if oil prices were to remain at this level?
Or should we expect a lower oil price also to lead to an adverse development in the group loan losses? And then secondly, on costs, again, just a clarification on comments made during the press conference around the restructuring charge in particular. Am I right in understanding that you are now contemplating absorbing this into your ordinary cost budget, I. E. The €4,700,000,000 for this year and then the below 1% cost CAGR going forward?
Thank you.
Okay. We have repeated our guidance in terms of expected loan loss levels in the coming quarters and that is that we have kept the guidance unchanged. So, that's what we say is that we expect to be within these 16 basis points. Yes, we have been now below these 16 basis points for a few quarters. But there are factors which are positive and there are factors which are negative.
And of course, those positive factors you already mentioned, so that the situation in Denmark has normalized and we do have a lot of allowances in our balance sheet. And sooner or later, I'm sure that at least partly, we start to see some kind of reversals from those if the situation continues to develop as it has been in Denmark. But then again, we have also some, of course, negative factors. We already talked about Norway and the oil and offshore, so that it's fair to expect that we may see some kind of increases in that credit portfolio. We have the same type of situation in Finland also, so that we had somewhat higher loan losses this quarter.
We don't expect that they are increasing a lot in the coming quarters, but the situation in Finland has not improved as such in terms of macroeconomy. So that we may expect that there are some slight increases also in Finland. So that and in that way, we have a diversified credit book and always there are some issues somewhere and there's some other type of issues somewhere else. So in that way, I think that it's a good guidance what we have given so that we would be within this long term average. There will be, as I always say, volatility between quarters, so that some quarters, we may be well below, but in some quarters, we may even be somewhat higher than the 16 basis points because we have a credit book, which is of the size of €350,000,000,000 so that there are always something which is happening.
So this is what how I see the future.
Yes. Can I just quickly follow-up on that? I think in previous quarters, you mentioned that the loan losses in Denmark were roughly equally split between agriculture and then the remainder of the book, is that similar this quarter or how should we think about the contribution of agriculture to the 10 basis points this quarter?
Yes, it's mainly that so that we still see some kind of flow of new individual provisions coming from mainly from agriculture. And if we take a look on our net loan loss figure in Denmark, one could say that, that's mostly coming from agriculture, whereas in the household side, we are on mortgage side, we are more or less at 0 for the time being. That is also what we expect what will happen going forward so that we still see some kind of losses, new losses coming from the agriculture. But currently, we have already such a big amount of provisions or satisfactory amount of loan provision so that we don't think that they would trigger any guide or bigger increase to the level we have seen right now in Denmark.
Okay. Thank you.
Yes. And on cost, I think we can repeat that the cost target for full year 2015 excluding any restructuring provision, still around €4,700,000,000 And on the question of whether or not we will make a ordinary budget we can say.
Okay. That's very clear. Thank you.
We'll now take our next question from Ronit Ghos from Citibank. Please go ahead, sir. Your line is open.
Great. Thank you. It's Ronit from Citigroup. I just had a question, just a couple of follow-up questions on asset quality, please. The first one was in the offshore, the oil exposures, the SOOS area.
I know you said that you're not worried about it, but if the oil price remains at the current level, say Brent remains at about $50 or so, are you basically saying that you don't expect any specific or individual loan losses till late next year, early 2017? That was kind of what I understood you to say. And particularly tied into that, I mean, how helpful or unhelpful do you think it is to look at traded asset prices, so kind of bonds issued by, whether it's offshore companies or oil services companies? I mean, some of these bonds seem to be trading at 0.75 dollars $0.80 to the dollar. And I don't know if that's at all kind of interesting as a data point for us as analysts to look at?
Or is your exposure even to these riskier companies further up the credit hierarchy, so you've got more collateral or whatever it is that you think that there really is even in the even you had to take a generic provision right now, some kind of provision, we're talking about pennies rather than larger numbers on in terms of versus exposures. And the second question on Denmark. Obviously, a big drop in the kind of Danish provisioning. I'm just thinking is, I mean, can you see I mean, given that you've taken a lot of agricultural provisions, I mean, can you see this provisioning kind of going further down in terms of its 10 bps, but actually for the next couple of years that in Denmark, we could be looking at something close to a 0? Or are there areas that actually we should be a little bit worried or cautious on the Danish side and not get overly optimistic?
Okay. We start from this Oil and Offshore. And yes, I will analyze, we have in this book, if we talk about this Oil and Offshore book, drilling rigs and support vessels and FPSOs and things like that, We have roughly 30 customers and that means that we can assess this customer by customer basis. And that is now what we believe is that if this oil price continues for 2016, yes, we may start to see first losses from this sector in 2016 and then further 2017. We don't see currently immediate problems.
There may be few very, very small support vessel type of companies, but then we are starting to talk about so small issues that we should not perhaps concentrate on those. You are right, so that the traded asset price is for these companies and their bonds, they are below par. But you have to remember that when we are where we are in this hierarchy of liabilities is that first there is an equity caution which will be hit 1st. Of course, that has already happened, so the equity prices have come down. Then if these high yield bonds come second and that is what you are now talking about, only after that it's then senior loans where we have collaterals, this kind of first liens on these drilling rigs or support vessels, so that we have these kind of layers before we are hit.
And of course, when now we have identified these customers, especially those customers which are in risk, then then of course, we are now acting so that we are not just assessing and analyzing. We are then of course initiating discussions with those customers each and every one of them and just trying to get ways to manage the situation so that raising perhaps more equity, thinking that whatever other means there are to manage or we are focusing on managing our risks. So in that way, I don't feel that this segment would be this kind of main headache for us. I'm not saying that we would not have losses, but at least the situation is under good control and we are close to these customers. Then in this Denmark, it's very difficult to say that what will be the longer outlook in the level of our loan loss provisions.
But now as we can see is that all other segments are more or less normalized except this Danish Agriculture. And then as I also said that we have, based on this crisis period, quite high allowances, credit loss provisions in our balance sheet. And of course, it means that if and when the quality of customers, especially on the household side, will improve, then we start to, of course, perhaps see some kind of reversals for those provisions. How this comes out as a loan loss level, I don't want to give any kind of specific guidance on that, but we have incorporated this kind of normalized level of loan losses in our expectations so that we have not expected, we are not fielding any kind of bigger reversals, at least so far. We want to see first that trend start to materialize before changing our outlook.
Thank you for that color. Just to go back to the your comments in offshore and oil, the 30 customers you referred to, was that 30 customers that you're taking a particular close interest in? And
could you
give us a number in terms of your exposure to those 30 customers?
This is the whole book we have.
The whole book, so that's not just your at risk book, that's the whole book?
That's the whole book when we look at offshore.
Right. I guess pretty much the whole book would be relatively risky right now, right?
Yes, of course, we're analyzing each and every one of these companies. Volume we are talking about is roughly SEK3 1,000,000,000 so that they are quite large customers. So, part of these customers are quite large.
Right, right. So about 30 customers in offshore and oil services with SEK 3,000,000,000 in total exposure?
Offshore is around SEK 3,000,000,000 with 30 customers. Then this oil services, the subcontractors, we have about SEK1.3 billion and 20 customers. So that then and if we even add these oil companies, these big oil and non gas companies, then we are talking about the SEK1.6 billion.
Dollars Right. Just sticking to the oil services, it's 1,700,000,000 and offshore 3,000,000,000, and 30,000,000 for offshore and 20 customers for oil services. That's great. Thank you for that.
We'll now take our next question from Riccardo Rovere I've
just
I've just noticed that your cash and central bank accounts have kept going over the course of the year. Just wondering whether this is just liquidity management or this is something, some cash that in the This is my question. Thanks.
No. The cash in central bank accounts is primarily a matter of the daily liquidity management and remembering that the opportunity costs are not that high by placing them in any other place. So it's only a part of the daily cash management of the bank.
Okay. Thank you very much. Thanks.
We will now take our next question from Jacob Kruse from Autonomous. Please go ahead. Your line is open.
Hi, it's Jacob from Autonomous. I just wanted to clarify what you're saying now on the dividend side. So when it comes to the payout for this year, are you still guiding for an increase to the payout ratio? Or have you scrapped that guidance entirely? And then when it comes to the DPS growth, that 10% target, is that now still an ambition?
Or is that sort of put on ice until you have more clarity on the regulation? Thank you.
Yes. And I think we should probably be very clear and splitting between our targets and our guidance. On the targets, you can say we basically maintain the target as an ambition, ambition that are guiding us as is our ROE target in the way we want to manage the business. So we are every day occupied with improving profitability and generating, let's say, capital and preferably excess capital, of course, rather than growing volume or growing market shares or growing income. These are the focus points.
And for that matter, clear targets and ambitions on generating capital internally and in the external dimension dividend. They are something we, of course, will always review, but that we simply only do once a year, and we don't see any reason to change them as of now. To the guidance of the dividend for 2015, what we were trying to say in the call earlier today or in the meeting earlier today was that, as Christian has alluded to and as we have discussed formally in this call, the short term uncertainty on capital requirements, it suffers such a nature that it will be non prudent, we think, to not also attach a higher uncertainty related to the dividend level, I. E. And thereby also the dividend payout ratio for 2015 without them being more specific.
Okay. So effectively, there is no guidance for 2015?
The additional comment on the guidance for 2015 is that there is a high uncertainty.
Okay. So it's the old guidance, but that is the outlook. Okay. Thank you.
We'll now take our next question from Edward Furst from Macquarie. Please go
It's Ed Firth here. I just had a quick question again I'm afraid on the capital and the dividend. Just to be absolutely clear, the 16.3 percent that you quote for Q3, that includes an accrual for 75% dividend. Is that right? Is that broadly the way that is calculated?
It's accrued with the effective payout ratio for last year, I. E. 70%. 70%. Okay.
And that is no indication in that other than you the accrual principle is that you use the payout ratio for the former year.
Okay. It's just I'm still struggling to see quite why you're so cautious because as you said that these rules are going to take some time to come in. And if I look at your corporate risk weighting, I mean, you're not that far off the European average. I think it's you're about 42% versus 45%, something like that. So I mean, you're certainly not one of the poster child of offenders.
And yet, I guess, of all the Nordic banks we're talking to, you seem to be most cautious about the outlook. And so I just wonder if I'm missing something.
No, I don't think you are missing something as such. But I mean please remember that first of all, we have now a capital requirement of $15,400,000 We know already now that by Q2 'sixteen, this will increase to 15.6%. We also know that we at any point in time have to comply with minimum 50 basis point in management buffer, meaning that we will typically operate somewhere between 50 and 100 basis points above the capital requirement of 15.6. Percent. Then you are right that a number of the issues we have discussed relating to the European regulators' risk to increase capital.
They might come clarification might come later. However, Sweden Swedish regulator have been relatively clear stating that they expect that we will look into the they think that the corporate risk weight of Swedish banks are too low and they will do something about it during 2016. We don't know exactly when. So these are the background for why we are if you add all of this together that we are just I think we're cautious because from prudency perspective that, of course and we have ambitious targets out there. So I think the only prudent thing was to make this remark that we have to be aware of these regulatory requirements and the change compared to when we the change in regulatory requirements since we announced our target back in spring.
So that is why we are raising this issue without making any more specific because we don't know. There are still a number of issues we don't know of. Thank you. Thanks so much.
We now take our next
Just one clarification on the corporate risk weights for a second. So let's assume that in 3 months' time, 6 months' time, the Swedish FSA comes out saying minimum risk weight on corporate exposure in Sweden, I don't know, 40%. And then 6 months later, you have DCB or let's say the not DCB, the European regulators asking everyone to incorporate in their legislation a minimum corporate risk rate of, I don't know, 50%. Is it correct to say that you should use the 50% instead of the 40% and forget about the complication about Pillar 2 requirements? Let's assume that doesn't exist, that is a complication just in Sweden.
Let's assume it's a Pillar 1 requirement going directly through your risk weighted assets. Is it just fair to assume that you would need to use the European one and not whatever is decided by the Swedish FSA?
I think that is very difficult to comment on specifically. We know of course we know of discussions with all of the regulators, and I think there's a process now of aligning all of this and getting this together from a regulatory perspective, and we should probably not speculate much more on that. To your point on risk weights and the Swedish FSA, which I think will of course they have addressed that they will do something during 20 16 which is pretty soon. And you are correct in stating that the corporate risk weight level of Nordea is 40% and then it's basically low for our peers, our big peers in Sweden. And that's why you can say that from a relative perspective, I think we have already seen certain increases that relate probably also to how SSM are conducting their view.
Then we are pending on Basel. I think other European banks are waiting the SREP decisions. And then we have this Swedish view on COVID-nineteen. So I'm sorry not to be able to be more clear. I think that there is a whole new regulatory agenda, and we are, as any other bank in Europe and in Sweden, we are trying to adapt to this.
So on as I said, we cannot comment much closer what the exact regulatory requirements will be. What we are doing, as I said, is that we are already initiating a number of reviews on how to adapt to the situation, including, of course, addressing specifically these Pillar 2 add ons that were somewhat not there specific and which we have already received, but where we, of course, will have to wait next year's script. So it's just to give the clear view that we are of course not just waiting to get more clarification. We are already reviewing and trying to adapt, but we cannot be clear on what exactly is the future capital requirements. And that's exactly back to our uncertainty guidance you can say.
Okay. Okay. And sorry, Let's assume whatever they decide at European level is going to be a Pillar 1 requirement. Is it fair to say that your SREP ratio should which includes the Pillar 2 requirement should then adapted?
I mean, I think we would have to I mean, the spread outcome is, of course, a joint decision by all our regulators, all the Nordic ones and SSM. The Basel Committee proposals will probably ultimately have to be incorporated in CRR and the so the form of decision around this could potentially be a long time from now. But as Christian earlier alluded to, we might get certain indications of the direction and then we will, of course, all start to make our assumptions exactly on where this will end being calibrated. But as we also know from earlier processes like this, there will be all kind of speculation for a period on the calibration that will be crisis and whatever as is already happening on fundamental review on operational risk, etcetera, etcetera. So I think we will have to live with a period of renewed capital requirement uncertainty unfortunately.
Very clear. Thank you very much. Thanks.
As there are no further question at this time, I would like to turn the call back to the presenter for any further remarks.
Thank you, operator. I think the message has been loud and clear. Otherwise you're always welcome to call. We also have an open launch presentation in London tomorrow at 12:30 U. K.
Time. Please welcome to join. Many thanks for now and thanks for calling in. Bye bye.
This will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now