Good day. 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 Rodney Alfvén. Please go ahead, sir.
Thank you all for calling in to this conference call about the third quarter report. In the room, we have Group President and CEO, Christian Clausen, and also Group CFO and incoming COO, Mr. Torsten Hagen Jørgensen, and Chief Risk Officer, Ari Kaperi, and then me and Emma. We would like to have an opening remark from Christian. Then we will have lots of time for Q&A. Please, Christian.
Yes. Welcome, everyone. A few remarks on the Q3. The quarter started quite normal for Q3, a bit slow, summer-like. 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. That, of course, meant that markets to a large extent were very difficult, also that some customers held back and were sidelined. A very unusual Q3. 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 on Q3 is visible, but on the savings side we see an underlying still momentum with good inflow. Of course, the assets under management are down due to the lower equity markets. On net interest income, we are more or less unchanged in local currencies. We see the trend during the year where the negative interest rates in particular Denmark and Sweden impact deposit margins still. We also have some FX effects. Costs are in line with plan. We repeat our target. 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%, 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 floors and so on, including the SREP 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. We are talking about a minimum around 16%. We are also flagging that the capital requirements going forward have some uncertainty to it. Three things have happened. The Basel Committee has been a bit more vocal about what's going to happen in the future on risk weights and floors, which suggests higher risk weights, 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. The Swedish FSA has been very clear, saying we have to expect higher risk weights in our corporate portfolios going forward. All in all, increasing the uncertainty on exactly what the capital requirements will be and when they will lock in. I think I will stop here as the opening for the Q3 report.
Thank you, Christian. Operator, we are now ready to take all kinds of questions.
Thank you, sir. If you would like to ask a question at this time, please press star one on your telephone keypad. If you feel that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. Our first question comes from Matti Ahokas from Danske Bank. Please go ahead, sir, your line is open.
Yes. Good afternoon. It's Matti Ahokas 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? 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? What should we expect regarding Norway going forward? Thanks.
I think on the capital requirements, if I may start, I think it will drag along before we know for sure. In addition to that, it will drag even further along before it gets implemented and phased in in all its details. It's likely there will be some more clarity from the Basel Committee within the next two, three months. Maybe not on the detailed numbers, but at least the way they think the combination between floors and standardized and some risk-weighted models will probably still be there. That's the most likely scenario. When that is translated into actual numbers so we can start to calculate 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 out for a few banks. That will be clearer. Also, the view from SSM on risk weights will be clearer. I even think that the Swedish FSA, sometime during at least the next six months, will be there. As I said before, everything is quantified in a way that we can calculate. In addition to that phase, we are talking about pretty long time properly. Clausen?
No, I have nothing further to add.
I can take this credit quality in Norway. That yes, you're right. Currently, the credit quality is very good and solid. We have not seen any kind of signs of deterioration. That is also our short-term outlook. Of course, talking about Norway, we have to talk about then the impacts of the oil price. Of course, over the time, it's fair to assume that if this level of the oil price continues 2016, 2017, we start to see some individual hits. 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.
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, first of all, limited. All in all, we are talking about EUR 6 billion total exposure. 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 customer 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. They would materialize towards end of 2016 and then 2017. Saying that, we have a first individual loan loss provision already this quarter actually in oil services, but it's a very small one and a small company.
It's fair to assume that if this type of market environment prevails, we will see somewhat increased levels in Norway. 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, we have not started to use those or release those, even if the situation in the shipping side, as we have seen, has normalized. That is what we have maintained just to cater especially for this loosening 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. I said that 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 Keenan from Deutsche Bank. Please go ahead, sir. Your line is open.
Hello, 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 fourth quarter. 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? Then my second question is on the regulatory developments that we talked about, and you're thinking about around that and implications for the payout ratio. Do you think that we're getting more and more a clearer picture on what's going to happen?
Firstly, we'll have the Fundamental Review of the Trading Book probably rules on Operational 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.
To your first question on NII, we had a pretty stable development from Q2 to Q3. From Q3 to Q4 it's a fair assessment. It's around stable to be expected since no material changes to the development we have seen. As we have indicated that will be very late this year, there will be further negative impact from the rate cuts in Norway. There 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. We continue to see a slight improvement of deposit margins in Denmark. Netting all of this out, it's fair to assume we're talking about relatively stable short-term outlook for NII.
On the regulatory development, you outlined very well, also the order you mentioned the fundamental review, the OP risk, and the risk weight issues in that order. We will probably get some kind of clarity in that order. What is important to understand is, of course, that we maintain our ambitions. While waiting for clarity on the regulatory requirement side, we are, of course, looking into the usual type of approaches. First of all, we continue to work on lowering our Core Tier 1 volatility. We will establish good contingency measures so we can operate with safety within our management buffer. 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.
We're, of course, reviewing all of this in light of the increased capital requirements. Our point is just that short-term, the uncertainty in general have increased. It will be not prudent to state anything else. In that light, you should see our statement relating to dividend.
Great. Thank you very much. Maybe just a quick follow-up question. We got a comment from the Bank of Finland through the press, that it sounded like they were not in favor of the organizational changes for the bank subsidiaries to be turned into 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. There is now a good dialogue with all the relevant authorities. As you know, this requires that they can agree on the terms of which Nordea can be allowed to simplify its legal structure. This project is still progressing. Of course, the final decision on this and the final terms related to going forward with these projects will not be fully known probably before beginning of next year. Of course, we will be back and communicate more around it.
Okay, great. Thank you very much.
We now take our next question from Daniel Dautai from JPMorgan. Please go ahead, sir, your line is open.
Hi, good afternoon. Just two questions from me. The first one was on asset quality. The second one just some clarification on costs. On asset quality, just want to clarify, Ari, in terms of your thinking around the group loan losses going forward, does the normalized sort of 16 basis points remain a 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 sort of expect a lower oil price also to lead to an adverse development in the group loan losses? Then secondly, on cost, 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 EUR 4.7 billion for this year and then the below 1% cost carry 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 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, there are factors which are positive and there are factors which are negative. Of course, those positive factors you already mentioned, so that the situation in Denmark has normalized and we do have a lot of loan loss allowances in our balance sheet. 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. 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. The situation in Finland has not improved as much in terms of macroeconomy, so that we may expect that there are some slight increases also in Finland. In that way, we have a diversified credit book, and always there are some issues somewhere and some other type of issues somewhere else.
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 in some quarters we may be well below, in some quarters, we may even be somewhat higher than these 16 basis points because we have a credit book which is of the size of EUR 350 billion, there are always something which is happening. This is how I see the future.
Okay. 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?
Yeah. It's mainly that, we still see some kind of flow of new individual provisions coming mainly from agriculture. If we take a look on our net loan loss figure in Denmark, in a way, one could say that's mostly coming from agriculture, whereas in the household side or mortgage side, we are more or less at that zero for the time being. That is also what we expect what will happen going forward, we still see some kind of losses, new losses coming from the agriculture. Currently we have already such a big amount of provisions or satisfactory amount of loan loss provisions so that we don't think that they would trigger any kind of bigger increase to the level we have seen right now in Denmark.
Okay, thank you.
Yeah, on cost, I think we can repeat that the cost target for full year 2015 excluding any restructuring provisions, still around EUR 4.7 billion. On the question of whether or not we will make a restructuring provision during Q4, I think you are right that we at least are now indicating that it might be that we will choose not to make a restructuring provision and instead include it in the ordinary budget, you can say.
Okay, that's very clear. Thank you.
We'll now take our next question from Ronit Ghose from Citi. 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. Particularly tied into that, 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. Some of these bonds seem to be trading at $0.75, $0.80 to the dollar.
I don't know if that's at all kind of interesting as a data point for us as analysts to look at. 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 if you had to take a generic provision right now, some kind of provision, we're talking about pennies rather than larger numbers in terms of versus exposures. The second question on Denmark. Obviously a big drop in the kind of Danish provisioning. I'm just thinking is, given that you've taken a lot of agricultural provisions, can you see this provisioning kind of going further down in terms of its 10 basis points, but actually for the next couple of years that in Denmark we could be looking at something close to a zero?
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. Yes, our analysis, 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. 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 a few very small support vessel type of companies. 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 prices for these companies and their bonds, they are below par.
You have to remember that where we are in this hierarchy of liabilities is that first there is an equity cushion, which will be hit first. That has already happened, so the equity prices have come down. If these high-yield bonds come second, then that is what you are now talking about.
Only after that, it's then senior loans where we have collaterals. These kind of first liens on these drilling rigs or support vessels. That we have these layers before we are hit. Of course, when now we have identified these customers, especially those customers which are in risk, 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 also manage, or we are focusing on managing our risks. That 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. In Denmark, it's very difficult to say what will be the longer outlook in the level of our loan loss provisions. Now, as we can see, is that all other segments are more or less normalized except this Danish agriculture. As I also said that we have based on this crisis period, quite high allowances, credit loss provisions in our balance sheet. 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 have not built in any kind of bigger reversals, at least so far. We want to see first that trends start to materialize before changing our outlook.
Thank you for that color. Just to go back to 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? Could you give us a number in terms of your exposure to those 30 customers?
This is the whole book we have.
That's the whole book. That's not just your at-risk book. That's the whole book.
That's the whole book when we're talking about the offshore segment.
Right. I guess pretty much the whole book would be relatively risky right now, right?
Yeah, of course. We are analyzing each and every one of these customers.
Right.
The volume we are talking about is roughly EUR 3 billion. They are quite large customers. Part of these customers are quite large.
Right. About 30 customers in offshore and oil services with EUR 3 billion in total exposure.
Offshore is around EUR 3 billion with 30 customers. These oil services, these subcontractors-
There we are talking about EUR 1.3 billion book and 20 customers. If we even add these oil companies, these big oil and gas companies, we are talking about EUR 1.6 billion.
Right. Just sticking to the oil services, it is EUR 1.7 billion and offshore EUR 3 billion and 30 customers for offshore and 20 customers for oil services.
Yeah.
That's great. Thank you for that.
We now take our next question from Riccardo Rovere from Mediobanca. Please go ahead. Your line is open.
Yes, good afternoon to everybody. Just one question from me. I've just noticed that your cash and central bank accounts have kept growing over the course of the year. Just wondering whether this is just liquidity management or this is something, some cash that in the future you think you can redeploy in something that is yielding less than cash or central bank accounts? This is my question. Thanks.
No, the cash in central bank accounts is primarily a matter of the daily liquidity management. Remembering that the opportunity costs are not that high by placing them in any other place. 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. 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? 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.
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 retarget in the way we want to manage the business. We are every day occupied with improving profitability and generating, you can 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. That we typically 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 formerly in this call, the short-term uncertainty on capital requirements is of 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 then being more specific.
Effectively there is no guidance for 2015.
The additional comments on the guidance for 2015 is that there is a higher uncertainty.
It's the old guidance, but that is the add on. Okay. Thank you.
As a reminder to ask a question, please press star one. We'll now take our next question from Edward Firth from Macquarie. Please go ahead, sir, your line is open.
Yes. Hi, it's Edward 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 that you quote for Q3, that includes an accrual for a 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.
That is no indication in that other than 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, these rules are going to take some time to come in. If I look at your corporate risk weighting, you're not that far off the European average. I think it's you're about 42 versus 45%, something like that. You're certainly not one of the poster childs of offenders. Yet, I guess of all the Nordic banks we're talking to, you seem to be most cautious about the outlook. So I just wonder if I'm missing something.
No, I don't think you are missing something as such, but please remember that first of all, we have now a capital requirement of 15.4. We know already now that by Q2 2016 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. You are right that a number of the issues we have discussed relating to the European regulators wish to increase capital. Clarification might come later. However, Swedish regulator have been relatively clear stating that 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.
These are the background for why we are, if you add all of this together, that we're cautious because from prudency perspective that of course. We have ambitious targets out there. I think the only prudent thing was to make this remark that we have to be aware of these regulatory requirements and the change in regulatory requirements since we announced our target back in spring. 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 question from Riccardo Rovere from Mediobanca.
Yes, thanks again for taking my second question. Just one clarification on the corporate risk weight. One second. Let's assume that in three months' time, six months' time, the Swedish FSA comes out saying minimum risk weight on corporate exposure in Sweden, I don't know, 40%. Then six months later you have ECB or let's say, not ECB, the European regulators asking everyone to incorporate in their legislation a minimum corporate risk weight 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 exists just in Sweden. Let's assume it's a Pillar 1 requirement going directly through your risk-weighted assets.
Is it 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 discussions with all of the regulators, and I think there is 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 2016, which is pretty soon. You are correct in stating that the corporate risk weight level of Nordea is 40%. Then it's basically lower for our big peers in Sweden. That's why you can say that from on a relative perspective, I think we have already seen certain increases that relates probably also to how SSM are conducting their view. Then we are pending on Basel.
I think other European banks are awaiting the SREP decisions. Then we have this Swedish view on corporate risk weight. 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. As I said, we cannot commit 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 Nordea specific and which we have already received, but where we, of course, will have to wait next year's SREP.
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. That's exactly back to our uncertainty guidance, you can say.
Okay. Thank. 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, which includes the Pillar 2 requirement, should then adapted?
The SREP 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, the formal decision around this could potentially be a long time from now. As Christian earlier alluded to, we might get certain indications of the direction, then we will of course, all start to make our assumptions exactly on where this will end being calibrated. As we also know from earlier processes like this, there will be all kind of speculation for a period on the exact calibration. There will be crisis and whatever as is already happening on Fundamental Review, on Operational risk, et cetera. 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 questions 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 lunch presentation in London tomorrow at 12:30 U.K. time. Please welcome to join. Many thanks for now and thanks for calling in. Bye.
This will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.