And welcome to the Q2 2013 Nordea Bank AB Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Romani Albi Ali. Please go ahead, sir.
Thank you, operator, and all of you welcome to this earnings call for our 2nd quarter. We would start we will start with a short introduction and then we'll open up for a Q and A. So please Mr. Christian Clausen.
Thank you and welcome. You can say we are proud today to present a strong report. We have a top line growth not coming from net interest income because we of course see the pressure on deposit margins for the negative interest rate levels we have in 3 of our countries. But on the other hand, we see a number of other areas delivering well. The savings and investment area, which we have been building over years is delivering really well.
Our customers want not to have 0 rates on a deposit. They want to invest their money and make some money. And our wholesale platform is also delivering well this quarter a bit slower towards the end. But in general, our wholesale platform is delivering an increase for our car. So top line is up.
Cost is down exactly as planned, loan losses is down as we expected, credit quality is actually improving quite a lot, which we are very pleased about. So we see a good development in our bottom line. We're also building a lot of capital this quarter. In the capital side, we're actually also making a reservation on Rhea to meet future regulation and to meet the ongoing SREP process in the Nordics for Nordea. There are several drivers in the capital side going forward and not least Sweden has through a memorandum recently described that the sea risk rates going forward will increase.
We also have the driver the ECB all over Europe is actually influencing the SREP processes, the yearly evaluation process quite a lot and putting in European standards, which the banks which is on the ECB supervision field. So we also see some requirements there. So we made this prudential reservation on the RIA side and there might be a few add ons on Pillar 2. We already have some reservations there. But still we see capital requirements may go up somewhat.
So that's of course important to note. Still, we deliver so much capital duration that I we will of course meet our capital targets for the margin. So all in all a very strong quarter 13.7 percent ROE and for the half year and 45% costincome ratio. So a satisfactory quarter in our own opinion.
Thank you, Christian. With us today, we also have the Group CFO, Thorsten Hagen and Chief Risk Officer, Ari Kappleri. So operator, please open up for Q and A.
Thank you, We'll now take our first question from Omar Kinan from Deutsche Bank. Please go ahead.
Good afternoon. Thanks very much for taking the question. My first question is just on capital and then the second one is on net interest income. Firstly, on capital, the €4,600,000,000 safety provision, I guess, that was taken, you mentioned on the press conference related to corporate risk weights. Could you just perhaps give us a bit more color as to how you calculated that €4,600,000,000 number?
Is this something that was driven kind of by the European process more through the Finnish subsidiary? Or is this because the Swedish regulator has been making some hawkish sounds? So just kind of if you could give us a flavor of why that €4,600,000,000 number? And should we expect more of these kind of conservation provisions to come through? And then the second question just on net interest income.
Looking kind of ahead to the second half, I see that NII in the group center was helped by positioning for rates. How sustainable is this? And should we keep it in our models going forward? Thank you.
Yes. But if I should try to put a bit more flavor on the SEK 4.6 €1,000,000,000 Our current understanding is that as we alluded to in the conference earlier today that we do see an increased scrutiny of many different perspectives of the use of models. And it's very much I think inspired by the European trend. And that is, of course, specifically fitted into Nordea in the Nordics as we have also ECB in our supervisory colleagues as the only region Nordic bank. So the SEK 4,600,000,000 relates to a number of issues that are raised by Swedish FSA or by the College of Supervisors actually, which are possible to quantify and where we see a risk relating to this number.
And that is all as I said, it's all Pillar 1 related And we expect we have covered pretty much by this reservation the Pillar 1 related issues as part of the SREP process. And then on top of that, we are indicating that the interpretation of how we manage the models and how we use the models etcetera, the interpretation have of current regulation have increased. It's more harsh. And we cannot rule out as we also put it in the Q2 report that we might find a number of additional pillar 2 requirements. Whether or not we are fully provisioned for that or not that is yet unclear.
And there we will have to do for the process and the final outcome in end of September. And yes, we do see these reservations we make and the issue we are raising here as part of a European agenda of scrutinizing this great in months more. If that hopefully covered your question on capital then on NII, I think that for the group corporate center NII, we had a relatively weak group corporate center NII in Q1 and we had relatively strong one in Q2 and that will typically be the short term effect of dropping in short term rates and then you will have some relatively fast positive effects. But the long term effect of lower rates of course are negative. So I don't think as Sophie can extrapolate from the relatively strong result in Q2 for glucocorticenter, you cannot extrapolate that into the second half.
Perfect. Thanks very much. And maybe just finally a follow on. Have you done any kind of benchmarking exercises of kind of looking at your corporate risk weights relative to peers? And kind of do you know where kind of Nordex stacks up against perhaps the other Swedish banks?
In general, we have a lower corporate risk weights than the other Swedish banks. And you should also remember that the sorry, Haiya. Sorry. Haiya. Yes, sorry.
I'm healthy about my colleagues. Yes, we have the highest corporate risk rate among our Swedish peers. Yes. Sorry, now I please repeat the question.
Sorry. Have you done any benchmarking exercises of Cardnoordev corporate risk weights versus peers?
Yes, we have. And therefore, we know we have higher corporate risk weights than the others. What we of course do not know is exactly the dialogue that are going on between Swedish FSA and the other Swedish banks. However, the 3rd July memorandum from Swedish FSA was pretty clear. And I think a clear signal from Swedish FSA that higher and probably most likely COVID risk rates is to be expected as part of the European agenda.
And that I think what I would also indicate and I was trying to indicate earlier today is that some of the findings we are now met with in the SREP process, we regard as having somewhat of a temporary character. So I. E, it's less what we
have done and potentially more on how
we have done it, meaning that we have potentially more on how we have done it, meaning that we have possibilities to remediate some of these findings and make the need for provisioning less. However, we don't know yet of course as we are only starting the dialogue the supervisory colleagues.
Okay, great. Thank you very much.
Will now take our next question from Heino Luz from Goldman Sachs.
Hello. I would come back to basically Omar's question on the risk rates on the corporate. So when you basically took this provision, was it basically sort of putting a uniform top up? Or did you use more like a floor saying every corporate exposure should have at least a certain risk rate? Or did you put a flow on probability of default sort of what's the sort of if you sort of can sort of share a bit more sort of technicality behind it.
So like if you sort of just uniformly moved it or if there's particular buckets that you feel most concerned of? Is this more SMEs? Is this more large corporate? Just to give a bit of a better understanding.
Yeah. But this relates to some I mean remembering that the draft that is quite
right or the decision paper
we have received for opening the spread process is quite detailed. These 4.6 relates to some relatively specific issues raised by the Supervisory College. And therefore, as we said, it's possible for us to quantify them and therefore also to make relatively specific provisioning related to those. They are not by so much by segment, but they are more by the type of initiative or by the type of corporate risk made impact they have had. It can perform it could be related to everything from collateral to provisioning to etcetera I.
E. Activities that impact the quarter.
Okay. I'm trying with one more detailed question on it. Do you have a sort of a split to how that would those increases would split over the different geographies that you operate in?
That we would that would of course we will be able to calculate. But as of now this is premature I would say. So we have made this provision because we were able to do it. And we were able to Okay. And then we will of course see what happens now in the dialogue.
Okay. Thank you very much.
We'll now take our next question from Daniel Doetroy from JPMorgan.
Daniel Doherty, JPMorgan. Just have three questions. First one was on Danish NII, the second one on Danish asset quality and the last one just on asset management. Just on Danish NII then. You mentioned during the press conference that you're now charging negative rates on a quarter of all your corporate deposits.
I just wanted to confirm whether that's a quarter of the outstanding Krona stock of deposits and whether that 25% presents some sort of an upper limit or whether there's scope to increase that proportion going forward? Secondly, then the 24% loss ratio in Denmark over the quarter. I guess about a quarter of that comes from agricultural collective provisions. And then if you take that out, I guess the underlying trends are fairly positive. Just wondering if you could talk us through the trends that you're seeing in Denmark in terms of asset quality and whether we could see the loss ratios coming down to sort of levels that you're experiencing elsewhere in your other markets?
And then lastly, on Asset Management, you've had AUM trend down this quarter, but fees were actually up quite strongly 14%. And I know there's some sort of an averaging effect as well, but when I try to adjust that even then it kind of looks like fee margins are still heading upwards in the second quarter. Just wondering whether maybe this was down to performance fees or FX or whether this was actually an underlying improvement quarter on quarter? Thank you.
Okay. I got to try to address your question on Danish NII. I think what we are now doing is that we basically are charging all of our large corporate institutional customers negative rates. And then we are charging approximately a quarter of our SME customer deposits. But remembering that we have stated all along that household deposits and majority of the smaller SME customers will most likely not recharged negative rates.
So we are close to charging all the in scope customers in Denmark negative rates. And it starts having a contribution mitigation wise.
And Dennis, as it's Walidhi, I can talk you through what happened in Q2 and how do we see it in the future. So that in terms of 1,000,000 of euros, we booked €40,000,000 additional loan losses in this quarter. Out of these €40,000,000 losses, €30,000,000 I. E. 75 percent comes from agriculture, meaning that then other than agriculture with Denmark was only €10,000,000 it's in basis points.
I think that we are talking about 8 basis points or something like that. So this indicates that then this and the quality situation in the end market has normalized, so that we are at very low level except or excluding this Danish agriculture. And looking at the credit risk indicators in this trade portfolio, they are solid, stable, partly positive, so that we don't expect that this overall situation in Denmark would deteriorate. But then it's reality that this agriculture portfolio is high risk portfolio, so that out of this €30,000,000 loan loss provisions we made this year €20,000,000 was individual customer specific provisions, so that we are seeing more and more agriculture customers' farms going into default or in that type of situation that we are putting these kind of individual provisions. And that magnitude was more or less the same already in Q1.
And I expect that we are seeing this level of new increased individual provisions also in the coming quarters. Then this remaining €10,000,000 of agriculture provisions in Denmark comes from our decision to increase collective provision for this portfolio. Now we do have all in all some €60,000,000 as collective provisions for this portfolio now in our balance sheet. And at least my estimation is that that starts to be enough to do to recover for increased risks. But I don't expect that there is a need for increasing this collective provision so much more.
As I said, we expect that this individual loan loss provisions will continue in Denmark in this segment. But all in all, it's relatively positive.
And when it comes to the asset management, yes, you're right that we have seen an increase in the income spread. It improved from 39 to 41 basis points in the quarter. And that is mainly a distribution effect because if you look at the calculate the average volumes, remember that the end of the second quarter was the weak part, so to say, when you had this turmoil. So therefore, it was a quite temporary dip in the asset and the management. So the average over average volumes were quite good actually.
That's clear. Thanks very much.
Our next question from Johan Ekblom from Bank of America.
Thank you very much.
So with Ocum, I think.
You want to stay around?
Yes. Can you hear me?
Yes.
Okay. Joao, please go ahead. We can hear you.
Okay. Perfect. Yes. So just two things really left. Number 1 is looking at the fee trends in Denmark, we've seen very strong remortgaging fee.
Can you give us an idea of how much sort of extraordinary remortgaging fees were still present in Q2? And then secondly, you spoke, I guess, at the press conference this morning about this change to legal structure. And you quantify or at least highlight what operational benefits you see from that move?
Yes. I think we have is it around EUR 11,000,000 euros 12,000,000 on the mortgage remortgage fee list as you mentioned. And on the legal structure part, I think the major operational benefits come from the fact that now where we are running simplification and we are building new consolidated systems and processes. And imagine that basically all customers, all employees, all transactions, all bookings, every time you do that you have to be aware of what legal entity to book in. So you can imagine the administrative effort of keeping track on that and then put on top the reporting requirements not only management reporting wise, but also increasingly regulatory reporting wise.
Putting on top also the increased requirements to be able to monitor and screen all transactions, etcetera, etcetera. So there is somewhat of a times 4 effect of having to keep track in our 4 main companies on the digital dimension. It's just basically book everything in one place. So that is you can say the root cause driver of complexity around the legal structure. Then you can add a number others, but this is a major driver.
And of course, especially as we are now harmonizing and consolidating and streamlining our systems and processes, we want ideally to do it with a simpler legal structure in mind instead of building a setup that should cater for 4 basically.
And in your cost benefit analysis there, does the savings from this outweigh the potential for higher bank levy
total total you can say business case. As I think I indicated earlier, we have identified at least 60 different drivers of fair value or effect in respect of this move. It's a very complicated equation and you can say there is a 2 year horizon before we are there. And it has become increasingly clear that the fundamental benefits are so high that even if there might be some cost related to it, mainly visavis higher taxes or stability fees or whatever, it's still worth it. And not least in connection with the strategic agenda as we have pointed out many times that improving our platform to 1 efficient platform that is the key strategic lever and legal structure has become important in that part.
So yes, even if we might see some cost additional direct cost related to this, we think it's a very good business case.
Perfect. Thank you very much.
We'll now take our next question from Riccardo Rovere from Mediobanca. Please go ahead.
Yes. Good afternoon to everybody. Sorry to get back to the €4,600,000,000 Now if I take the €4,600,000,000 and divide it by the corporate exposure and defaults you reported in this quarter, which is about 170 bps. That would mean that the less than 3% risk rates. So I just don't understand why did you do it?
It's simple because 3% or more risk weights cannot be enough in preparation of higher risk weights on the overall exposure at default corporate exposure at default. So can you be extremely simple in explaining why you do that? And in preparation given that you sound, I don't know if to say concerned, but given that you flag in possible higher risk rates buffers here and there, is what about the messages you conveyed during the Capital Markets Day a couple of months ago on dividends, dividend distribution and so on. And do you have and how do you feel with the current leverage ratio of roughly 4.5%. Do you think that is enough?
Are you aspiring to get closer to the one released by TMB? How do how should we see the 4.5%? Thanks.
Yeah. I think we cannot come much closer to the €4,600,000,000 and what we have said that it relates to specific findings pointed out by the supervisory colleagues as part of their paper. And so we of course know exactly what type of issues they are pointing to and we think it's premature to disclose it in more details now. With relation to the messages we did on the Capital Markets Day, I don't think we are at this point in time changing anything. I mean, we have a capital policy, which is a regulatory requirement saying that we need to meet the regulatory requirements set by Swedish FSA, plus a management cover, which we have defined as 50 basis points to 150 basis points.
That's a requirement. Then we have a dividend policy, which is not a requirement. It's an ambition stated by ourselves. And it's guiding us in our effort to generate as much capital as possible. What we are raising as an issue is of course we do now see this more harsh stand by the supervisory college on capital and risk weight, etcetera.
And then we are making certain provisions and then we are looking into hopefully having a good process. And by end of December mode, I think we will know more and be able to tell more about how to view this in context of the dividend. On for 2015, on the leverage ratio question, I think that, of course, there are now ongoing discussions in Europe also on what should be the real backstop. We feel confident that with the current leverage ratio we have and hope with the fact that leverage ratio will not be a backstop and at least not at a level that we will not be able to meet. So we are pretty confident as of now with regard to the level of our leverage ratio.
One thing again on the leverage ratio. You said backstop mechanism. Do you think this is going to become a key supervisory parameter mechanism?
We hope that we do not regard the leverage ratio as the most adequate way to construct a backstop, but we understand that that is debated for the moment. And we do not know of course where it will end. But with what we know as today we think that our current level is adequate. And then of course we will have to see what comes out of this data.
Very clear. Thank you.
We will now take our next question from Matthew Clark from Nomura. Please go ahead.
Good afternoon. In conjunction with the reassessment of the corporate structure, did you reassess the domicile of your head office? Was that a consideration? Or was it purely the legal structure within the existing geographic footprint? Thanks.
The only and key objective for Nordea is to simplify the legal structure I. E. Branchify and that is absolutely done in the most easy way with out of our current domicile. So we have no plans to change domicile.
Okay. Thanks.
We will now take our next question from Adrian Cighi from RBC.
Hi, there. One follow-up question on capital please. During the conference press this morning, you mentioned that the management buffer was in place to address business volatility as opposed to potential regulatory changes. However, as we see regulatory changes are coming in, do you see the need to adjust the size of that management buffer? Thank you.
I think what we said on the Capital Day was that the management buffer would cater for normal volatility plus potentially swings you will see in the capital cyclical buffer. But I also think we said very clearly that the capital policy and dividend policy by the way was based on what we the current understanding of regulation. And I think that the last 2 to 3 years have shown us that unfortunately the finish of capital requirements for European banks seems to be constantly moving. And as we said also, we will probably now have about a tree like process lasting 2 to 3 maybe even longer years, where we will unfortunately have uncertainty around it. And I think it's close to impossible to cater for that by a management buffer or the management buffer will have to have a range that would not really then have a big bearing of guidance.
So that is why we see it in that way.
Perfect. Many thanks.
There are no further questions at this time.
Okay. Thank you, operator, and thank you everyone for calling in and asking questions. If you have any further questions, please don't hesitate to call me or my colleagues at any time. We also have a breakfast presentation tomorrow at 8 a. M.
At the Langham Hotel in London, where you're all welcome. So thank you very much and have a nice evening all of you.
This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.