Good day, welcome to the Q2 2015 Nordea Bank Abp earnings conference 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, operator. All of you, welcome to this earnings call for our second quarter. We will start with a short introduction, then we'll open up for a Q&A. Please, Mr. Christian Clausen.
Thank you, 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 with the negative interest rate levels we have in three of our countries. 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 zero rates on a deposit. They want to invest their money and make some money. Our wholesale platform is also delivering well this quarter, a bit slower towards the end, but in general, our wholesale platform is delivering increased ROIC. 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. We see a good development in our bottom line. We're also building a lot of capital this quarter. In the capital side, we are actually also making a reservation on REA 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, not least Sweden has, through a memorandum recently, described that they see risk weights 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 in putting in European standards, which the banks which is under ECB supervision feel. We also see some requirements there.
We made this prudential reservation on the REA 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. That's of course important to note. Still, we deliver so much capital generation that I think we will of course meet our capital targets for the margin. All in all, a very strong quarter, 13.7% ROE for the half year and 45% cost-income ratio. A satisfactory quarter in our opinion.
Thank you, Christian. With us today we also have Group CFO, Torsten Hagen Jørgensen, and Chief Risk Officer, Ari Kaperi. Operator, please open up for Q&A.
Thank you, sir. If you would like to ask a question at this time, please press star 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question. We'll now take our first question from Omar Keenan from Deutsche Bank. Please go ahead.
Good afternoon. Thanks very much for taking the question. My first question is just on capital, then the second one is on net interest income. Firstly, on capital, the EUR 4.6 billion 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 EUR 4.6 billion number? Is this something that was driven by the European process more through the Finnish subsidiary, or is this because the Swedish regulator has been making some hawkish sounds? If you could give us a flavor of why the EUR 4.6 billion number, and should we expect more of these kind of conservation provisions to come through? Then the second question, just on net interest income.
Looking 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.
If I should try to put a bit more flavor on the EUR 4.6 billion, our current understanding is that, as we allude to in the conference earlier today, that we do see increased scrutiny of many different perspectives of the use of models, it's very much, I think, inspired by a European trend. That is, of course, specifically relevant to Nordea in the Nordics, as we have also ECB in our Supervisory College as the only Swedish and Nordic bank. The EUR 4.6 billion relates to a number of issues that are raised by Swedish FSA or by the College of Supervisors, actually, which are possible to quantify, where we see a risk relating to this number.
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. On top of that, we are indicating that the interpretation of how we manage the models and how we use the models, et cetera, the interpretation of current
Regulations have increased. It's more harsh, 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. There we will have to look for the process and the final outcome in end of September. Yes, we do see these reservations we make and the issue we are raising here as part of an overall European agenda of scrutinizing risk ratings much more. If that hopefully covered your question on capital, on NII, I think that for the group corporate center NII, we had a relatively weak group corporate center NII in Q1, we had a relatively strong one in Q2, that will typically be the short-term effect of dropping in short-term rates.
You would have some relatively fast positive effects. The long-term effects of low rates, of course, are negative. I don't think, as such, you can extrapolate from the relatively strong result in Q2 for group corporate centers. You cannot extrapolate that into the second half.
Perfect. Thanks very much. Maybe just finally a follow-on. Have you done any kind of benchmarking exercises of looking at your corporate risk weights relative to peers, and do you know where Nordea stacks up against perhaps the other Swedish banks?
In general, we have lower corporate risk weights than the other Swedish banks. Probably higher.
Higher.
Yeah, sorry. I'm helped here by my colleagues. Yes, we have the highest corporate risk weight among our Swedish peers.
Yes.
Sorry, now I lost my, please recall. I lost the, please repeat the question.
Oh, sorry. Have you done any benchmarking exercises of Nordea's-
Sorry, yes.
corporate risk weights versus peers but-
Yes, we have. 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. The 3rd of July memorandum from Swedish FSA was pretty clear. I think a clear signal from Swedish FSA is that higher, and probably most likely, corporate risk weights is to be expected as part of the European agenda. 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.
I.e., it's less what we have done and 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. We don't know yet, of course, as we are only starting the dialogue with the Supervisory College.
Great. Thank you very much.
We will now take our next question from Heino Lüs from Goldman Sachs.
Hello. I would come back to basically Omar's question on the risk weights on the corporate. 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 weight, or did you put a floor on probability of default? If you can share a bit more technicality behind it. If you 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.
Right
decision paper we have received for opening the SREP process is quite detailed. These 4.6 relates to some relatively specific issues raised by the Supervisory College. Therefore, as we said, it's possible for us to quantify them and therefore also to make a specific provisioning related to those. They are not so much by segment, but they are more by the type of initiative or by the type of corporate risk-weight impact they have had. It could be related to everything from collateral to provisioning to et cetera, i.e., activities that impact the corporate risk weights.
Okay. I'm trying with one more detailed question on it. Do you have a sort of a split to how those increases would split over the different geographies that you operate in?
That would, of course, we would be able to calculate, but as of now, this is premature, I would say. We have made this provision because we were able to do it.
Okay
Because we were able to quantify these specific issues, then we will of course see what happens now in the dialogue.
Okay. Thank you very much.
I think we can go on to the next one.
We now take our next question from Kian Abouhossein from JP Morgan. Please go ahead.
Hi. Good afternoon. Kian Abouhossein, JP Morgan. 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, 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 kroner 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, the 24% loss ratio in Denmark over the quarter. I guess about a quarter of that comes from agricultural collective provisions. 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 levels that you're experiencing elsewhere in your other markets. Lastly, on asset management. You've had AUM trend down this quarter, but fees were actually up quite strongly, 14%. I know there's some sort of an averaging effect as well, but when I try to adjust for that, even then, it looks like fee margins are still heading upwards in the second quarter. Just wondering whether maybe this was down to performance fees or effects, or whether this was actually an underlying improvement quarter on quarter. Thank you.
Okay. If I could 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. We are charging approximately a quarter of our SME customer deposits. Remembering that we have stated all along that household deposits and majority of the smaller SME customers will most likely not be charged negative rates. We are close to charging all the in-scope customers in Denmark negative rates, and it starts having a contribution, mitigation-wise.
It's asset quality. I can talk you through what happened in Q2 and how do we see the future. In terms of millions of euros, we booked EUR 40 million additional loan losses in this quarter. Out of these EUR 40 million losses, EUR 30 million, i.e., 75%, comes from agriculture. Meaning that other than agriculture within Denmark was only EUR 10 million. It's in basis points, I think that we are talking about eight basis points or something like that. This indicates that this asset quality situation in Denmark, it has normalized, so that we are at very low level, except or excluding this Danish agriculture. Looking at the credit risk indicators in this grade portfolio, they are solid, stable, partly positive, so that we don't expect that this overall situation in Denmark would deteriorate.
It's reality that this agriculture portfolio is high-risk portfolio, so that out of this EUR 30 million loan loss provisions we made this year, EUR 20 million was individual customer-specific provisions. We are seeing more and more agriculture customers, farms going into default or in that type of situation that we are booking these individual provisions. That magnitude was more or less the same already in Q1. I expect that we are seeing this level of new increased individual provisions also in the coming quarters. This remaining EUR 10 million of agriculture provisions in Denmark comes from our decision to increase collective provision for this portfolio.
We do have all in all some EUR 60 million as collective provisions for this portfolio now in our balance sheet, at least my estimation is that that starts to be enough to do cover for increased risks. I don't expect that there is a need for increasing this collective provision so much more. As I said, we expect that these individual loan loss provisions will continue in Denmark in this segment. All in all, it's relatively positive news coming now from Denmark.
When it comes to the asset management, you're right that we have seen an increase in the income spread. It improved from 39 to 41 basis points in the quarter. That is mainly a distribution effect because if you look at the inflow, we mainly had inflow to high-margin products in the quarter, and that helped us. Please remember that when you calculate the average volumes, remember that the end of the second quarter was the weak part, so to say, when you had this turmoil. Therefore it was a quite temporary dip in the asset under management. The average over average volumes were quite good, actually.
Yeah. That's clear. Thanks very much.
Our next question from Johan Ekblom from Bank of America.
Thank you very much.
Sorry, we lost you, I think. You want to stick around?
Yeah. Can you hear me?
Yes.
Okay, Johan, please go ahead. We can hear you.
Okay, perfect. Yeah. 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 extraordinary remortgaging fees were still present in Q2? Secondly, you spoke, I guess at the press conference this morning, about this change to legal structure. Can you quantify or at least highlight what operational benefits you see from that move?
Yeah. I think we have, is it around EUR 11 million?
12.
EUR 12 million on the remortgage fee list as you mentioned. 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. 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. You can imagine the administrative effort of keeping track on that, 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, et cetera. There is somewhat of a times four effect of having to keep track in our four main companies on the legal dimension is just basically book everything one place.
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 the simpler legal structure in mind instead of building a set up that should cater for four companies.
In your cost benefit analysis there, does the savings from this outweigh the potential for higher bank levy contributions in Sweden? Or is that not part of your decision?
Yes. Many parameters goes into the total, you can say business case, as I think I indicated earlier today. We have identified at least 60 different drivers of value or effect in respect of this move. It's a very complicated equation, you can say there is a two-year horizon before we are there, it has become increasingly clear that the fundamental benefits are so high that even if there might be some cost related to it, mainly vis-a-vis higher taxes or stability fees or whatever, it's still worth it. Not least in connection with the strategic agenda, as we have pointed out many times, that improving our platform to one efficient platform, that is the key strategic lever, and legal structure has become important in that part.
Yes, even if we might see some 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.
Good afternoon to everybody. Sorry to get back to the EUR 4.6 billion. If I take the EUR 4.6 billion and divide it by the corporate exposure defaults you reported in this quarter, which is about EUR 170 billion, that would mean adding less than 3% risk weights. I just don't understand why did you do it? Is it because 3% or more risk weight cannot be enough in preparation of higher risk weights on the overall exposure at default, corporate exposure at default. Can you be extremely simple in explaining why you do that? In preparation, given that you sound, I don't know if to say concerned, but given that you flag in possible higher risk weights buffers here and there, what about the messages you conveyed during the Capital Markets Day a couple of months ago on dividends, dividend distribution, and so on?
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 relieved by DNB? How should we see the 4.5%? Thanks.
I think we cannot come much closer to the EUR 4.6 billion than what we have said that it relates to specific findings pointed out by the Supervisory College as part of the paper. 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. 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 buffer, which we have defined as 50-150 basis points. That's a requirement. We have a dividend policy, which is not a requirement.
It's an ambition stated by ourselves, it's guiding us in our effort to generate as much capital as possible. What we are raising as an issue is, of course, that we do now see this more harsh stand by the Supervisory College on capital and risk weights, et cetera. Then we are making certain provisions, then we are looking into hopefully having a good process. By end of December, most likely, we will know more and be able to tell more about how to view this in context of the actual dividend 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, hopefully the fact that leverage ratio will not be a backstop, at least not at a level that we will not be able to meet. 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 rather than being a backstop mechanism?
We do not regard the leverage ratio as the most adequate way to construct a backstop, we understand that that is debated for the moment. We do not know, of course, where it will end, but what we know as today, we think that our current level is adequate. Then, of course, we will have to see what comes out of this dialogue.
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 on Nordea is to simplify the legal structure, i.e., branchify, and that is absolutely done in the most easy way out of our current domicile. We have no plans to change domicile.
Okay. Thank you.
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. 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 Markets Day was that the management buffer should cater for normal volatility plus potentially the swings you will see in the countercyclical capital buffer. I also think we said very clearly that the capital policy and the dividend policy, by the way, was based on the current understanding of regulation. I think that the last two to three years have shown us that, unfortunately, the finish of capital requirements for European banks seems to be constantly moving. As we said also, we will probably now have about a three-line process lasting two to three, maybe even longer years, where we will unfortunately have uncertainty around it.
I think it's close to impossible to cater for that by a management buffer, or the management buffer would have to have a range that would not really then have a big bearing of guidance. That is why we see it in that way.
Perfect. Many thanks.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Again, please press star one if you would like to ask a question. There are no further question at this time.
Okay. Thank you, operator. 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 8:00 A.M. at the Langham Hotel in London, where you're all welcome. 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.