Good morning, everyone. It is still two minutes to 9:00. We at Nordea like to be efficient, let us start now. My name is Rodney Alfvén, Head of Investor Relations at Nordea. It is my pleasure to welcome you to this Capital Markets Day 2015. We will present the strategic direction of Nordea, the financial targets for 2016-2018, present our risk management. Then after the break, we will present the business areas. There is a free Wi-Fi, Berkeley. Please use that. Now it is my privilege to present the first speaker, the Group CEO and President, Mr. Christian Clausen. Welcome.
Yes. Welcome to this Capital Markets Day. I am impressed to see you all seated two minutes before the opening time. It is because we are all so anxious to hear what is going to happen now, I am sure. Welcome. It is a pleasure. We are going to talk about the future. Fantastic subject. Knowing more about the future is, of course, important. More specifically, our headline is Shaping the Future Relationship Bank. Everything you are going to hear will be concentrated around looking into what exactly what type of bank is it we are shaping. I would sort of build the overall picture now, and we will fill it in with presentations from Torsten Jørgensen, our CFO, Ari Kaperi, Chief Risk Officer, and our three business heads that will fill in on what we actually do. First, let me do a small flashback.
It is two years ago, we were here at a Capital Markets Day in 2013. I am proud to say that we are delivering on everything we said. You cannot see it here. Our commitments two years ago was on capital, ROE, and loan losses. We have indeed delivered. Capital generations of EUR 4.9 billion. We talk about a 15.7% Core Tier 1 and a 70% payout ratio. Now, in 2013, we talked about 13% capital, actually. Even then, I remember that the questions were, "Is not that a bit high?" "Are we going to end there?" It became clear during 2014 and onwards that it should be much higher. Today we are at 15.7%. We are delivering an ROE of 11.6%. That is also a satisfying number.
Actually, if we adjust it into the Core Tier 1 of 13%, which was actually part of the target setting, then we are actually delivering the 13%, which was the target under the present economic scenario with low growth and negative and low rates. We are also delivering ancillary income growth of 9%. You may remember that was the most important part of our presentation. We wanted to build these special core competencies where we could do ancillary income, where we could service our customers on a variation of advisory and services. We are delivering underlying cost decreases of 5% in the two-year period. Loan losses at 15 basis points below the 10-year average. Actually, I could show one more slide from 2011. That is four years ago. We also had a Capital Markets Day where we also delivered.
We have actually delivered now for four years in a row on what we have said. Even more, that points, of course, well into the future. What we're going to present today, you can count on that will be delivered. Let me take an even longer perspective, because I think the story on Nordea's ability to generate capital is a very continuous one. If we look at the past 10 years, you will see that we have actually an impressive build of capital. We started at EUR 12 billion in core capital. We have built EUR 13 billion of new capital, and we have paid out EUR 14 billion. That's easy to remember. Starting at 12, building 13, and paying out 14, all in all, EUR 39 billion. That gives a CAGR of 13%.
It is more or less a straight line of build of capital or generation of capital, of which quite a lot have been retained, but also quite a lot have been paid out. At the same time, with more numbers down here, you can see the Core Tier 1 ratio have developed from 5.9 to 15.7. A very significant journey through the financial crisis. The very short story of the Capital Market Day today is that we will continue this journey. We will keep building free capital. Now, the coming years, we will not have to retain as much capital because we are more or less in place on capital. Of course, depending on whatever regulation will come in more, but more or less in place, which means, of course, that the free capital will be available for payouts.
That was a very short version, I'm sure you want to hear a little more, let's take the big longer version. Now, building the future, you have to have a mark out there to point towards. What we have done, we have built a customer vision which will shape the future relationship bank. We have defined it along statements which we like the customer to be able to say out there in the future. Now, we are not only talking three years, we are talking further out as well. What is it we are building? It's a bank that's easy to deal with, relevant and competent, anywhere, anytime, where the personal and digital relationship makes Nordea my safe and trusted partner.
Now, each and every word has a meaning, that is being translated in each business to what is it exactly we should do to be able to deliver this. Let me just give a few comments to each of these statements. Easy to deal with is probably quite obvious. It's the most important thing the customers answer when we ask them, "What's the most important thing about your bank?" The highest ranking is always, it must be easy to deal with. Easy not only in the sense it's hassle-free, but also in the sense that the complicated stuff we do, we make easy to understand. It's not a hassle. It's easy to approach us. It's easy to understand what we are saying. Relevant and competent is maybe the most important statement. Relevance is going to be king going forward.
We all know on the net relevance is important. What's irrelevant just gets deleted immediately. Relevance is about being relevant to the situation of the customer. If the customer is looking to buy a home, it would be square meter prices, recent deals, how to finance, and so on and so forth. That would be relevant information. Competent will, of course, be to give this overlay of our competence to give the customer some information he didn't know, some analytics which makes him wiser on his decision or her decision. Anywhere, anytime is, of course, very important. This is the digital changed behavior we see from customers. They want to be able to do it anywhere, anytime, and they don't even want to wait. They want to be able to approach us, to ask questions, to do transactions, to get advice, whatever it is.
The important statement of the relationship bank, which we have been working with for 10 years now. It's the future relationship bank, because in the future, it will be to get the personal and the physical relationship and the digital to come together. Most likely, we will, in the future, have much more digital interaction with our customers than we have physical. When we ask customers, which we just did in January, we asked all our employees to go out with a smartphone and interview customers, big customers, small customers, any customer, what is it you require from your bank in the future? We posted on our intranet hundreds of interviews. The interesting thing, they all said the same thing. We want to do mobile here, there, and everywhere.
When it gets really important, when we make important decisions, we want to meet an advisor physically, and we want to understand and discuss. This came from the biggest customer we have, more or less, who said, "When I do an IPO, I want you, Christian, to talk to right here so we can get some advice." The small customer who says, "Yeah, but when I'm buying a home or doing some important pensions, yeah, but then it's super important I have somebody to talk to." The trick is to get the personal digital relationship to come together. Most likely, the digital will be by far the most important in quantity. This should make Nordea my safe and trusted partner. Any research we do also shows that the customers still put great emphasis to have trust when they're talking about their financial services.
This is not only about strong capital and rating and these things, it's about trust. It's about knowing us as being relevant and competent. I can rely on Nordea. I know that they are always giving me relevant and competent advice, so I trust them. When I go into the Nordea Mobile Bank to get advice and information, I trust it and I feel safe. This is not the Wild West. This is a safe room on the internet, and I can trust what I see there. This is the customer vision on which we built our future, because being able to do all this puts huge requirements on the bank. As I will demonstrate, we're going to change more or less everything we do in the future years in order to get there.
To get there and enable the vision, we have lined up three business priorities. It will also be a common theme through the presentations. They are building on the platform you know, the Pan-Nordic platform, the superior distribution power, and this low-risk portfolio we have. The three priorities are simplify for scale, and then this forceful digital response to the changed customer behavior. It is expanding the core strength and drive cost and capital efficiency, and it is to maintain a low-risk profile. Let me elaborate on each one of these. First on the simplification. The reason for simplification is very much the most transformational drivers we see in the future, which are these three, which actually get us there. The balance sheet regulation we know are in place.
Maybe not fully, we still have a list of things to come in the coming years, we can see the shape of it and we are well prepared. This puts a requirement on us to increase capital efficiency and liquidity efficiency and so on, because we have permanently an increased cost of running our balance sheet, of course. The other one is operational regulation, which is also very important, and there we only seen it start. We know your customer, anti-money laundering, and these things, MiFID, much more is to come. When I look at the pipeline, it is probably likely that we, in five years from now, will be needed to survey and screen all transactions being done in the financial system towards the customer, the customer needs, the customer profile, the customer's best interest, and towards all types of laws and regulations.
We have to do a lot of reporting in all different dimensions. They are very complex, by the way, because it is putting together things which are not in a bank normally put together. Different transactions, different customer types, putting together and screen them on information items we may not even have stored today. Digitalization is obvious. It is moving very fast now. Behavior is changing extremely fast among our customers. It is, of course, a great opportunity because digitalization in itself is, of course, something that creates scale effects by obviously because digital is more efficient. Of course, it is also a threat if we are not agile and ready to respond to the changed customer behavior, and this require investments. The last two ones are the ones that call for simplification.
Simplification in everything we do, not only in terms of processes and IT, but also in structures, in anything. We have now worked with this for one and a half years. One year ago, we launched the simplification program as such. We still have quite a lot of things to do. It will take at least four to five years. It is a huge progress to change everything you do. We are well underway in the first wave of reducing number of products, account products, deposits, and loan products by approximately 90% in one year. This is ongoing. We are more than 80% done. We are also making new data records, aligning all our data, all customer data, for example, in one data structure. We are automating processes. We are increasing commonality. Things which are done out there, we do it the same way all over, also documentation and these things.
We, of course, investing in the new common core IT systems, which we have been talking about for more than a year. We are well underway. It is a core banking system, a core payment platform, a common data warehouse, and we are well progressing. We have already the payment platform in place, and we will later this year deliver our Euro SEPA payments out of the new platform. We have closed data warehouses in two countries, replaced all the reporting we do by new warehouses and so on. It will gradually now gain as we go and increase our efficiency. Of course, there is a huge spend to this. We will come back to this later. We spend a lot of money. It is a huge investment, going forward. This will, of course, create the benefits listed. It will increase the scale, efficiency and agility.
Scale is obviously if you get the same processes, the same IT system, the same processes, you will, of course, get scale and efficiency. You will, maybe more importantly, gain agility. The ability to fast response to new customer needs. When you have things well-structured, it is going to be an easy thing to respond, of course, from one platform. It is this end-to-end digital response, as we call it, to be able to execute on the customer vision. End-to-end is important. I will come back to that in a moment. Of course, a stable, resilient operation, compliant and in control, which of course, is also very important with all the requirements hitting us. The digital development you all know about. Here we just have the mobile transactions versus manual transactions.
There is no doubt that the manual transactions are gradually disappearing, actually very fast, and the mobile are exploding. More importantly, we now see that a lot of other things are moving digital. Just in Q1 this year, we had more than 10% of our advisory meetings with gold customers online. More than 10%. One quarter ago, it was 3%. The 10% are more satisfied, and they want to have a new digital meeting. They do not want to go back on it. A digital response is, of course, required in this development. It is not enough to produce new front-end solutions, new customer apps and these things. It has to be end-to-end, digital in, digital out, and no paper in between. This is where it becomes problematic.
It is easy to do the new apps and new front-end applications, to get the whole flow through the factory aligned is a complicated thing. That is where we require new technology and common platforms, because when you have that and well-structured data, it is actually possible to do an end-to-end digital factory where we can produce our banking products. The next priority is to build on our core strength. We have a fantastic situation. There is no doubt that we have by far the leading corporate relationships. We have by far most relationship and highest quality in the eyes of the customer, and we have by far the most household relationships, and the same thing goes for a number of other things, private banking and so on. Based on this, we are building on some core strength. You can put it in another way.
It's also what we normally call ancillary business. It's all the advisory items, all the things when we have done lending to a customer that we do on top. It's concentrating around capital markets and savings, asset management, life and pension, and so on. For the corporate space, it's mainly the capital market running the balance sheet advice to a customer. It's M&A, it's equities, it's debt, capital market, and so on. We have, during these four years when we presented building the wholesaler bank, created a wholesaler bank that's clearly number one, and I'm sure Casper will repeat that message in a while. We have the leading platform where we integrated everything, and we have this lead position. Of course, we will keep driving this. This is a very important part of the way we run our customer franchise.
It's not enough to lend money to corporates. We all know that. With all the capital requirements, we have to do this on top. That is something we will do also for a number of smaller customers, as a matter of fact. Then the savings and asset management space is super important. We have been building this for many years. Actually, for 15 years, we made that a top priority. Now when we have lower negative rates, it's of course even more important. The customers are not putting money into the bank and with a negative rate or zero rate, they want to invest. We have created a fantastic platform. You can also say that within asset management savings, we have done simplification in the past eight years. We have created one system, one process, one legal structure, one, one.
Therefore, we have the most efficient asset management operation of any bank in Europe, according to all the surveys which are out there. The biggest one is the McKinsey one. We have a product range which is very well suited for this environment with negative rates, because of course it's about advising customers, not only our own customers in the Nordics, but customers throughout Europe, that when they invest, they do not just buy a lot of equity funds, because that was not the risk profile they were probably looking for. Some of our leading product ranges, which are the ones which are leading the scene in Europe right now, are actually balanced funds with fairly low equity, but very stable and very predictable return.
I can actually tell, I just got the numbers last night, the Nordea Stable Return is the best-selling fund the first four months of this year in Europe of all 250,000 funds existing. It is the most wanted product range. In this product range, we have many product families, but they are very well suited for a retail network where you want to have some risk, but not too much risk in this environment, where you don't seek negative returns, you seek some small, but positive and stable returns. The same thing then comes from life and pension, because that's also an area we see growing. People are saving from their retirement. We are clearly number one. We have during the past four years, managed to turn that business around from being capital intensive to be capital light.
Now we are at 24% market share on the capital return products in the Nordics. We are building new retirement families now, retirement products, because of course, customers get older. When they are older, they retire. When they retire, it is a slightly different product range. Also very successful. By the way, our life and pension meet our return targets today. Private banking is of course, part of it. More and more customers grow up to become private banking customers. It is part of this whole area of being able to do ancillary business. The fourth priority is then to build capital and cost efficiency. Capital efficiency is part of the business model. With all the regulation coming in, it is very important to think about running the bank not as lending more money, but to service our customers with the lending need they have.
On top of that lending need to do all the business the customer have. Building on the cost range I just went through. On cost efficiency, it is of course to prove that we can do this more cost efficient as we are simplifying the bank. This is of course something that is important because we also need to free up the resources to invest in the future and to become efficient. The third priority is this low-risk profile and stable development. We also here, I can say we will continue the journey. These are the ROE numbers back from 2006, and the lowest quarter is 8% and no years below 11%. We have indeed proven with our diversified product structure, our diversified business with customers, that we have actually delivered stable results.
We are continuing and refining and improving this way of running. We see the bank as delivering very stable results, a very stable capital. We are working on 16 risk boundaries on which we optimize our portfolio. We are optimized not only on a few risks, but a lot. We are monitoring a lot of indicators. We do deep dives. We do stress tests. Every single quarter when we report, you heard me say something about, "Now we stress test this, we stress test that." We take a consequence of that. We change the way our portfolio looks like in order to get this sustainability. I must say the most important part is our diversification among customers and products. Every time we have an area of problems, it is often 2% of our portfolio.
That is what we have seen in history, and that is what we see going forward. We manage our way through on the cycles, which of course we will see. Summary is that we have the three business priorities. You will hear more about them. Simplify for scale and forceful digital response. Expand on cost range on which we build our new business model with cost and capital efficiency. We will maintain the low-risk profile, and that will of course deliver some strategic targets you can say. One scalable common platform, anywhere, anytime. That is short for delivering on the customer vision. Efficient, agile and resilient. That is the characteristics. That is the targets we want to deliver on that journey. The next one is leading customer relations. It is no less ambitious than to say that we will be the number one bank for all our customers.
That's of course part of the business model, because being number one bank is of course a bank that do all the advisory, all the savings, all the capital markets business on top of our lending, which of course is the one to make capital efficiency. Number one bank, we'll hear more of that from Lennart and also from Casper ongoing today. The last one, we will increase the free capital generation, and we have specific targets on all businesses to do that. This was hopefully the overview. Torsten will dive into the numbers more specifically. Ari into the risks, we'll hear the three business areas telling how to do it. Thank you.
Thank you, Christian. Two small excuses on a personal note. I have some kind of flu which makes my voice even more strange than normally, I'm sorry for that. The other thing is that I have been so bold, I have taken away some of the slides that I'm going to show you. They are in your pack, but I thought the flow was better without them. I will guide you through it. I can have this one. That's the same. I have been looking forward to this. I think we have managed to come up with some financial targets that are not only well-aligned with the current market and regulatory environment, they are also well-suited to guide and support our strategic journey and our huge internal change agenda.
Finally, of course, but not least, I think they will reconfirm our wish to position Nordea as the dividend yield stock. I will talk hopefully enthusiastically about our 2016 to 2018 targets. What would be more natural to start with our current targets. Elaborate. There are still seven months left of our 2013 to 2015 plan. Remembering on the financial target setting what we promised. We promised that we would generate a lot of excess capital, we would repatriate it by increasing our payout ratio year by year. We promised you 15% ROE with something that today sounds a little strange, based on a CET 1 requirement of 13% and normalized interest rates. We promised you flat RWA, we promised you flat cost. It didn't exactly spell out this way. However, we did generate a lot of excess capital.
We did increase the payout ratio year by year. We will increase it for 2015 compared to 2014. We will most likely pay out, in EUR terms, more than we had anticipated when we started our 2013 to 2015 plan journey. We did not see normalized interest rates, actually pretty far away from the normalized interest rates. We did not see a CET 1 requirement of 13%. Actually, we are 20% higher at 15.6% Q1. We are certainly not a normalized interest rate. Judging our current ROE run rate of around 12%, I don't think is far away from the 15% we thought about back in 2013. We did not deliver flat RWA. We have delivered until now EUR 31.8 billion of the EUR 35 billion RWA efficiency program.
On top of that, we have very skillful managed business selection, meaning that RWA is down 10%, not flat. Then we promised flat cost to start with, but were hit by changed market condition, we altered our cost guidance to 5% down, excluding FX from 2013 to 2015. What I am particularly proud about is that we also spelled out quite precisely how we were going to deliver on this cost program. We showed you how we would streamline a lot our physical distribution, changing from physical to digital, taking out a lot of efficiency. How we would insource a big part of our IT production, a lot of consultants. How we would slimline our internal service levels. How we would take down external spend, marketing, consultants, travel, et cetera. We have actually done all of that, I would argue. We can even document it.
We have delivered a lot of gross savings that are not only have mitigated inflation, which is at least EUR 400 million for the period, allowing a lot of reinvestment in digital and advisory services and capabilities, but ended up delivering a net cost reduction of EUR 250 million, exactly meeting the 5% excluding FX. We have been hit by one thing we had not foreseen completely, we have taken a management decision I will explain you shortly about. We believe we have delivered, the program have delivered. As we said in Q1, we had not expected the market conditions we saw in Q1. We also warned you that as we had a change between line items in Q1, not least, but also total income much higher than anticipated, but also net fair value being much higher than anticipated.
We had an effect that now for the full year 2015 update for Nordea means that we have EUR 46 million higher VSP or performance-related salary than we anticipated beginning of the year. We have another EUR 30 million that come from the fact that as we have adjusted our internal full-year budget somewhat up, we have a profit-sharing scheme for the 30,000 employees in Nordea. By the adjustments we have done, you are passing a threshold in this scheme, meaning that EUR 30 million additional will be released to this profit-sharing agreement. These EUR 76 million, I think, is good money because they are coming on the back, of course, of much better income and a higher net profit at the end of the year, more dividend.
We have on the not so much to do with the Q1 result, but we have lately taken a decision to front-load and accelerate certain activities relating to compliance. We will conduct a number of deep dives, reviews, together with external help and consultants. We will front-load certain recruitments of key persons and a number of positions related to compliance activities. That's, of course, a management decision, and it's based on the fact that we think this is important to do. That wasn't the plan to ramp all of this up, but we have front-loaded it and accelerated it. Currently, we estimate that to be an additional cost that will mainly hit us in the second part of 2015, of around EUR 27 million. We have the FX effect.
What we are now guiding you towards is a EUR full year 2015 cost base of around EUR 4,700 million, which is, by the way, close to 7% down in all inclusive costs from 2013 to 2015. I will let you judge whether or not we have fully accomplished what we have promised you on cost. To recap maybe on the 2013 to 2015 plan. What are the key takeaways from having being so bold to have targets reaching almost 3.5 years out? Well, first of all. We don't know. Many things will also change we have not foreseen as of today, when we soon will talk about the targets. Another thing I think is very important is that the fact that we are anyway delivering a lot stem from the fact that Nordea is truly diversified.
Now I'm not talking about credit risk is diversified because we have a country-based diversification. I'm talking about the truly diversified nature of Nordea. Finally, maybe, which I should not probably do, but it's you to judge, I think management have felt very committed to deliver as much as possible according to what we had promised. None of the three of the above things will, of course, be significantly different now looking into the plan going ahead. What is it you are saying? Never change a winning formula. You should not look in our overall target setting to find a spectacular news. We are still focusing on the same. Generate a lot of excess capital, be guided by an ambitious ROE target, and we have adjusted a little how to formulate both of these. Not using risk to close any gaps.
We will continue to be a very low-risk appetite bank, hopefully producing very predictable and stable results. The management levers are the same. This is an attempt to formulate it in a way what you can manage. We have learned that we cannot manage income in any details. Just very briefly on income anyway, as we will not try to be too bold to have very explicit income forecasts. I think that based on the current environment, moderate income growth is what we should expect. We don't expect any particular marked improvement in macro conditions. We think that GDP growth in the Nordic space will pick up somewhat, be slightly higher. We don't think interest rates will be higher, and here we are only looking on the forward rates, sometimes into 2017 and 2018.
We are calculating that the effect on our income CAGR of our rate expectations is around a half a percentage point CAGR for the period from coming from rates. We are not going to grow our balance sheet a lot. I think we, for many good reasons, we will grow our mortgage portfolio somewhat. It has typically trended for the total portfolio around 3%, and there's no particular reason to believe it will be very different. We will continue to be very selective on our corporate portfolio, volume-wise, lending-wise. Lending assumptions should be very moderate. We will take down our funding costs. They will go down somewhat into 2016 and again into 2017, and then they will flatten out. Unless something very different should change. Margins we estimate will be under pressure. Customer margins will be under pressure.
We will continue to do a lot of good things on the fee and commission side as part of the strategy. We should expect to see fee and commission income line growing in relative to NII. On net fair value, I think 2015 will constitute a pretty strong baseline number. That was more or less what I will say on income. I will leave it to you to calculate the risks. On cost, I know you are already disappointed about the fact, if we start on the far right-hand side, that we are saying that a cost CAGR, you should expect a cost CAGR of up to 1%. Is that ambitious or not? If we start on the top, we do have underlying costs, which we cannot really do anything about as such.
We do in most of our countries, including Denmark, a lot in Norway, Sweden, Baltics, Russia, et cetera. We do have quite strong salary drift. It's basically only in Finland we don't have it. We do have a lot of rent agreements, software license agreements, et cetera, et cetera, where we are obliged to pay according to a certain structure. A widening around 1.5%-2% underlying cost is not possible as such. We have taken what I would call a strategic decision to invest much more in two things. The simplification journey that Christian has just talked about. A lot of the costs there are capitalized and are not seen on the P&L.
However, as we are already engaging several hundred people, and we will peak 2016, 2017, and partly 2018 on our simplification efforts, it's impossible that you will not see effects on the P&L also. This is investing in the long term and in the right things for Nordea. It is increasingly also very clear, I think for everyone, that not investing in compliance is a no-go. We already have equivalent to 900 full-time people working on compliance, and we will during the next couple of years have many more. That means a CAGR of around 1%. That is around 2.5%-3% underlying cost, which I think we absolutely will have to do. Then comes, of course, the more manageable part. We have a number of growth areas we would like to invest more in. Some of them are listed here.
It relates very much to advisory services. It relates to savings and investments, corporate advisory services, et cetera. Fee business, not requiring capital. We would like to do more. We can see that our capabilities are in place. We can see we have scalable platforms. We can see that the more we invest, the better the return. As we are all concerned about too much cost drift, we are of course trying to balance both the underlying and the compliance with a number of cost efficiency initiatives. We are in cost efficiency initiatives, we are looking for a program that is almost as ambitious as the one you saw for 2013 to 2015. That will also be more of the same, maybe even slightly more overweighted towards continuing the streamlining of our physical distribution towards a digital world.
Still reinvesting, also taking out efficiency and more of the same as we have presented in the last plan. We will try to manage this to stay within this cost restriction. I personally think that with all the activities we're talking about, all the things we want to invest in, that it is a pretty ambitious plan, actually. It will deliver a lot of capabilities, a lot of resilience, and a lot of income. Don't forget that. I also have to warn you a little that as we are now detailing this quite ambitious cost efficiency program that will allow us to do all of these things and still stay within the 1%, we might have a need for a restructuring provision, and then we would have to announce that in the Q3. Then to capital.
Our new capital policy is to, at all time, have the minimum capital requirement plus a management buffer. We have decided that a management buffer for Nordea, an adequate management buffer for Nordea would be in the range of 50-150 basis points. One can, of course, argue whether or not 50-150 is high or low. We think it's more than adequate. You can have many approaches to this. One we have done is, of course, to investigate all the underlying drivers of Core Tier 1 volatility. Some of the main ones we have is related to FX. We have certain type of FX exposures that can be easily or not easily hedged. There is some kind of underlying sensitivity around 30-40 basis points. You all know that most Swedish banks at least have pension risk.
We have also indicated the level of sensitivity there. Finally, we have all kind of other stuff that could hit us. 50-150 is actually, you can say, explained by the residual as we have put in there, because our current volatility, looking on the last 10 years, the average quarterly Core Tier 1 volatility have been 21 basis points. The worst quarterly drop in Core Tier 1 ratio have been 38 basis points. You could argue for an even smaller buffer. However, I don't think it will be seen as credible and prudent, why we are guiding for the 50-150. As you can see, we are already within that range. The latest updated numbers on the minimum capital requirement set by Swedish FSA, based on Q NUM figures or data, they have now revised, and they have told us that the minimum capital requirement is 14.7.
However, they have also told us that on three specific Pillar 2 risks, the concentration risk, the pension risk, and the interest rate risk in the banking book, Nordea only have 70 basis points of risk. They have a formulation that they might have other Pillar 2 risk add-ons, and they will be revealed in the so-called SREP process. The .8 is yet not really defined. Ideally, they will all go away, which I don't think is realistic. Worst case, they will find add-ons and other Pillar 2 risks that will eat up more or less all of the 80 basis points. Hopefully unlikely, but still, we are prudent, so we show it in this way. As you know, Sweden also the other day took a decision of they are proposing 22nd of June, they might decide to increase the countercyclical buffer for Sweden to 1.5%.
That will increase the Nordea requirement down here with 13 basis points. Hopefully, that could be fully covered by our 80 basis points reserve. You also have to remember that you have to add another 20 basis points because when Sweden do this calculation, and we have used Swedish FSA numbers, they do not, for some reason, include the Norwegian countercyclical buffer. You have another 20 basis points on top. 20 plus 13 kind of have already been used for countercyclical buffer, most likely, but still leaving room within the 80 basis point for whatever additional Pillar 2 requirements they might come up with in the SREP process, and we will know the result by end of year. I need to check how much time I have. Not a lot. I can do this very fast. It's just showing the numbers I said before.
Very low Cohort one volatility, very low underlying volatility, actually the lowest we can find. We will do whatever it takes to continue to run the bank, creating preferably even lower volatility. To sum up the targets. We also have a new dividend policy. Actually, the dividend policy is on the right-hand side. We believe a more elegant way of expressing our ambitions on repatriating capital is by promising a dividend CAGR of at least 10% in the period. We have supplemented it by a payout ratio policy saying that we will pay out at least 75%. You will not spend much time in finding out when calculating that this might mean that it's higher than 75%, and so it might be. We have discussed the capital policy and the management buffer.
We have supplemented our ROE targets with a relative one, I will come back to that. We have the cost target, we have the RIA, which we will keep largely unchanged in the period. Keeping RIA largely unchanged means that we will continue to, as I said, be very selective on our corporate volumes. We will continue all kind of housecleaning activities. The largely unchanged RIA do not rely to any high degree, big roll-outs or approvals, as they are more or less impossible to achieve. We think we have a RIA ambition that is very much within what we can manage. To the adjusted ROE. This is the external version. I will come back to how we internally do this. We have acknowledged that it's a little complicated to find good comparisons with the Nordea.
We are a Nordic bank, none of our peers are really resembling the Nordea characteristics in a good way. We have constructed our own index. As you can see to the right-hand side here, this is the true allocation of Nordea Capital in a country dimension. The weighting of our peers is a qualitative assessment of actually who do we compete the most with. In how many markets, in how many segments are we meeting this peer? If we should do a somewhat non-scientific weighting, this is the weighting that we as management come up with each of the banks. That, of course, can be discussed, but now you can see how we have done it.
The ambition is that we should, at all time, or at least some reasonable volatility in this, we should stay kind of in the long-term picture, we should stay above, of course. We believe in our strength, and we believe by simplification, we will structurally be even stronger. Over time, we should, of course, always have the ambitions of being above this peer index. It's important for me to say that internally we are still applying a ROE of 13% equivalent threshold. We still have an internal profitability threshold of 13% ROE. We are also managing our business units by how much dividend capacity they are generating. We are measuring on a ROIC or ROIC an ROE equivalent, and we have the threshold of 13. We are measuring them on a number of other things.
We are allocating all capital and costs, and we are increasingly differentiated the internal thresholds and targets for business areas. I think that was actually more or less what I would say as I have also now used my time, by the way. Our annual guide on our loan loss provisions expectations.
Now we are moving to risk angle and then risk area. As you have heard from the previous presentations, one of the key cornerstones in the bank strategy is to have and maintain the low-risk appetite and risk profile. My intention here is to explain you that how we ensure exactly that. I'm starting from the credit risk, but I'm also shortly covering the market risk and operational risk because usually we are very much concentrated on focusing on the credit risk and the other areas are a little bit left aside, but I will also shortly cover those. Starting from the credit risk, which is, of course, a very key driver for the net profit volatility.
Here we are naturally supported by our business mix, which is providing us with this kind of natural good diversification in terms of clients and geographies, as you have understood, but also with this kind of very strict and firm one-bank risk management approach. More and more moving to more forward-looking risk analysis, trying to understand that what has happened in the marketplace, what could happen in the marketplace, what could be the impacts on our risk position and acting accordingly. The history is perhaps too well known, the level of credit loan losses you can see here. What I'm just saying here is that please take a look on the 2009 losses, at the peak of the financial crisis, which was actually the real-life very severe stress test, we ended up at 55 basis points and ever since come steadily down.
I would say that this has been moderate risk profile we have been running this bank with. This development brings us to the average loan loss level of 16 basis points. That's nicely below the Nordic peer average. We can also see that we are not the bank with absolute lowest loan losses over this period, but that's also very understandable. I'm covering those issues somewhat later in my presentation. Little bit looking back what we discussed and outlined in 2013 Capital Markets Day. Our main outlook guidance at that time was that we should expect that we are reaching this long-term average level of 16 basis points by the end of 2015.
Of course, very glad to report you back that actually we have done it, and indeed, we reached that level already a little bit earlier so that we reached the level in the end of 2014. Denmark improved and especially shipping recovered quite fast. As a matter of fact, a bit faster than we anticipated even ourselves. That brings, of course, us to these levels we have seen. Definitely we have executed all these risk management actions we outlined in 2013. If you take a quick look on our grade portfolio and this diversification. Geographic diversification, you can see on the left-hand side, we are a Nordic bank. 95% of our portfolio is Nordic-based. Even in the Nordic area, we are even split between these four Nordic countries.
If you take a look on the long-term loan losses in the Nordic countries, you can see some differences. In Sweden, very low, five basis points. In Denmark, obviously higher because we have had in Denmark a five to six years period of very difficult times. Norway, Finland, around 10 basis points. The client segment diversification is on the right-hand side, 50/50 between household and corporate. What I would like to point out that please take a look on the mortgage book loan loss ratio. We have a quite substantial large mortgage book, but the long-term loan losses is four basis points. Remember that this includes even Denmark and at this very difficult times in Denmark. Once again, a very good proof that the Nordic mortgage portfolio is stable and solid and low risk.
If everything is so fine as I indicate and show here in these slides, why from time to time you have a focus on our credit risk, and we have a lot of questions here and there. The reason is that just because of our size and exactly then this diversity. It means that quite often, if not always, we are exposed to the areas where we have a little bit more negative market environment or development. In addition, actually, we run businesses in some areas which are more cyclical and higher risk by nature. What is important to understand that in these areas, these cyclical areas and higher risk areas, first of all, we know what those areas are. We have limited the size of our credit portfolio in those areas, and we are very actively managing the risks in those areas.
With these elements, we are able to limit the impact of these more volatile areas on our total loan loss levels in the bank, which is visualized in this bar. The annual loan loss season and these Nordic core portfolios, if I would use that wording, these are dark blue bars. They are explaining the majority of the loan loss season and the trend, of course, these higher levels driven by situation in Denmark. We have these more cyclical and higher risk areas isolated here, so that you see that we define these areas to be leveraged buyout portfolio. That is, of course, Nordic portfolio, but nevertheless, it is a Baltic portfolio, Russia and shipping. Yes, they are increasing this level of losses, but largely speaking, they are not changing the total loss picture we have in the bank.
I said that these areas are very limited in terms of size. We want to keep these limited. Russia is 2% of the total lending. Actually, you see that Russia is not even visible in these total losses over this period. The losses have been very small in that area. Baltics is 2% of the lending. In Baltics, yes, you can see the bars, especially in 2009, but only in the deepest crisis it was only 10% of our total losses. LBO portfolio, 3% of the total lending, more or less relatively speaking, same type of impact in the worst year than in Baltics. Finally, the shipping, 3% of our total portfolio, there the crisis hit a little bit later than in other cyclical portfolios. We saw some impact in 2012.
It's also important to understand that the cycles are not the same for all of these portfolios, which is also giving this kind of stability in the long-term development. You can say that why we are having business in these type of areas, how is exactly how we manage these risks. I said that we are actively managing those risks. I will elaborate a little bit more on that on each of these four areas, starting from Russia. To answer the first question, why do we run business in these areas, is that we make money. We make good money in these areas. As you can see on the bars in Russia, very low loan losses, very good level of profit after losses and before losses. How do we manage the Russian portfolio?
First of all, with very same grade standards than anywhere else in Nordea. On top of that, we have specific risk appetite statements which are capping the Russian exposure. We're also capping commercial real estate exposure within Russia because we want to keep it low. We have some specific credit restrictions related to that portfolio. We are on continuous basis stress testing these clients, and that's done client by client base in order to understand what is the situation, what could go wrong, taking actions. Also when we see something adverse development in the environment in these type of portfolios, we are also taking actions.
In Russia, the recent decision to run off the household portfolio was based on the analysis that the profitability was poor in that portfolio and also the risk profile started to go up, and then we decided to run it down. Baltics, the same type of approach. First of all, you see the numbers. Also there, we usually are making quite decent returns and profits. There is one loss-making year in 2009, but after that, the loss levels have been very moderate. There was one exception in the last year, so that we took down some of the collateral values, mainly in those assets which we had taken over from our customers, and we hadn't been able to sell those to the market. Then we just simply took down the values. Then now they are going to be sold.
Underlying development in Baltics in terms of risk has been very stable. In Baltics, the same. Very same credit standards. In Baltics, we have built the portfolio organically. We have used Nordea standards when we have chosen the customers. We have not bought the portfolio, we have not acquired the portfolio made by somebody else. We are very close to each of these customers. We are making quarterly deep analysis on the risk levels of the portfolios and of course, analyzing risk-classified customers on a customer level and so forth. Very actively managed. Leveraged Buyout portfolio. By definition, this portfolio is of companies where we have a relatively high leverage, and thereby they are very sensitive to any kind of negative market development or company-specific issues. Results are very impressive, as you can see.
Also the loan losses in absolute terms, they are a little bit higher, but they are very well covered by the income we are having from this portfolio. Here we have a very specific industry policy governing this business and risk-taking. This portfolio is comprising of roughly 100 target companies, meaning that we monitor very closely each and every single one of those customers. There is a diversification in the target companies over various industries. Most of all, the way we run this business is important to understand. This is not the business for us where we originate loans and keep those long-term in the balance sheet. This is a business for us where we originate the loans and distribute those loans to the marketplace, to other banks in the banks syndicates or to the bond market.
We may underwrite very big tickets, and thereby, of course, it is very important that we also control and cover this underwriting risk. There we have to know what is happening in the marketplace. We have to follow up very closely that how we are able to distribute those loans to the final hold levels we have decided ourselves. The intention here is not to increase the credit book, but just to increase the business and run it in this way. This means that the behavioral maturity in this portfolio is very short because by definition, these companies are sold and bought. These are refinanced. Most of their lending is bridge financing, short-term bridge financing. In that way, that is quite easy to be managed and observed and monitored. Then finally, the shipping. This may be the most familiar segment for you and portfolio.
We have discussed a lot about the shipping over the years. Same goes here. Very profitable business. We made even profits in the worst year of crisis in the shipping segment in 2012. Here we have also in our risk appetite capped the total exposure for this segment. Here we have built a very extensive in-house knowledge over the years. We have been long in this market, and we know how the market works and how the financiers shall act in these markets. We are today very strict on the business selection. We have even the learning points from the previous crisis was that we have to exit also, and we have exited some of the clients. There is also a specific industry policy. There's numerous type of credit parameters guiding individual risk-taking and structuring of the loans.
Also here, actually, the business model is very much the same as in LBO, so that underwrite and distribute, not underwrite and keep. In that way, we can keep the total exposure at the controllable level. Also here, we are performing lots of stress testing because that's the nature that we have to understand that what are the impacts of market events to our risks. That was this kind of main message coming from the risk management. Few words on some other areas which may create some volatility in our earnings. Obviously, we are also exposed to the market risk areas. That means treasury, that means markets or FICC, what we sometimes call the back book, so that what are the flows, how we manage the flows coming from customer transaction. That also includes the life and pension market risk part.
Here our purpose is to limit the downside risk, so that in a way we don't care if there is this kind of upward volatility in this area, as long it's done within the existing risk appetites and risk limits and risk practices. Our intention is to always ensure that the downside risk is very limited. That we do on overall level by capping the relative size of this business in relation to Nordea's total business in our risk appetite framework. In more operational terms, we have very dynamic risk management framework, stop-loss limits, very many stress tests and what-if scenarios. What is very important is this daily P&L explanation, so that every day, in the end of the day, we take a look what has happened in the market, how the market has moved.
We combine that with our risk information, what should be the outcome in our portfolios when market has moved in this way, and compare that outcome to the reported P&L. If there are big differences, we want to have an explanation, understand that what has driven these differences. That has increased a lot of our understanding of our positions, how they are managed, what can be done, what could be the events. Very active touch. We also have this kind of more traditional, naturally more traditional VaR limits governing this area. Moving to operational risk and compliance. Also here, I want to show you this kind of financial track record we have, so that the graph is showing that what is the level of cost coming from the operational risk incidents, which we have booked in our P&L.
As you can see, the track record also in this area is very good, so that it's stable, low-level risk. We are aware that this is definitely an area that we have to enhance our capabilities. This is one of these kind of investment areas together with the compliance, where we will build more capabilities. The need is obviously also coming from this, us going and world going more digital, which is of course changing and introducing new type of risks, not to mention about cybercrime and all those, the information security, you see the list there. Here we are investing just in order to keep this good, stable track record. In compliance, we have already taken lot of very dedicated, significant actions to improve our capabilities and status over the past two years, but there is a lot of things to be done.
They are directed and managed by our new GM member and compliance officer, Eva Lotta Rosenqvist, which is also here today. We have quite many different types of risk frameworks in the bank, but the overall guiding principle and this kind of umbrella is the group risk appetite framework. This is a comprehensive framework. This is decided by the board, and these are very hard limits, so that the management is not mandated to breach these limits. They are naturally covering credit risk, market risk, operational risk, solvency, liquidity, this kind of financial risks, but also non-financial risks in the bottom. This a good framework to have. Whenever we are changing some of our plans, our strategies, introducing new focus areas, it's easy to test that whether they are fitted into our risk appetite framework, because these are the outer boundaries of all the risk-taking we have.
This is not a fixed framework. We update this at least annually. Today, we are now working a lot with these market risk statements. These type of statements are quite this kind of static and high level, we will improve those to be more precise what do we mean by that. This is of course reported and discussed thoroughly through every quarter with the board and also with the business area management. Summing up, our business makes business policies, risk policies are deriving for the fact that we will have a high quality and stable credit portfolio. We are also aware that we are exposed to more cyclical areas. There are, as I said, we know those areas. We have limited our exposure to those areas. We are taking very active risk management approach and also business approach in those areas.
We have moved more and more our risk management to forward-looking, analysis-based, scenario-based type of approach, which has helped us a lot. We are courage enough to take actions if and when these analyses or deep dives, if they show that actions need to be taken. With these elements, now our current guidance to you is that we expect that our credit risk and other risk, they are expected to remain low. Thank you. That was my part. If I remember the program in the right way, now it's a time for coffee break. It's a half an hour coffee break. 10:30 is the order to come back in the room and then we continue. Thank you.
Let's talk about the business and not just the numbers. I think there will be plenty of numbers in my presentation as well. Just a quick look at retail banking. We have the number one position in the Nordics, but also very strong positions in each market, and we'll come back to that in a second. A very broad distribution network with 600 or 700 branches. Perhaps more importantly, customers choose to log into our services 2 million times a day. That is quite dramatic, actually. We run about 2 million full in-depth 360 meetings with our customers every year. We sit down with the customers and go through their total economy. We have a good mix of products and channels and also segments.
This diversification has created a stable, predictable and also quite resilient business model that has served us well over the last few years. In terms of our promises that we made a few years back, I think we delivered well also, as the group has. We've done a lot on the restructuring side. We shut down quite many branches, about two every week last year. The manual cash services is being reduced very fast based upon customers changing behaviors. Cost has been reduced, and will be reduced even more. We have our promises here for 2015 to be at least 5% below the 2013 level, and we will be that and more for retail. As Torsten said, from a gross perspective, that is pretty dramatic because we're also building a lot of stuff, moving capacity from what was in the past to what will be in the future.
Also on capital, actually, you can see the ROE number here has been quite dramatic also for retail business. Doing all that and at the same time actually attracting more customers, more core customers or relationship customers, and also improving the customer satisfaction is something that we are very proud of. Also, the income has been developing very nice and especially then driven from non-interest income, as we decided a few years back. Just looking at the numbers in total here, and this is three years, so you can see more of the trends. An 8% increase of income. We have repriced the stock or the book. Margins on the lending side is up. We are of course challenged by the deposit margins. Relationship customers are increasing. On the cost side, about 2,000 jobs have been reduced over the last three years.
At the same time, we have invested in online and compliance and other areas. A third of the branch locations have been shut down. This has, of course, led then to a quite nice development here of both the cost-income, which is one of our main metrics that we followed super closely at all levels, basically in retail with a 900 basis point improvement and also then, of course, the ROC or the RORAC. If I were to comment on this in the same way as Christian did, I think the short story for retail is that this will hopefully also continue. Looking into the future then. Our long-term ambition is to be number one. What does that mean? We're already number one in terms of size in the Nordics.
It's not that difficult to be number one just by being present in all the countries. It's much more difficult to be number one in each market by using the scale of Nordea, and that is what we're trying to do. On the journey of making sure that Nordea is using its size in the best way, we're trying to become number one in each of the markets. Not in terms of market share and size, we already have good size. As profitability, but also customer satisfaction and employee satisfaction. These three actually go hand in hand. You can't, at least not sustainably, have one of them without the other two. We have a quite ambitious, at least long-term journey here. How is this going to happen? If you start with the platform that we have, we have a quite good platform already.
A lot of things we do, we do together already in terms of branding, in terms of many of our processes, quite a few of the front-end systems as well. The way we run our branch network is the same across the countries. We're using scale already, but there's more to do, especially on the back end as Christian mentioned. We also are very proud of our relationship banking model, where we invest in knowing our customers. We can serve them well, stay with them on rainy days, by that, we think that they will give us the full share of wallet, and they do. That needs to be taken online because customers are moving online. It's a little bit tricky, trickier at least, to have a relationship with customers through machine interfaces than physical. It can, of course, be done.
Those two worlds will have to go hand in hand in the future to a larger extent than today. Customers' behavior is also changing very fast. I think that's the main driver for us. Although regulation is tough, in terms of being able to do all those things. For us in retail with 10 million customers, it is of course about automation and risk-based approach. If you were to use only 10 more minutes, 10 minutes every month on all our customers You would need 12,000 people. This is really about scale and automation to deal with the retail business. We have chosen three value drivers or areas that we think will be the most important ones for us to be successful in the future. First one is advisory, we'll come back to all these three more in detail, but it's about anywhere and anytime.
We will move the advisory also online, also to remote meetings. The digital experience needs to be improved today. Most banks, including us, what you see when you log in with our systems, you see, here's everything we can do. Mr. Customer, figure it out yourself what you want to do. That is not going to be okay in the future. Why do we like Google? Because it's relevant to me as an individual, not to one like me, but to me. If you sit down with your wife or your husband and you search for the same thing, you will get two different answers. We will have to make sure that we have systems that can adapt to customer needs and preferences in the same way, we're working on that.
The prerequisite for that, as well as the advisory, is actually really good analytics and a lot of data. The last one we already have, the other one we're building up fast. It's not just about financial analytics, it's about behavior and all those things as well. Of course, all banking, or at least all retail banking, is a competition about low cost. Now, for us, it's about the efficiency and scale of having one Nordic model. A lot has been done, but more can be done. If you go in then to household first and look at that. What is happening here? Well, the biggest change that is happening now is actually that we're moving advisor meetings to remote meetings, which is that you share a screen, but you do it over a phone call. Why is that important? Actually, for many reasons.
The customers, they don't have to travel anywhere. It doesn't matter how close their branch is. They can do it conveniently from their home. When we ask the customers, about 50% of the customers without having tried this says, "I would prefer to do it that way." That's quite interesting given that also we get very high remarks from our customers or when they have physical meetings with us. They really like the physical meetings, but they still say, "I would prefer a remote meeting." As Christian mentioned as well, the customers that have had that, they like it more. We get very good feedback. They are a little bit faster. We sell a little bit more. We get more business volume. It's a win-win in all ways. We're rolling this out fast, and Christian said that now in the first quarter, we have about 10%.
I think this pace now is about 15% where we are now. That's quite a lot. It's about 300,000 of those meetings in a year at the pace we are now. Advice. Why is advice important also in the future? Well, for the Nordic model, I think many, especially here in the household side, many customers have been not thinking about their financial situation that much. They have been counting on the social network. If they get unemployed or if they get divorced or when they retire, someone will take care of me. We all know that's not the way it's going to look some years from now, or actually depending on your preferences, already today. Customers will have to know more and take more decisions and plan more in terms of their financial situation than in the past in the Nordics.
We can play a very important role to help them. We already do, and that will only increase. The way we then deliver advice will not just be in in-person meetings. They will remain to be the most rich and the most important meetings with the customers, but they will be saved for this bigger in-depth 360-degree of advisory meetings. All the other stuff will be done more remote or even automated on digital channels. Segmentation is key here as well to make sure that we serve the customer based upon their needs and preferences and not based upon how much business they do with us. Needs to be an outside in, not an inside out way of doing this. We will launch that later this year in terms of the segmentation, both for household and corporate.
On the digital side, as I said, it's about relevance. I think the key word to reach that is personalization, that you feel when you use our system, that it's relevant for you. Here we change the way we work. Internal versus external expertise. More external. We can tap into the best people out there. We do hackathons where we invite people to come up with new ideas. We do a lot of different things to be ahead of the curve here. If you look down on the left-hand side, basically the people-involved meetings that we have today, calls and physical meetings, it's about EUR 30 million. We have EUR 3 billion other opportunities to sell, to create relationships, to sustain relationships, and so on, that we are not tapping into as much as we could yet.
That is our huge opportunity and also what the customer wants. This is not about pushing product to someone who doesn't want it. It's the opposite. It's use analytics to really understand or foresee the need of a customer and where they want it, when they want it, and how they want it. We can do exactly that and nothing else. Hopefully you will get less offers from us that doesn't mean anything to you and more offers that actually is relevant for you in time, in channel, and in content. Of course, efficiency and scale here. The branch network will continue to develop. Being optimized, it will be smaller, it will be different. Most of the services already automated to be online. There's not a lot of value add by doing services in a branch. Most of the cash is gone.
It is about advice in the end. It's about the advisory business that we do that will happen and will continue to happen in the branch network. It will look different than today. Automation and simplification, as Christian said, wing to wing. It's always good to automate because it's not a value to the customer to have a process that is difficult, although the decision or the advice might be important and complex or also difficult for the customer. When you have decided to buy your house, of course, the mortgage should be simple. You can focus on the advisory and not on the processes. Products, we have reduced many of our products already, that is also products that customer has to move customers from one product to another. When we go into the new system, it will be even fewer but more flexible products.
Capital will also be an important lever also for household business. Perhaps then more in terms of how we set up our products, what credit limits, as an example, that we give to our customers and so on. Looking in then to corporate business. On the corporate side, the cross-sale has been and will continue to be very important. We cannot use our balance sheet just for lending. We need to make sure we get the full business with our customers, and we do. We have a good track record here. Later this year, we will introduce a new segmentation model also for our corporate customer, which is more linked to their world than to our world.
It will be where we can use our information and knowledge about their industry to serve them better, to be more relevant, to have better advice to them, rather than today when it is more geography-based. More relevance for the customer, perhaps a little bit less relevance for us, then more difficult, but much better for the customer. We'll drive the cross-sales not just by knowing the customer from a relationship perspective, but also powered by good analytics. Again, we have great data that we can use to the benefit of the customer and therefore also to the benefit of the bank. In the digital area, it is similar for the small corporates that we have in retail as it is for the household customers.
For the larger ones, I think it is important that we think about the customer journeys and how their lives looks like, and not about the banking capabilities that we have. Today, we are a little bit too much on the verticals. Here's a solution for that, and here's a solution for that. While the customer is more thinking about things horizontal. Might be a little bit different when you get to real big corporate customers, and I am sure Casper will talk about that in a second. We will build a lot on that also for the corporate customers within retail. The biggest lever for corporate business for us, creating value in terms of owner value, it is in terms of capital.
I think this demonstrates pretty well what we have been able to do over the few last years, taking down RWA a lot and still increasing lending a little bit. We have been doing a lot of business selection, and we'll continue to do that. Capital management remains to be important for us. Although a lot of the things that we were setting out to deliver some years back, as Torsten said, we have done, but there is of course always some more to do. Also in the corporate area, automation will be important. Sometimes when we discuss corporate versus household, there's people who think that household consumers have another need than corporates. I do not think that is necessarily true. If you get used to, as a consumer, to intuitively good services online, you would not go to your job as a CFO and then think it is okay with papers, of course.
You would have the same expectations. It is just a little bit later in the process. Securitization is something that we will have to explore pending the different types of regulations coming our way. Putting it together, we have clearly delivered upon our promises from the 2013 Capital Markets Day. We have set out a very ambitious plan for the years to come. We know what to do. We will focus on advice, on digital, and on scale. For household, it will be quite dramatic because it is a transformation of our industry, and then, of course, for our business. It will release cost that can be reinvested, but also the total cost level will come down. It will be simplification in the household area, but it still be more value for the customers.
For corporate, it will be more on the capital side, where we think that we can continue to push the need for capital down a little bit. I think all in all, of course, we will continue to focus on the improvement of cost to income and ROCAR, which is our most important metrics. I think with this short presentation, I think we demonstrated that we can deliver, that we have delivered. We have the ability and the commitment to continue to deliver short-term financial returns while actually managing a quite dramatic transformation of our total industry. Thank you for listening. Now I hand over to Casper.
Thank you, Lennart. Okay. It's good to be here. Wholesale banking, when we look at strategy, is actually very simple. The strategy in wholesale banking is to be the lead bank to the largest corporates and institutions in the region. That's it. Why is this the right strategy? That's because I think we have actually a unique platform, a unique opportunity to capture that lead relationship with actually all the corporates and institutions in the region. That comes from the fact that we are regional. We operate in an area where we have four currencies. We are truly regional. We are probably the only regional bank operating in all of the countries as a lead bank. We have a scale to be relevant. We have a scale where we have actually competence and quality to serve these customers. We are close enough.
We have the intensity to actually build long-term relationships. I think it's very important to understand that it's the regionality, that we are local and have the scale benefit to actually deliver to our clients. The customer base, of course, is the heritage of the mergers. The mergers that we have done, making us a number 1 or joint number 1 in Finland, Denmark, Sweden, and then a clear number 2 in Norway. Then in our global business, which is shipping and offshore, we are probably one of the top two or three players in the world. We have that scale. Since having the scale, we have done everything to build a product and service platform to actually compete with the best.
That's why really being in this quadrant with the relevance and the locality close to your clients is a unique opportunity to actually be that lead bank. Since forming wholesale banking now actually exactly four years ago, everything we have done, or everything I have done in terms of strategy, structure, choosing the management operating model, and the way we serve the customers, the culture, has been to make sure that we operate in that quadrant and to make sure that we are the number 1 player there. I also argue that it's only up here where you actually can generate returns that are attractive for us. It's very simple. Maybe just to highlight, I think we get some confirmation from Greenwich that the strategy is working. We are the share leader in the region, and we are also the quality leader, as Christian also mentioned.
It's very simple. Of course, those are kind of the strategies, the words we should, of course, say. Have you delivered? Have we actually driven value over the last three years? Three years I take because three years is the full three years that we have actually operated as a wholesale bank. As I said, we formed wholesale banking in summer 2011. Since 2011, three years. Of course, you have to put performance into perspective. When you look at the environment where we have operated in the last three years, it's not been an easy one. Low growth, low interest rates, low volatility, and particularly in wholesale banking, a lot of regulation, particularly in the capital markets, CRD IV. A lot of new capital coming in. Not an easy environment for a traditional banking model. How have we done?
Let's look first at the top-line drivers. Top-line drivers are probably the ones that we all, certainly we bankers, but also you, use to look at the key drivers and the key levers in judging if you're successful. Let's admit that. That's exactly what we did, certainly four or five years ago. How have we done? Lending down -15%, income down -5%, net interest income -7%, net fair value -15%, cost income up 2%. It's silence. You look at, "What the hell is he doing there?" On those traditional metrics, not very good. Let's look at what I call value drivers. Pricing of the loan book, that's the whole loan book, up 30 basis points. Fees and commissions up +15%. Cost, flat. That's the only reason why cost income is changed.
RWA down 30%, despite increased capital from regulation, loan losses down almost 50%. What's the net result then? Top-line drivers, what I call value drivers. We actually have improved return by almost 4 percentage points. Importantly, we have actually gained the number one position that was always our aim, probably not as quickly as we've done. Certainly, I have to admit that. I didn't actually believe that we would get to the number one position. It was the aim, but we have done that. I would argue, and I think you agree, this business now with these numbers is a more valuable business. More important, what you don't see here is that this business today consumes EUR 3 billion less in capital than it would have done if I would have had the original business. EUR 3 billion. More valuable business and EUR 3 billion less in capital.
You get how you drive a modern wholesale bank. It's all about returns. That's the way you create value. The number one position, I just want to mention, because number one position we've done at flat cost and the return and number one position are interrelated. I do not think you can drive return unless you are number one or number two in this business. You need those capabilities. How did we do it? I think we delivered, or I know we delivered on what we said two years ago. If I would use one word to say how we delivered, that word would be reposition. We repositioned the wholesale business over the last three years. We talked about relationship strategy, global product capabilities, and cross-sell. Those were the words that I used two years ago. That's what we've done.
We have achieved the number 1 position, that is global capabilities, and we have a balanced income mix. Net interest income today is 46% of the total income of wholesale banking, 46, so less than half. The other half or more than half is 50/50 fair value and fees and commissions. A very balanced income mix, really what I call a relationship banking strategy, balance serving customers. We said we would develop the organization, strengthen the organization. We've done that. Today, we operate with one Nordic or let's call it global model. I have a tight management team running the model. We've actually improved our capabilities without increasing cost. I see Martin Persson here, so I will take equities as just one example. Martin actually runs our equity business, so I chose that.
As one example of what we have done really in less than three years. 2011, we were probably number 5 in the equity business in the Nordics, if you listen to someone like Prospera. Today, we are number 1. 2011, our share of commissions in the region was 8%, 9%. Today, it's double, actually more than double, getting closer to 20%, and we are number 1. We have increased income more than anybody else by 60%. Last year, of the 25 largest equity transactions in the region, we were part of more than half in a senior role, not in a junior role, in a senior role. That's what I mean by improved capabilities. We said we would do micro-optimization and strict resource management, that's really what I call a return-driven culture.
I think by discipline pricing, you saw the numbers, business selection and capital reduction, we have actually delivered on that. Is there something we haven't delivered? Yes, there is something. It's always good to be honest. We've done what we said, but what we have not done, I think Lennart said the same in some areas, we have not delivered income growth. We could not have done income growth with the return. Could I actually have increased income? Yes, I could have, but not by creating value and not getting the returns that I have. I think that's not the right way to run a business. We will keep that discipline also going forward. One thing you do not see here in terms of promises, probably the biggest thing for me, is that we are changing the culture.
We are changing the culture to a return culture. Return is what we measure. We are changing the culture to a culture of teamwork, because that's the only way you can deliver. We are changing the culture to a culture of relentless customer focus, because the customer, that's where we actually earn our living. It's been a continuous development over the last three years, but it's quite clear that the shift in focus has been as we have moved along. For the first two years, it was all about forming the business, getting the management, getting the structure in place, organization in place. The last two years has really been transforming the business, improving the capabilities, looking at how we serve clients, segmenting clients in the right way, and as I said, really work on that culture. Transforming the culture, return, teamwork, and customer.
As the model in my mind is transformed, now it's all about leveraging that platform. I think it would be wrong to say that the culture transformation is done and we continue. Culture is something that you need to work on, and I think what I just said is something that is ongoing. That takes a longer time, but we are working very hard because that is really what makes a difference. What now? I said leveraging and strengthening is really where the focus is now. Probably nothing surprising here. I can say very firmly, don't expect change in direction because we are on the right path. Don't expect change in structure, operating model, management. We are doing the right things. It's all about, in my mind, execution, continuous improvement, and staying close to the client. Yes, there are things we need to do.
Those are leveraging the customer franchise. I say leveraging the customer franchise because it's only now we actually have a product and service capability that I actually think is second to none. When I look at, and there's a lot of data here, but when I just look at what we have achieved in terms of capital markets and advisory, in terms of transaction services and risk management, really which are the key capabilities of the bank, we actually have achieved that number 1 position. I repeat myself, I think in this business, you actually have to be number 1 or number 2 to be relevant. That's the only way you can actually say to the client that I'm good enough to serve you. We have that now in place, so we can now serve our customers.
95% of the customers in the region actually bank in my target market, large corporates and institutions, actually bank with Nordea. I would say only 60, that's actually a high number, but only 60 view us as a core bank. We can actually increase that core bank relationship, but we can also go much deeper in with the existing customers. Particularly, if the demand is there, the platform actually allows you to capture that demand because you need to have the capabilities, and that we have in place. That is a very important element. The platform is in place. We can do a lot more with this. Capabilities. It's quite clear a regional wholesale bank needs to be an integrated model. We are not a specialist.
We're an integrated model, and to be a lead bank, you need to have a pretty broad product and service capability. What the customer expects from you is efficiency, that you work efficiently, in a coordinated way, and with quality. You need to actually be broad because that's the only way you are relevant when you talk and operate as a regional player. Your relationship may actually sometimes give you the opportunity to actually get a deal or business if you're as good as the alternative. I've always said that's a bad proposition. We should always aim to be better. Yes, relationship will give you the opportunity to sometimes be as good and still win the deal. That means also that we have transformed the business. We are well-positioned, but I would be the last one to say is that we are done.
There's many areas where I think we can strengthen our position. I showed our league table position is number one pretty much in everything. When you look at subsegments in terms of country or products, we may not be number one or number two. There are many areas where we can actually improve and increase our position or improve definitely also the revenues. To do that, we actually do need to invest. Some of the areas will definitely be our equity distribution. Here, we are still absent in the U.S., which needs to be fixed. We need key additions into our investment banking, which is broad. It's the whole DCM, ECM advisory side, particularly in Norway. In Norway, we still don't have the position we have in the three other countries, but we will get there. That's being deliberate as well.
In our FICC business, there's definitely a secular and cyclical transformation taking place. We need to invest in digitalization, e-markets. Well-positioned there, but needs investments. In our core transaction banking business, particularly with simplification, we will have opportunity to improve that offering too. Yes, there are areas where we will invest, but the platform is in place. It is about building on that platform. I think we have shown that we have the discipline to use that platform to drive returns. Capital has probably been the key driver of the last three years that has been driving the returns of wholesale banking. You saw that on my performance slide. It's probably fair to say that a lot of the big gains have probably been had. I still think capital going forward will be something that we can do more of.
Of the three levers that drive return, which is income, capital, and then cost. Income, actually, 1% improvement in return requires 4% improvement in income or increase in income, -6% in capital, -12% in cost. You can clearly see that the key drivers for wholesale banking return is income and capital, and capital is probably the only thing that we control. You'd never really control your income side. Income is dependent on market environment, demand, et cetera. Capital. We can do more on capital. It will probably not be, as Torsten said, on model improvements. That's, I think, a journey that is pretty much over. It will be really what I said, the culture of driving returns, looking at low-yielding relationships, what we do. Business selection, what type of business do we take in so that we can manage the capital?
It's about looking at the business mix, take in business which actually doesn't consume capital. It is also about hedging. I would actually argue that capital management is a core competence that you need to learn. I think we're getting better and better at it. We've now been working on capital management actively for the last four years, I can tell you that just even culturally, the awareness of capital management is going up. It is an important element. I couldn't actually stand here, I won't repeat what Ari said, the fact that I run wholesale banking and a big credit book, that also I say that we will not increase our risk in this business. Yes, we are in a low growth environment, we will not increase risk. We will manage risk in a prudent way, the way we have always done.
Now I say not only credit risk, market risk, but overall business risk, operational risk, compliance risk, and reputational risk. A big focus. I think we are well-positioned here, not changing tack. We've shown it before, and we will continue. We are well-diversified, and we are close to our clients. In summary, I don't think you will see 3 years from now the numbers I showed in the beginning, because the numbers in the beginning with negative top-line numbers was all about repositioning. That has been done. What I do promise is that we will drive 2 things. One, return, and I do think we can improve returns from here on. We will improve returns from here on, and we will maintain and safeguard that number 1 position. I emphasize again, I think these 2 things are interrelated. You need both.
We need the number 1 position to drive the returns. That is what we'll do. The key drivers for this is actually income and capital. Income, cannot foresee 3 years out where the income is, but if we assume low growth, we internally assume flat. I think that's prudent because if I can show you that with flat income, I will improve returns. I think that's discipline. If that demand is there, if we actually get the demand, yeah, we will capture it because we have the platform. I think the first quarter of this year was a good example when we had more volatility in the market. Guess what? Who captured that benefit? We did, because we had the platform in place. We will capture whatever demand is there, but I will not actually build my business plan on increased income.
I will need to be able to drive return without that. That's where capital comes in. I already spoke. Cost, not a key driver, but we need to be cost competitive. I think what we have proven over the last 4 years or 3 years, we've actually done everything at flat nominal cost. All the improvements, I took equities as an example, but there are many other examples we've done with flat cost. I'm saying that may not be possible anymore that we do it flat. We probably have a slight increase because we need to make those investments. Our cost-income ratio, also a demonstration of efficiency, at 33%-35%, probably will not change. We can operate at that level. Then, of course, risk I already talked about. I'm confident that the journey continues.
If there's one message, it is about us being relentless on customers to maintain that number 1 position and also driving returns. There's nothing else that actually matters. Now I give the word to Gunn. Now you get some growth.
Thank you, Casper. I have the privilege of serving you the last part of this Capital Markets Day presentation. I hope you're ready for some nice dessert. The wealth management area consists of three business lines. It's asset management, life and pension, private banking, plus one service unit, savings and wealth offerings, which supports private banking and retail banking, and also delivers tools and concepts. We hold by far the position as the largest wealth manager in the Nordic. Measured in AUM, we are 47% larger than the second-largest competitor, and also typically hold the number 1 or 2 position in each country. We also operate internationally. We actually operate in 20 countries.
We have, over the last years, strived hard to work in an integrated way. We run our business as an integrated value chain to extract synergies to the benefit of customers and customers alike, across the value chain, across countries, across segments. This way of operating in the integrated value chain means that we have a very cost and capital efficient business model. It's a well-diversified business. This EUR 290 billion in AUM, 18% is international. The 82% comes from the four Nordic countries, or you could split it in the business lines, EUR 194 billion in asset management, EUR 93 billion in private banking, EUR 62 billion in life. Or if you would slice and dice it differently in customer segments, it's 32% private banking, 18% retail, 17% institutional clients, 8% global fund distribution. If you wonder where the last 23% is, it's life and pension customers.
Just to prove the point, it's a well-diversified business. Not least, it's also a growing business. Since the last Capital Markets Day, since 2012, we have delivered a profit growth of 43%, which is a CAGR of 19.5%, delivering EUR 903 million in profits last year. We made some strong commitments in the last Capital Markets Day in March 2012. The question is, what have we delivered? I'm proud to say that we have delivered on the commitments. Income CAGR, 9.5%. Profit CAGR, as I mentioned, on 19.5%. We're close to flat cost. The cost-income ratio has decreased by nine percentage points and was last year 46%. The return on capital, 32%, which is an increase of 10%. The share of group profit for wealth management has increased from 16% to 21% over this same period.
Personally, I like to focus on flow because the net positive flow is not only an indication of future income growth in the form of increased AUM, but it's also an indication of the competitiveness and attractiveness of our offering. We are proud to say that our customers have trusted us with more assets, both existing customers and new customers. The last three years, an accumulated flow of EUR 35 billion. If you add up the flow of the first quarter this year, EUR 42 billion in net flow. Counted on the assets we started this period with, it's 18%. This is a strong growth. The cost-income ratio we delivered in Q1 was 42%.
I would like to elaborate a bit more on this flow because this strong equity market and the strong bond markets we have seen over the last years tend to overshadow the importance of flow. Of course, given the volatility of market appreciation, we have seen drops. Actually, the last, and this is a long period going back to 2003, the largest drop we saw was in 2008. It was a drop of 20%, but it was regained the year after. Even if you had had no growth in this period, we would still have doubled the assets under management due to the flow. Flow has proved to be a stable contributor to our growth in assets under management. There are several drivers behind this. I will mention only three. First of all, growth through external distribution. We have more than 350 distributors internationally.
It's local banks, local insurance company, wealth management networks, family offices, and not least, the 21 of the 25 global wealth management distribute products for Nordea. The sales through these channels has increased 2.5 times since 2012. Second part of the growth contributor has been bancassurance. This has proved to be a strong success to sell insurance We are distribution in Nordea Private Banking and Retail Banking as well. More than 77% of our premiums now come from bank distribution, so low acquisition cost. The third example is that the focus on client acquisition in Private Banking has paid off. We see that the net flow per private banker has tripled since 2012. This is both due to external client acquisition and a very well-functioning referral model from Retail Banking.
This was what I would like to highlight on the looking back on what we have promised and our commitments. Looking into the future, we have, of course, analyzed all of these trends. I will not go into detail as these should be well-known. Just mention that the demographics also for the coming period will work with us in the Nordics. It's high savings rate, increased concentration of wealth, and we also see generation shift in companies where the owners sell their business and convert this into investable assets. Based on the strong platform we have demonstrated, and also in alignment with the Nordea platform and the Nordea business priorities as presented by Christian earlier today, these are the three focus areas that we have decided will be key going forward. Client relationships with three headlines. It's sales, advisory, service excellence. It's increased international distribution.
We are distribution partners. It's leading digital offerings. It's advice and solutions, again with three headlines, advisory capabilities to deliver superior investment returns, not least in the low yield environment, and leading digital offerings. Thirdly, efficiency, which is a lot about adopting global best practices, reliable, scalable IT and operation platforms, and what I call a high-performance culture. It is the quality of our people and culture that has delivered the strong development over the last year, and it will be pivotal also going forward, the quality of our people and culture. We focus a lot on that. Let me go through with some more detail how these three focus areas will filter through into the business units. Let me start with Asset Management. Asset Management is by far the largest Nordic asset manager, but also a leading European asset manager.
Nordea Asset Management was the only European asset manager that has been on the top 10 list of fund sales the last three years. We take pride in being an active manager. We have structured our investment activities around 11 investment boutiques with multi-asset capabilities as a special area. As Christian already mentioned, the Nordea Stable Return was the most selling fund in Europe year to date. The financials talk for themselves with a profit CAGR of 30% the last three years and a cost level which is 30% below European peers, according to the last McKinsey survey on asset management. Not only delivering strong financials for the bank, but also for customers with 99 basis points investment outperformance the last 36 year and a high number of higher ranked funds.
Going forward, the strategy and key priorities for asset management will be to continue capitalizing on the strong momentum and expanding capacity to service new and existing distribution partners international. It will be to deliver and develop new investment products, creating value for customers, especially addressing the low yield environment, and to benefit from the strong offering we have on the multi-asset management solutions. The second business unit, life and pension, also holds the number one position Nordic. In this business, we do drive this for focus on ROE, not on volumes. For the traditional business, we actually had a negative CAGR of 26% on premiums over the last years. As you see from this slide, we have seen a very strong growth in market return products.
These premiums have more than doubled in this period, in 2008, less than 50% of premiums was in market return. Today, 89% of premiums is market return business. This is transformed from a traditional life company to a market return company as of today. As I already mentioned, focus on bancassurance, low distribution costs, also here, strong financials with close to 30% CAGR on profit and a Strong decrease in cost-income, 21 percentage points reduction the last three years. Going forward, the priority for the Life company will be to build next generation retirement offerings. We've seen in the Nordic a very high focus on pensions. It's both due to longevity, increased expectations for the kind of life you would like to live as a retiree, not least, also, lower expectations to state and government pensions.
This drives the need and the focus on long-term savings. To focus on products which combine the accumulation phase and the de-accumulation phase is key. Investments in IT and operations will be important to cease cost reductions. On the capital side, today, we have, or as of end March, a solvency of 199%, no lower than 186 in any countries. We expect to do the Solvency II transition with no equity capital injection. We did a very clear commitment on the ROE to be delivered from Life on our last Capital Markets Day, 15% in 2015, which was actually delivered last year. We also, this time, commit ourselves to a target of ROE 18% in 2018. Third business unit, private banking. Again, a unit which holds the number one position in Nordic, number one to two position in each country.
We also have an international business domiciled in Luxembourg. In total, 110,000 private banking customers. I would say that one of the successes behind private banking is the very well-functioning referral model we have, and it works both ways. When customers fall below the threshold or have less complex needs, customers are referred to retail banking, and customers in retail banking with high private banking potential are referred to private banking. We see clearly that this generates increased volumes due to the fact that some of these customers, they also bank with other banks. There are assets transferred from other banks. We see higher fee generation for the bank via asset shift and asset mix. Not least, also the customers see higher returns due to the same reason. This is a very well-functioning model for the bank and for the customers.
Also here, strong value drivers, a CAGR of close to 12% on profit and reduced cost income, which also are lower than the European peers. Not only to measure on financials, again, this is an area where word of mouth is very important. We measure customer satisfaction both after each meeting and also on an annual basis. This customer satisfaction on the annual basis has actually improved with 8 percentage points since 2008. Going forward in this area, it will be focused to maintain the very strong position we have in Denmark and Finland, to further grow in Luxembourg, in the international private banking, and to increase capacity in private banking in Norway and Sweden, where we do see that we have a lower market share than for other parts of the bank.
This is a good example that there still are pockets of growth in the Nordics as well. Secondly, to develop new digital offerings. Digitalization and digital is not something which is not applicable for this customer segment as well. To have this as a part of the offering to increase quality and perception of the value proposition is very important. It's about access to own data, it's reporting, advisory solutions, remote meetings, and so on. It's also important for increasing the efficiency of our advisors alike. Enhance solutions for wealth planning and investment advice, and continued shift to managed solutions. It's still interesting with the low interest rate environment we have in the Nordics, still 12% of our assets from private banking customers are in deposits. We see a potential to increase the managed solution further.
Of a flagship offering the private banking portfolio management has a penetration rate of 18% of AUM. It delivered 105 basis points value add to customers last year. It's healthy margins to the bank, and it's a product which also means that we have lower cost to service customers. Going forward, we will and expect to deliver growth according to the plans and initiatives we have taken. If we see on the last year's 4.7% is the growth we have seen in flow measured in assets under management. Going forward, we expect to reach a 5% and to deliver a 5% level. Actually, last year, and also beginning of this year, the flow has been higher than this.
We expect positive flow due to the market growth and what we will see from our initiatives in all parts of the business, but stronger growth rates in Private Banking Norway and Private Banking Sweden, and not least global fund distribution. First quarter this year, global fund distribution was more than, or 50% of our net flow was actually derived from the international. As we have shown over the last years, this will be focused on profitable growth. Cost will stay in control. There will, of course, be marginal cost increases, even though we have a scalable, highly automated, straight-through processing business model or operating model. It will not be possible to handle this kind of growth at zero cost increases. There will be increased cost efficiency. Cost-income will come down, and we expect it to stabilize around the 40 level.
Summing it all up, what can you expect from Wealth Management? First of all, income growth. We have the strong platform. We are well-positioned to capitalize on trends, and we see also the growth initiative and the growth track record we have international to be continued. Before I leave income, I would also like to touch upon the margins, because that is a question very often asked. We do see and expect some margin pressure. However, we also have a shift to higher margin products and higher margin channels, not least global fund distribution. It's actually a highly profitable channel, not only delivering scale to our platforms, but also being a constant source of challenge and making sure that we are close to changes in customer behavior and trends. We expect this to be flat and to be leveled out.
On cost, as I have said, there will be cost increases, again, to underline, increased cost efficiency and lowered cost-income. On capital, Wealth Management only consume 8% of group economic capital. It's the life business which consume the bulk part of that capital. We have harvested the lowest hanging fruit by migrating traditional business to the market return business. Still, it will be high on the agenda to have a capital efficiency. As I have mentioned, the transition to Solvency II without capital injection.
Let me just finish off by saying that in the same way as we have shown our commitments to deliver on what we promised on the last Capital Markets Day, we will stay as committed and work very hard with efforts to deliver on these commitments going forward, maintaining the number one position, tapping into the international market and to deliver profit growth also going forward. Thank you.
Go to Q&A session. You will lead it.
Thank you. Let me see. First of all, there will be possibility to ask questions on the webcast. Then also on stage, we have a new member in Group Executive Management, which is Eva Lotta Rosenqvist. As Head of Group Compliance, she is responsible for one of the growth areas in the bank. Let's start, please. Jan. Jan, if you can state your name and company, you will soon have a microphone.
Sure. Thank you. Thank you for taking the question, Jan Wolter from Credit Suisse. Four questions, really, and they are on capital and RWA. The first question is, the target is unchanged RWA for the next three years or four years or so. The capital level is already in line with the company's stated target, more or less, 15.5%. This implies that virtually all cash generated in the foreseeable future, in the next few years, could be distributed to shareholders. Is this the way we should see it? The payout ratio would then be significantly above the 75% that the company has highlighted. That's the first question.
Maybe I can use Is it okay? I think I'm number 2. Maybe if we can take the questions one by one, because.
I agree.
It was almost a question as if you were close to conclude, but I think you got it right.
Is this also the management and the board's ambition to pay out that amount of capital? Do you see any political hurdles to this or if you could muse-
This is exactly why we have chosen to formulate as we do this time. We could have chosen differently. We could have articulated a very explicit payout development accordingly with the original plan. I think it's a far more elegant way of phrasing our dividend ambitions, leaving some optionality, not knowing, to some of the points made by my colleagues, on what exactly will happen on the demand side. We are fairly confident that we can manage our EA as we are indicating, i.e. largely unchanged . Yes, the strategy is on profitability, on making excess capital, being very efficient on capital. It will free up a lot of excess capital. It will mean that we will be able to repatriate a lot of capital.
We think the most elegant way of phrasing it is by promising a dividend CAGR rather than formulating in terms of the payout ratio, which will then be the residual of the CAGR.
Thank you. The other question is on the ambition to keep the RWA unchanged. If you could elaborate a little bit how that is achieved. It feels like there is an implied target here to deselect a number of clients to keep the level stable more or less. It would be helpful for investors to see what amount of corporate volumes or retail volumes or other volumes is Nordea able to take out of the business. Because if the company wants to achieve some kind of growth, then you need to push some clients or some volumes out. To get a feeling for how much that could be.
You are almost there with your question. This is exactly what we will do. What we will not do, as we also discussed in the break, we will not make explicit what amount of customers or amount of capital. What we have done instead is that we have, first of all, we have a strategy that is, you have seen outlined, which is very much about capital management, capital discipline, and business selection, deselection. We are supporting it with a set of internal performance management frameworks that measures how much dividend capacity to each business area free up. We establish ROCAR ratios, i.e. ROE equivalent internal thresholds. We allocate all funding liquidity and capital cost et cetera.
In all aspects, strategy-wise, business-wise, performance management-wise, we are incentivizing capital management, capital discipline, deselection, selection, and it happens on a daily basis out there, relationship manager by relationship manager, transaction by transaction. Trying to make a top-down quota on who should be taken out or not, I think is close to impossible. I think we have built a framework that exactly allows what have been described by my colleagues to happen, and we feel confident that that will mean with a disclaimer, of course, on capital regulation, but with the capital regulation we know of now that we can manage accordingly with a largely unchanged year figure.
I think it's important you phrase it in another way than I would do because it's a business model, and the business model is built this way, and I think most banks will follow because of the regulation. We cannot allow ourselves to commit capital to a customer that only borrows money and does nothing else, and the return will be too low, the margins are simply too low. That we cannot afford ourselves to do. We will use the capital market for attracting debt capital and other forms of capital to the customers. We will probably use some form of securitization when that regulation is clear. We will not push customers out. We will simply have the a proposition to a customer is that when we allocate a capital, we need to do all the other business available.
That's the reason why we emphasize so much the investment in all the other competence areas, which are needed, of course, for the customer to be able to do all the other business with us. We have to look at the customer relationship as a full one. There will be no bank that can just drive a balance sheet bank by lending money and doing nothing else. That will not be a sustainable business model. This business model is coming out of everything that's happening. We are just very sharp on it, saying this is our proposition to customers. We will be the lead. We'll make sure we are the lead bank for all our customers. It's more the business model I will look at it.
Therefore, of course, when we then talk with customers, we discuss this with them, and we of course also discuss each individual part of the capital commitment. Particularly for the corporate segment, as I said, we will use the capital market as a source of providing capital as well.
Thank you. Just the final question is if you could give us a feeling for the housekeeping measures that you were highlighting, how much more over and above the EUR 3 billion in mitigation that we could see to keep RWA unchanged or largely unchanged?
I think we should expect the strategy measures, the business selection, deselection, and capital discipline being the main driver. We don't know. There are pending regulations that will some house clean, even house clean. We will do it now. This is around maturity, it's around collateral, data quality, et cetera. More of the same we have already been conducting. Much of this could hopefully be done without too much disturbance from regulation or supervisors. The majority is coming from what we just discussed.
Okay. Thank you.
Andreas Håkansson next to you.
Hi. Thanks. It's Andreas Håkansson from Exane BNP Paribas. Just basically following up on Gunn's questions here. On the future regulations, we're all looking at the proposals of the RWA floors, which would have a major negative impact on the Swedish banks and yourselves, of course. How are you thinking about them and what are the discussions you're having in terms of those regulations?
First of all, we fiercely agree with the Swedish regulator that these proposals are wrong. We are lobbying intensively together with them. It will take a lot of time before you can say what ultimately will become possible for something. It requires a long process. We don't know if it should materialize at some point in time. As you say, it will punish not the Swedish banks, a couple of other countries will be severely hit. We have to lean towards the understanding with the Swedish regulator that this will be unacceptable for Sweden, and they will take all measures to neutralize any effect, i.e., adjusting Pillar 2 requirement accordingly. That's how we have to think about these specific proposals that are pending.
In terms of operational risks and market risks, where we also see potential changes, have you factored that into your flat RWA?
We have factored in all capital regulation that we can quantify with a decent amount of certainty. That means also that the whole standardized approach, including capital flows, which is all over the place with heavy lobbying ongoing. Exactly how it will be calibrated, how it will be defined, whether or not it will be these more aggregated measures, or they will allow some kind of granularity, et cetera, means that we can arrive at all kind of outcomes. No pending regulations that we cannot quantify with a decent amount of certainty is not included.
Another question. On your cost inflation to roughly 1%, how much of that is regulations, and have the recent ruling by the Swedish FSA in terms of the money laundering issues, is that a driver of your regulatory spend going forward?
Oh, it's a total view. We have been ramping this up since 2012 and 2013, as you correctly point out, the Swedish regulator made an inspection in 2013, which we now got the verdict of. We have ramped up through 2014 and 2015. It's clear that it is not only KYC and AML and all these things. It's a much wider range where I think all banks now are ramping up, and we are taking the steps to do it in an accelerated way because it's obvious that it's important to focus on these areas. It's a broad spectrum of regulation. As I said, it has been ongoing, but there's still more to be done.
Thanks. Just last questions. You put in EUR 76 million as an unexpected performance pay this year. Is that only then related to the Q1 trading or the strong Q1? Does that mean that we shouldn't expect either high trading or high performance pay for the rest of the year?
This relates to the updated full year, which is basically, as you know, we were positively surprised about Q1, and there we want around EUR 30 million to EUR 40 million effect. We have updated our full year budget, which is basically that we never really have strong opinions about net fair value, for example. The full year effect of what we said in Q1 is the EUR 46 million. On top of that, as we updated the full year forecast, we had this effect on the profit-sharing scheme. You should expect as of what we know as of today for the full year, this should be included.
Okay. If we can go to Pavel, followed by Peter, and then Johan and Jacob.
Yes, hi, Pavel here from Danske Bank. Couple of questions. First one, restructuring cost in Q3. Would that be for personnel reduction, IT writedowns, kind of what magnitude should we expect, also how would that impact the dividend base for 2015?
First of all, it will probably include provisions for more or less everything you mentioned. We are in the process of detailing the extent of the program, including the pace and the sequencing of the cost efficiency program. It's much too early to come with a specific number. I think it's fair to assume that if the number gets sizable, then would it also be fair to assume that it is kind of deducted from the dividend calculation, i.e. should not punish the expected dividend for 2015.
Okay, thanks. Another question. You're stating lower funding costs. Could you give us any sort of, say, impact of what we should expect there? Any kind of back book versus front book, if you'd like to disclose that.
You tried in the break, and the answer is still no. No, we don't disclose any particular numbers, but I think we are trying to be relatively transparent. Cost of funds, everything is equal, should go down from 2015 to 2016, and again from 2016 to 2017, after which they will kind of flatten out. You can discuss what is sizable, but we have-
You have redemptions of around EUR 15 billion a year, then you can make certain assumptions around the average spread, as we have quite expensive long-term funding rolling off the next couple of years.
All right. Two more just questions. On fund fees, we have a lot of fund fees pressure in Sweden. We are also having something going on in Norway. How would you expect it to go through? We saw the slide that funding costs are going to remain flat.
Yes.
Do you think that it will remain flat all the time now, or when is pressure?
Well, this is a presentation of the 2016 to 2018 plan. My statement was for that period of time. Yes, we do observe the media attention. I think those of us that has been in this business for some years know that we also discussed margin pressure on funds 10, 15, 20 years ago. What we see as key is to deliver value add to customers. That is what really matters. Of course, as we are an active manager, to us, it is very important to deliver value add. However, as I said, we do believe there will be margin pressure, that will be compensated due to shift to higher margin products and also distribution channels with higher margin.
And then-
Net effect, 0.
Then the last question just to Casper. You're stating flat income costs up. Could you just say anything about capital RWA? How much do you expect it to come down in order for ROE to continue increasing upwards?
We talk about marginal increase in cost, I said that cost income, probably one of the most efficient lean banks that I know in Wholesale Banking at 33%-35% cost-income ratio will stay so, capital will go down enough to increase returns. I'm not going to give a number, but as I already showed the last three years, you manage for returns and you have the levers, then you use them. If I would have presented three years ago those numbers, most people would have said, "Don't do it." They wouldn't have believed it. It is about dynamically managing and believing and coming back to the culture that we are able to do it. I said flat income as a result of flat or very low growth, and I think it's the right way to plan.
If there is more demand, we'll get it.
All right. Thank you, Peter.
Thank you very much. Peter Ketzel from Carnegie. I have two questions. First of all, I think, Torsten, you mentioned that the IT investment program that you will be undertaking for the coming years, which is quite ambitious, that it could potentially have some P&L effects at some point in time for the coming years. If you just can give us some clarifications on what you mean exactly on that. Secondly, just on the compliance costs. Please, you mentioned that it's relating to various items, the EUR 27 million that will be taken front-loaded today or this year. Just following the warning that you received from the Swedish FSA relating the money laundering, do you feel that this in any way changes your IT investments for the coming years and how you've planned to pursue the new IT platform?
To the last question, no, it does not. On the contrary, if anything, it tells us to speed up the simplification effort, in reality, a lot of compliance issues has to do again, with simplicity in structure and simplicity in data. The more data we have readily available, the easier it is to solve the compliance equation. Ultimately, as I said, the operational regulation will be about screening all transaction against all customers in all sorts of dimensions. That's actually what we are looking into because we have to add in the consumer protection directives, which are also coming. In reality, monitoring the whole financial system, that is about simplification. That can simply not be done, neither manually or through the old type of systems that has been built. The compliance is a general thing.
As I say, we have been ramping it up since 2013. We knew that we had a catch-up to do. We have done it. We keep adding on more regulation on this area, and we have now decided to accelerate to do some deep dives to involve more consultants in the period of time to accelerate the programs. As Torsten is saying, it's clearly a growth area for us in the coming period of time. This is to get ahead of that curve, which we have not been back in history. I think today we are much better positioned. As I said, the sanction we got from Swedish FSA was related back to 2013, so we are much better positioned today. In order to get ahead of the curve, we have decided to take extra measures.
On simplification, which in reality are many different things. First of all, it is what we call initial simplification, and you have heard a lot of it already. It's basically going through all our products, all our data, all our customer records, all our processes to simplify. It's a huge effort. It requires a lot of business resources. This is not something you can really leave for external vendors or consultants to do. We have four major IT-related type of projects, including in the simplification program. We will replace the four core banking systems within mainly retail, i.e. the typical banking product, the product for the 10 million customers. That's a huge replacement. A lot of cost there goes to vendors and consultants, et cetera. A lot of that can be capitalized and will be capitalized. We will make a new global payment platform within Wholesale Banking.
A lot of that can also be capitalized. We will make whole new data records, new data systems, new data warehouses, new ways of sourcing data. The fifth thing we will do is that we will basically transform, as Lennart was also alluding to, we will basically transform a lot of our operating model because we will look different as part of this exercise. Many business resources are involved, and accounting rules are so that a number of these type of resources is not possible to capitalize 100%. As we are now ramping up fully, and we will peak in 2016 and 2017, a lot of people will be involved, a lot of business resources will be involved. Some of these costs can simply not be capitalized. That is why there will increasingly be a pressure also on P&L cost.
As we promised upfront, it will not be significant. We are still containing, I would say, to a high degree, cost within the 1% bucket, which is both simplification and compliance-related expenditures. That's why.
Just a follow-up question on that. As you mentioned, Christian, that you're taking some of these compliance costs and so upfront, and that you need to perhaps speed up your simplification program and so on. Does that mean that a big part of the spending that you have planned for the coming years and that you outlined roughly 6 months ago, that a large portion of that will be more front-end loaded than you previously had expected? Does that also mean that the cost growth profile will be somewhat higher cost growth for 2016, 2017 and lower in 2018?
That we cannot say yet. We are detailing the plans on exactly how to do it. We are ramping it up in a faster speed, as I just said, and that probably will run into 2016 as well. We have given the guidance now, and we're detailing plans right now. Of course, it takes quite a lot of efficiency plans to get there. That's clear.
Maybe if we should make a small, not warning, we stay with the CAGR guidance. As we are ramping up simplification, as we are ramping up compliance, as we are in the process of ramping up cost efficiency initiatives, which will have certain lead time to get to their full run-rate benefits, you can say. You cannot completely rule out that 2016 will be a slightly more difficult year than 2017 and 2018.
If you can hand it back to Johan, please.
Thank you. Johan Eklund from Bank of America Merrill Lynch. Just two questions. First, coming back to the dividend. I think in the past you sort of said you didn't want to lock yourself into a very high fixed payout, and now you're clearly signaling a total distribution that potentially could be well in excess of 75%. Will you look to split this into some kind of ordinary long-term payout structure and a special on top? Will you just basically face the fact that at some point in the future, should growth pick up, you might very well see a declining dividend? I guess second, coming back to wealth management. If I didn't misunderstand you talking about a cost income towards 40% in this period.
If I take where you were in Q1 of this year and adjusting for some seasonality towards year-end, you're not a million miles away from that already. If we assume your 5% net new money flows in some kind of normal market performance, you need to see some high single-digit cost CAGR over these three years, not to go well below 40. What am I missing there?
Should you take that? Should we start with the question relating to dividend policy? I think I will answer in more or less the same way as I've done once before. I think we have found a good way of formulating it, setting a certainty of the fact that we don't believe we will need to use all the capital we were generating, i.e., a relatively high minimum payout ratio. We also believe that we will actually grow profit, and we will be even more capital efficient. We have now supplemented with, I think, an elegant way of saying that we want to grow absolute dividend by 10%. I think the combination of these two allows us the sufficient amount of flexibility at the same time of setting somewhat of an ambitious target for dividend payout and dividend payments, you can say in your terms.
I think in the very long run, that's the reason why we have phrased it like that. It's of course so that growth may come back one day. Interest rates may get positive. Things may develop differently. Of course, at one day lending may grow. It's not in this period. We don't expect that. If it actually happens in 2017 or 2018, fine. We have a new equation. We expect that we do not grow our lending book that much, and thereby we don't need the capital. Since profitability is a given, it's not only a requirement from shareholders. Actually, regulators clearly state now that we need the profitability levels we have. Of course, the end result is very simple, then it's the dividends will increase. I will answer before Gunn takes the floor, I will say something.
If we continue the inflow we have had in Q4 and Q1, which is sort of world record-like.
It's fantastic numbers, I have to say. We have the luxury that we risk our cost -to-income ratio will go below 40. Gunn, what would you say?
I think that was a very good answer, Christian. First of all, the number I mentioned was for Q1. Of course, there will be cost increases. Given the scalability of our model, it will be marginal cost increases. This is not disclosed per business area what the cost CAGR will be. Stabilizing around 40 is the guidance you will get for the 2016-2018.
Thank you.
Jacob, followed by Daniel-
Thank you.
and then Heinrich.
Just two quick questions. Firstly, on the wealth management. I think on the Q1 call, you discussed historical growth of 8%-9% of revenues, which should be sustainable going forward. Is that something we could see as a realistic growth rate in your mind for revenues?
Was it the wealth management? I didn't get the first part.
Yes.
Sorry.
8%-9% revenue growth, I think, was discussed at the Q1 call.
Yes.
Is that what you would view as a realistic pace of revenue growth until 2018 for your division?
We are planning with income growth in that range. Yes.
Okay. Thank you. Just my second question was, we talk about this CAGR growth of 10% of dividends. Is that versus 2014 or versus 2016 dividends?
That is versus 2015.
2015. Okay.
2015 dividend. Yes.
Thank you.
Daniel Dutoit, JP Morgan. Again, two quick questions. The first one is just a follow-up on the dividend. You made it quite clear that the 10% growth refers to the total dividend payment. Just wondering whether the 75% also refers to the total or just the ordinary. How are you thinking around that? Secondly, on the management buffer, the zero to 90 basis points. I guess part of that refers to variation in the countercyclical buffer. Just wondering whether that would absorb any increase in the countercyclical buffer going forward, because at the moment it looks like that's on top of the requirements there. Thank you.
Now I forgot the first question, actually.
The first one was on the 75% minimum payout-
Right
whether that's the total or the ordinary? Yes.
It's total dividend CAGR, it's total dividend payout guidance. It's deliberately that we are not using phrases like ordinary or special. At the end of the year, you will know that at least there will be a 75% payout, you'll be waiting to see what will come on top. 10% is a good guidance. On the countercyclical buffer, the numbers we are showing is the Swedish FSA numbers, they have calculated based on Q1 data that the minimum capital requirement for Nordea, they still calculate it to 14.7%, not 14.8. They have also stated this about the 70 basis points on the 3 types of Pillar 2 risk. It's a little unclear what we can expect on top.
What we are also saying is that if you look on the countercyclical buffer, when Swedish FSA announces these numbers for Nordea at least, they don't include the Norwegian countercyclical buffer. If you add that on top, you are at 14.9, they have said that the Swedish countercyclical buffer should increase to 1.5. You add another 13 basis points. You deduct the 80 basis points that we call other Pillar 2, which we don't yet know whether or not we have to, you can say, use. That will be clear in the SREP process how big a part of the 80 basis points, as they have not said anything else than 14.7. I think that as we said, it's fair to assume that it will probably maximum be 14.7, hopefully the minimum capital requirement will be somewhat lower. We don't know yet.
At least I think you should see it as a very positive outcome that these 3 specific Pillar 2 risk only came out at 70 basis points, which was actually close to what we have assessed all along. Now we are just prudent and park these 80 basis points, you can say, as a reserve for the SREP process. Unfortunately, we cannot say exactly the number yet.
We have room for one final question. Please keep it to one.
Okay. It's Heinrich from Goldman Sachs. My question is you're dealing with your four core markets with four different regulators. A lot of your strategy seems to be built around synergies, economies of scale. Basically the same time you're probably going to be faced with more and more complexity given you have four different regulators looking for different ways. Is this one of the risks that you think would be one of the headwinds that could potentially get you a bit off target, or is this something you feel very comfortable dealing with, and how are you dealing with actually?
When we talk simplification, we talk about everything. We have specified a lot and been discussing a lot the IT and process part. There are other structures which we are simplifying. We're actually simplifying much more than we have talked about. One of them will be legal structures where we are in a process of simplifying our legal process as well, ensuring that we have a more simplified approach to regulators and so on, also getting this one common platform with one system and one process and one. Of course, that ultimately comes up towards regulators as well. We are in that discussion right now. We'll come back later in the year how that develops.
I strongly expect that simplification to be possible because the learning point in Financial Stability Board has been that recovery solution is only possible if you simplify structures. If they are too complicated, you can simply not do it. We're just pursuing what Financial Stability Board and others want us to do to simplify the whole thing. That is exactly what we're doing.
Okay. Thank you. This concludes the Capital Markets Day, and today we have disclosed the management buffer, and now it's time to enjoy a management buffet over there. Thank you.