Everyone. It's still 2 minutes to 9, but we at Nordea like to be efficient. So let's start now. My name is Rod Malvin, Head of Investor Relations at Nordea. And it's my pleasure to welcome you to this Capital Markets Day 2015.
We will present the strategic direction on Nordea, the financial targets for 2016 to 2018, present our risk management and then after the break, we will present the business areas. There is a free Wi Fi, Barclay. So please use that. And now it's my privilege to present the 1st speaker, the Group's CEO and President Mr. Christian Clausen.
Welcome.
Yes. Welcome to this Capital Market Day. I'm impressed to see you all seated 2 minutes before the opening time. It's because we're also anxious to hear what's going to happen now I'm sure. So welcome.
It's 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. And everything you're going to hear will be concentrated around looking into what exactly what type of bank is it we are shaping.
And I would sort of build the overall picture now and we will fill it in with presentations from Thorsten our CFO Ari Kavri, Chief Risk Officer and our 3 business heads that will fill in on what we actually do. But first, let me do a small flashback. It's 2 years ago we were here at a Capital Market Day in 2013. And I'm proud to say that we are delivering on everything beside. You cannot see it here, but our commitments 2 years ago was in capital ROE and loan losses and we have indeed delivered capital generations of €4,900,000,000 We talk about a 15.7 percent core Tier 1 and a 70% payout ratio.
Now in 2013, we talked about 13% capital actually. And even then I remember that the questions were isn't that a bit high or are we going to end there? But it became clear during 2014 and onwards that it should be much higher and today we are at 15.7%. We are delivering an ROE of 11.6% and that's also a satisfying number. Actually, if we adjusted into the core capital of 13% which was actually part of the target setting, yes, then we're 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 services. And we are delivering underlying cost decreases of 5% in the 2 year period and loan losses at 15 basis points below the 10 year average. And actually, I could show one more slide from 2011.
That's 4 years ago. Then we also had a Capital Market Day where we also delivered. So we have actually delivered now for 4 years in a row and what we have said, yes, even more. And that points, of course, well into the future. So what we're going to present today, you can count on that will be delivered.
But 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 you look at the past 10 years, then you will see that we have actually an impressive build of capital. We started at $12,000,000,000 in core capital. We have built $13,000,000,000 of new capital and we have paid out $14,000,000,000 So that's easy to remember. Starting at 12, dollars building €13,000,000,000 and paying out €14,000,000,000 all in all €39,000,000,000 And that gives a CAGR of 13%.
So 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 had developed for 5.9 to 15.7, so a very significant journey through the financial crisis. And the very short story of the Capital Market Day today is that we will continue this journey. So 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, but I'm sure you want to hear a little more. So let's take the big longer version. Now building the future you have to have a mark out there to point towards. And what we have done, we have built a customer vision, which will shape the future relationship bank.
And 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 3 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 and that is being translated it is 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. And 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.
So 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. And 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. And then 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. And then 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. But 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 and we posted on our intranet hundreds of interviews. And the interesting thing, they all said the same thing.
We want to do mobile here, there and everywhere. And when it gets really important, when we make important decisions, we want to meet an advisor physically and we want to understand and discuss. And this came from the most 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 or the small customer who says, yes, but when I'm buying a home or doing some important pensions, yes, but then it's super important I have somebody to talk to. So the trick is to get the personal digital relationship to come together. But most likely the digital will be by far the most important in quantity.
And 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. And this is not only about strange strong capital and rating and these things, it's about trust. It's about knowing us it's 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. So 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 in the on the Internet and I can trust what I see there. Now 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 3 business priorities will also be a common theme through presentations. They are building on the platform you know, the Pan Nordic platform, the superior distribution power and this low risk portfolio we have. But the three priorities are simplify for scale and then this forceful digital response to the changed customer behavior. It's expanding the cost range and drive cost and capital efficiency and it is to maintain a low risk profile.
Let me elaborate on each one of these. 1st on the simplification, now the reason for simplification is very much the most transformational drivers we see in the future which are these 3 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, but we can see the shape of it and we are well prepared. Of course, 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, but much more is to come. When I look at the pipeline, it's probably likely that we in 5 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 rollouts and regulation. And we have to do a lot of reporting in all different dimensions and they have to be and they are very complex by the way because it's 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. And digitalization is obvious.
It's moving very fast now. Behavior is changing extremely fast among our customers. It's, of course, a great opportunity because digitalization in itself is, of course, something that creates scale effects by obviously because digital is more efficient. But of course it's also a threat if we are not agile and ready to respond to the changed customer behavior and this require investments. So the last two ones are the ones that call for simplification.
Simplification in everything we do, not only in terms of processes in IT, but also in structures in anything. And we have now worked with this for 1.5 years. 1 year ago, we launched the simplification program as such. We still have quite a lot of things to do. It will take at least 4 to 5 years.
It's 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 1 year. That is ongoing. We are more than 80% done. We're also making new data records aligning all our data, all customer data, for example, in one data structure.
We're automating processes. We're increasing commonality. So things which are done out there, we do it the same way all over, also documentation in these things. And then we're 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's 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 Euroseper payments out of the new platform. We have closed data warehouses in 2 countries, replaced all the reporting we do by new warehouses and so on. So it will gradually log in as we go and increase our efficiency.
And of course, there's a huge spend to this. We'll come back to this later. We spent a lot of money. It's a huge investment going forward. And this will of course create the benefits listed.
It will increase the scale efficiency and agility. Now scale is obviously if you get the same processes the same IT system, the same processes you will of course get scale and efficiency. But 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. And it's this end to end digital response, as we call it to be able to execute on the customer vision.
And end to end is important. I'll come back to that in a moment. And then of course a stable resilient operation compliant and in control which of course is also very important with all the requirements hitting us. Now the digital development you all know about. Here we just have the mobile transactions versus manual transactions.
There's no doubt that the manual transactions are gradually disappearing actually very fast and the mobile are exploding. But more importantly, we now see that a lot of other things are moving digital. And 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%. And the 10% are more satisfied and they want to have a new digital meeting.
They don't want to go back on it. So a digital response is of course required in this development. And it's 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. And this is where it becomes problematic.
It's easy to do the new apps and new front end applications. But to get the whole flow through the factory aligned is a complicated thing. And that's 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 cost range. We have a fantastic situation.
There's 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. Now based on this, we are building on some cost range. 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 our customers, it's M and A, it's equities, it's debt capital market and so on. And we have during these 4 years when we presented building the wholesale bank, created a wholesale bank that's clearly number 1 and I'm sure Casper will repeat that message in a while. So we have the leading platform where we integrated everything and we have this lead position. And 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.
And 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 top priority. And 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. And we have created a fantastic platform. You can also say that within Asset Management Savings, we have done simplification in the past 8 years. We have created one system, one process, one legal structure, 1-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. And 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. So somehow 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. And I can actually tell I just got the numbers last night. The Nordea stable return is the best selling fund in the 4 months 1st 4 months of this year in Europe of all 250,000 funds existing.
So it is the most wanted product range. And 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 or you growth in And 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 1. We have during the past 4 years managed to turn that business around from being capital intensive to be capital light. And now we are about 24% market share on the capital return products in the Nordics.
And we are building new retirement families now, retirement products because course customers get older and when they're older they retire. And when they retire it's a slightly different product range. Also very successful and by the way our life and pension meet our return targets today. And Private Banking is of course part of it more and more customers grow up to become private banking customers. It's part of this whole area of being able to do ancillary business.
And the 4th 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 needs they have. And then on top of that lending need to do all the business the customer have building on the cost range I just went through. And on cost efficiency, it's of course to prove that we can do this more cost efficient as we are simplifying the bank.
And 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. And then the 3rd priority is this low risk profile and stable development. And we also here I can say we will continue the journey. These are the RE numbers back from 2,006 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.
And we are continuing and refining and improving this way of running. We see the bank as delivering very stable results and very stable capital. And we are working on 16 risk boundaries on which we optimize our portfolio. So we are optimized not only on a few risks, but a lot. We're monitoring a lot of indicators.
We do deep dives. We do stress tests. And every single quarter when we report, you heard me say something about, yes, now we stress this to this, we stress this to that. And we take a consequence of that. We change the way our portfolio looks like in order to get this sustainability.
But I must say the most important part is our diversification among customers and products. Every time we have an area of problems, it's often 2% of our portfolio and that's 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. So summary is that we have the 3 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 anywhere, anytime, that's short for delivering on the customer anywhere, anytime, that's short for delivering on the customer vision.
And then efficient, agile and resilient, That is the characteristic. That's the targets we want to deliver on that journey. And the next one is leading customer relations. And it's no less ambitious than to say that we will be the number one bank for all our customers. Now that's of course part of the business model because being number 1 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 a one to make capital efficiency.
Number 1 bank and we'll hear more of that from Lennart and also from Kasper and Goen today. And then the last one, we will increase the free capital generation and we have specific targets on all businesses to do that. So this was hopefully the overview. Now Thorsten will dive into the numbers more specifically, Ari into the risks and then we'll hear the 3 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. So I'm sorry for that.
The other thing is that I have been so bold, so I have taken away some of the slides that I will go to I'm going to show you. They are in your pack, but I thought the flow was better without them. So but I will guide you through it. I can have this one. That's the same.
But 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. And finally, of course, but not least, I think they will reconfirm our wish to position Nordea as the dividend yield stock. So I will talk hopefully enthusiastically about our 2016 to 2018 targets. But what would be more natural to start with our current targets?
Elaborate. There are still 7 months left of our 2013 to 2015 plan. And remembering on the financial target setting what we promised, We promised that we would generate a lot of excess capital and we would repatriate it by increasing our payout ratio year by year. We promised you 15% ROE, which something that today sounds a little strange based on a core Tier 1 requirement of 13% and normalized interest rates. And we promised you flat REA and we promised you flat cost.
Well, it didn't exactly spell out this way. However, we did generate a lot of excess capital and we did increase the payout ratio year by year And we will increase it for 'fifteen compared to 'fourteen. And we will most likely pay out in euro 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 co tier one requirement of 13%.
Actually, we are 20% higher at 15.6 Q1 and we are certainly not a normalized interest rate. So judging our current ROE run rate of around 12 percent, I don't think it's far away from the 15 we thought about back in 2013. We did not deliver flat REA. We have delivered until now €31,800,000,000 of the R35,000,000,000 efficiency program. But on top of that, we have very skillful managed business selection, meaning that REA is down 10%, not flat.
And then we promised flat cost to start with, but were hit by changed market condition and we altered our cost guidance to 5% down excluding FX from 13% to 15%. And 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 in source 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, etcetera. And we have actually done all of that. I would argue.
We can even document. We have delivered a lot of gross savings that are not only have mitigated inflation, which is at least $400,000,000 for the period, allowing a lot of reinvestment in digital and advisory services and capabilities, but ended up delivering a net cost reduction of 250, dollars exactly meeting the 5% excluding FX. And then we have been hit by one thing we have not foreseen completely and then we have taken a management decision, I will explain you shortly about. So we believe we have delivered, the program have delivered. But 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, 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 €46,000,000 higher VSP or performance rated salary than we anticipated beginning of the year. And we have another €30,000,000 that comes from the fact that as we have adjusted our full year internal full year budget somewhat up, we have a profit sharing scheme for the 30,000 employees in Nordea. And by the adjustments we have done, you are passing a threshold in this scheme, meaning that a $30,000,000 additional will be released to this profit sharing agreement. This $76,000,000 I think is good money because they are coming on the back of course a much better income and a higher net profit at the end of the year, more dividend.
Then we have on the not so much to do with the Q1 results, but we have lately taken a decision to frontload and accelerate certain activities relating to compliance. We will conduct a number of deep dives, reviews together with external help and consultants. We will frontload 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 was in the plan to ramp all of this up, but we have front loaded it and accelerated it.
And currently, we estimate that to be an additional cost that will mainly hit us in the second part of 2015 of around €27,000,000 Then we have the FX effect. So what we are now guiding you towards is a euro full year 2015 cost base of around €4,700,000, which is by the way close to 7% down in all inclusive costs from 13% to 15%. I will let you judge whether or not we have fully accomplished what we have promised you on cost. And to recap maybe on the 13% to 15% plan, so what are the key takeaways from having being so bold to have targets reaching almost 3.5 year out? Well, first of all, we don't know.
Many things will also change we have not foreseen as of today and we soon will talk about the targets. But 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. And 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. And finally, maybe, which I should not probably do, but it's you to judge, I think management have a very committed to deliver as much as possible according to what we had promised.
And none of the 3 of the above things will of course be significantly different now looking into the plan going ahead. And 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 and 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. And the management levers are the same. This is an attempt to formulate it in a way what you can manage. And we have learned that we cannot manage income in any details. But 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 somewhat be slightly higher. We don't think interest rates will be higher. And here we're only looking on the forward rates sometimes into 2017 2018.
We are calculating that the effect on our income CAGR of our rate expectations is around 0.5percentage point CAGR for the period 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 is 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.
So 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 on this something very different to 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 commissioning side as part of the strategy. So we should expect to see fee and commission income line growing relative to NII. And on net fair value, I think $15,000,000 will constitute a pretty strong baseline number. That was more or less what I was saying. And we will leave it to you to calculate the rest.
On cost, and 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%. And is that ambitious or not? Well, 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, etcetera, 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, etcetera, etcetera, where we obliged to pay according to a certain structure. So a widening around 1.5% to 2% underlying cost is kind of it's not possible as such. And then we have taken what I will call a strategic decision to invest much more in 2 things, the simplification journey that Christian have just talked about, a lot of the costs there are capitalized and are not seen on the P and L. However, as we are already engaging several 100 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 and L also. And this is investing in the long term and in the right things for Nordea.
And it is increasingly also very clear, I think, for everyone that not investing in compliance is a no go. We already have equivalents 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%. So that is around 2.5% to 3% underlying cost, which I think we absolutely will have to do. And 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, etcetera, fee business not requiring capital. We would like to do more.
We can see that our capabilities are in place. We can see
return. But
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. And we are in cost efficiency initiatives, we are looking for a program that are almost as ambitious as the one you saw for 13% to 15%. And that will also be more of the same, maybe even slightly more over weighted towards continuing the streamlining of our physical distribution towards a digital world, still reinvesting but also taking out efficiency and more of the same as we have presented in the last plan. And we will try to manage this to stay within this cost restriction. I personally think that with all the activities we are talking about and all the things we want to invest in that it is a pretty ambitious plan actually and 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 will have to announce that in Q3. And then to capital, our new capital policy is to at all time have a minimum capital requirement to have the minimum capital requirement plus a management buffer. And we have decided that MADM is buffer for Nordea and adequate management buffer for Nordea would be in the range of 50 basis points to 150 basis points. And one can of course argue whether or not 50 to 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.
So there is some kind of underlying sensitivity around 30 to 40 basis points. You all know that most Swedish banks at least have pension risk. We have also indicated the level of sensitivity there. And finally, we have all kind of other stuff that could hit us. 50 to 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 co tier one 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 to 150. And as you can see, we are already within that range. The latest updated numbers on the minimum capital requirements set by Swedish, if you say, Based on QNOM figures of 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 3 specific pillars, 3 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. Then they have a formulation that they might have other Pillar 2 risk add ons and they will be revealed in the so called threat process. So the 0.8 is yet not really defined. And 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. They are proposing 22nd 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. So you have another 20 basis points on top. So 20 plus 13 kind of have already been used for countercyclical buffer most likely, but still leaving room within the 80 basis points for whatever additional Pillar 2 requirements they might come up with in the threat process and we will know the results by end of year. I need to check how much time I have, not a lot. So I can do this very fast.
It's just showing the numbers I said before, very low COH-one volatility, very low underlying volatility, actually the lowest we can find. And we will do whatever it takes to continue to run the bank creating preferably even lower volatility. So 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.
And then we have supplemented it by a payout ratio, if policy is saying that we will pay out at least 75%. You will not spend much time in finding out when calculating that this is not 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 target with a relative one and I will come back to that. We have the cost target and then 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 REA do not rely on any to any high degree big rollouts or approvals as they are more or less impossible to achieve. So we think we can have we have a RIA ambition that is very much within what we can manage. And then through the adjusted ROE, this is the external version.
I'll come back to how we internally do this. So we have acknowledged that it's a little complicated to find good comparisons with the Nordea. We are a Nordic bank and none of our peers are really resembling the Nordea characteristics in a good way. So we have constructed our own index. And as you can see to the right hand side here, this is the true allocation of Nordea Capital in a country dimension.
And the weighting of our peers is a qualitative assessment of actually who do we compete the most with. So in how many markets, in how many segments are we meeting this peer. So if we should do a somewhat non scientific weighting, this is the weighting that we as a management comes up with each of the banks. That of course can be discussed, but now you can see how we have done it. And the ambition is that we should at all time or over 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. So over time, we should of course always have the ambition 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. So 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 mentioning on a RaUCAR or ROCCAR and RE equivalent and we have the threshold of 13. And 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. So Ari, you will guide on our loan loss provisions expectations.
So now we are moving to risk angle and then risk area. And 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. And my intention here is to explain to 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 to side, but I will also shortly cover those. But 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. And 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, so that the level of quarterly loan losses you can see here. What I'm just saying here is that please take a look on the 2,009 losses so that 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. Yes, and 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.
Also looking back what we discussed and outlined in Tucson's 13 Capital Markets Day, Actually, 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. And of course, I'm 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 our 2014. Denmark improved and especially shipping recovered quite fast. As a matter of fact, a bit faster than we anticipated even ourselves and then that brings of course us to these levels we have seen.
And definitely, we have executed all these risk management actions we outlined in 2013. If you take a quick look on our trade 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. And even in the Nordic area, we are even split between these 4 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, very low five basis points. In Denmark, obviously higher because we have had in Denmark 5 to 6 years period of very difficult times. Norway, Finland around 10 basis points. The client segment diversification is on the right hand side fifty-fifty 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 4 basis points. Remember that this includes even Denmark and at this very difficult time in Denmark. So once again a very good proof that the Nordic market 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 we have a 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.
But in addition, actually we run businesses in some areas which are more cyclical and higher risk by nature. But what is important to understand that in these areas, these cyclical areas and high 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. And 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.
So the annual loan losses and these Nordic core portfolios, if I would use that wording, these are dark blue bars. So they are explaining the majority of the loan losses and the trend and of course these higher levels driven by situation in Denmark. But then we have these more cyclical and higher risk areas isolated here, so that you see that we define these areas to be leveraged by our portfolio. That is, of course, Nordic portfolio, but nevertheless, it's a Baltic portfolio, Russia and shipping. And 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 size and we want to keep these limited. Russia is 2% of the total lending. Actually, you see that Russia is not even visible in any of 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. LPO portfolio, 3% of the total lending and then more or less relatively speaking same type of impact in the 1st year than in Baltics. And then finally, the shipping, 3% of our total portfolio.
And then there, the crisis hit a little bit later than in other cyclical portfolios. And then we saw some impact in 2012. And it's also important to understand that these 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. Then you can say that why we are having business in these type of areas and then 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. And 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. But then how do we manage the Russian portfolio?
First of all, with very same credit standards than in naval rails in North Asia. But on top of that, we have specific risk appetite statements, which are capping the Russian exposure. We're also capping estate exposure within Russia because we want to keep it low. And we have some specific credit restrictions related to that portfolio. We are on a continuous basis stress testing these clients and that's done client by client base in order to understand what is the situation and what could go wrong and taking actions.
And 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 then 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. And then we just simply took down to the values and then now they are going to be sold. But underlying development in Baltics in terms of risk has been very stable. In Baltics, the same, very security standards.
In Baltics, we have built the portfolio organically. We have used Nordea's 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 analyses on the risk levels of the portfolios and, of course, analyzing risk classified customers on a customer level and so forth, they're actively managed. Leverage by our 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 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's a diversification into target companies over various industries. But 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. 2, other banks Interbank syndicates or to the bond market. We may underwrite very big tickets. And thereby, of course, it's very important that we also control and cover on 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 due to final hold levels we have decided ourselves. So 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. So in that way, that's quite easy to be managed and observed and monitored. And then finally, the shipping. This is 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 1st year of crisis in the shipping segment in 2012. Here we have also in our risk appetite capped the total exposure for this segment. But here we have built 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 financial shall act in these markets.
We are today very strict on the business election. 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 is a numerous type of credit parameters guiding individual risk taking and structuring of the loans. And also here actually the business model is very much the same as in LPO.
So that underwrite and distribute not underwrite and keep. And in that way, we can keep the total exposure at a 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 due to our risks. That was this is the main message coming from the risk management, but then a few words on some other areas, which may create some volatility in our earnings. And 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 going to upward volatility in this area as long as it's done within the existing risk appetites and risk limits and risk practices. But our intention is to always ensure that the downside risk is very limited.
That we do on overall level by capping the size of relative size of this business in relation to Nordea's total business in our risk appetite framework. And then 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 and L explanation, so that we all every day at 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 portfolios when market has moved in this way and compare that outcome to the reported P and L. And if there are big differences, we want to have an explanation and understand that what has driven these differences.
And that has increased a lot of our understanding of our positions, how they are managed, what can be done, what could be the events. So very active touch. We also have this kind of more traditional naturally more traditional VAR limits governing this area. And 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 and L. And as you can see, the track record also in this area is very good, so that it's stable low level risk.
But we are aware that this is definitely an area that we have to enhance our capabilities. And 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 we're going more digital, which is, of course, changing and then introducing new type of risks, not to mention about cybercrime and all those information security, you see the list there. So that here we are investing just in order to keep this good stable track record. In compliance, we have already taken a lot of very dedicated significant actions to improve our capabilities and status over the past 2 years, but there is a lot of things to be done.
And they are directed and managed by our new GM Member and Compliance Officer, Eeva Latar Ruzek, 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. And 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, financial risks, but also non financial risks in the bottom.
This is a good framework to have. Whenever we are changing some of our plans, our strategy is introducing new focus areas. It's easy to test that whether they are fitted into our risk appetite framework, because these are the out of boundaries of 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, so that we are definitely we will improve those to be more precise what do we mean by that. And then this is, of course, reported and discussed thoroughly through every quarter with the board and also with the business area management. Summing up, we our business mix, business policies, risk policies are deriving for the fact that we will have a high quality and stable credit portfolio. But we are also aware that we are exposed to more cyclical areas.
And there 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, analyze based scenario based type of approach, which has helped us a lot. And then we are encouraged enough to take actions if and when these analyses are deep dives, if they show that actions need to be taken.
And 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. And then 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 into room and then we continue. Thank
you.
It. For
it. It.
It.
It.
It. It.
It. It.
It.
It.
It.
It.
It.
It. It. It. It. It.
It.
It.
It.
It. It. It.
It.
It.
It.
It.
It. It.
It.
Okay. So let's talk about the business and not just the numbers. I think there will be plenty of numbers in my presentation as well. So 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, but perhaps more importantly customers choose to log in to our services 2,000,000 times a day. That is quite dramatic actually. And we run about 2,000,000 full in-depth three sixty meetings with our customers every year. We sit down with the customers and go through their total economy. Have a good mix of products and channels and also segments.
And 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 2 every week last year. The manual cash services is being reduced very, 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 13% level and we will be that and more for retail. As Tarsund 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. And also on capital, actually you can see the REE number here has been quite dramatic also for retail business. But 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. So just looking at the numbers in total here and this is 3 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. And on the cost side about 2,000 jobs have been reduced over the last 3 years. And at the same time, we have invested in online and compliance and other areas. The third of the branch locations have been shut down. And 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 road car or the RORA car.
And 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. So looking into the future then, our long term ambition is to be number 1. So what does that mean? We're all at the number 1 in terms of size in the Nordics. It's not that difficult to be number 1 just by being present in all the countries.
It's much more difficult to be number 1 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 1 in each of the markets and not in terms of market share and size. We already have good size, but that's profitability, but also customer satisfaction and employee satisfaction. And these 3 actually go hand in hand. You can't at least not sustainably have one of them without the other 2.
So we have a quite ambitious at least long term journey here. So how is this going to happen? Well, if you start with the platform that we have, we have a quite good platform already. A lot of things we're doing, 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.
So 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 within rainy days and by that we think that they will give us the full share of wallet and they do. But 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, but it can of course be done. And 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, 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. And for us in retail with 10,000,000 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. So this is really about scale and automation to deal with the retail business.
We have chosen 3 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 and we come back to all these 3 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, we basic 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 adapt to We will have to make sure that we have systems that can adapt to customer needs and preferences in the same way and 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. And it's not just about financial analytics, it's all about behavior and all those things as well. And then of course all banking or at least all retail banking is a competition around low cost.
And for us, it's about the efficiency and scale of having 1 Nordic model. A lot has been done, but more can be done. So if you go in then to household first and look at that. So what is happening here? Well, the most 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.
So 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 do it conveniently from their home. When we asked the customers about 50% of the customers without having tried to say 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. We really like the physical meetings, but they still say I would prefer for remote meeting. And as Christian mentioned as well, the customers that have had that, they like it more. We get very, very good feedback. They are a little bit faster.
We sell a little bit more. We get more business volume. So it's a win win in all ways. And we're rolling this out fast. And Christian said that now in the Q1 we have about 10%.
I think this pace now is about 15% where we are now. And that's quite a lot. It's about 300,000 of those meetings in a year at the pace we are now. Advice, so 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. So customers will have to know more and take more decisions and plan more in terms of the financial situation than in the past in the Nordics. And we can play a very important role to help them.
And we already do and that will only increase. But the way we then deliver advice will not just be in person meetings. They will remain to be the most rich and the most important meetings with the And 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. It needs to be an outside in not an inside out way of doing this.
We will launch that later this year in terms of 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 log in to our or when you use our system that is relevant for you. And here we change the way we work, internal versus external expertise. So 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 $30,000,000 We have $3,000,000,000 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. So that is our huge opportunity and also what the customer wants. So this is not about pushing product to someone who doesn't want it.
It's the opposite. It's to 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. So we can do exactly that and nothing else. So 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. And then 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 service is already kind of automated to be online. It's not a lot of value add by doing services in a branch. It comes most of the cash is gone. So 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. But 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. But when you have decided to buy your house, of course, the mortgage should be simple.
So you can focus the advisory you can focus on the advisory and not on the processes. Products, we have reduced many of our products already and 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. And capital will also be an important lever also for the household business, but perhaps then more in terms of how we set up our products, but 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, 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. So 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's more geography based. So more relevance for the customer perhaps a little bit less relevance for us than more difficult, but much better for the customer. And we will 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 household as for sorry, in retail as it is for the household customers. But for the larger ones, I think it's 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. It might be a little bit different you get to real big corporate customers and I'm sure Casper will talk about that in a second.
But we will build a lot on that also for the corporate customers within retail. But the biggest lever for corporate business for us creating value in terms of owner value, it is in terms of capital. I think this is demonstrates pretty well what we have been able to do with a few last years, taking down REA 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's 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 don't think that's necessarily true. If you get used to as a consumer to intuitively good services online, you wouldn't go to your job as a CFO and then think it's okay with papers of course. You would have the same expectations.
It's just a little bit later in the process. And then securitization is something that we will have to explore pending the different types of regulations coming our way. So putting it together, we have clearly delivered upon our promises from the 13 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's 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 to still be more value for the customers. For corporate, it would be more on the capital side, where we think that we can continue to push the need for capital down a little bit.
So I think all in all, of course, we will continue to focus on the improvement of cost of income and raw car, which is our most important metrics. So 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. And now I hand over to Casper.
Thank you, Lennart.
Okay.
It's good to be here. Wholesale Banking, when we look at strategy, it's 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. And 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. And that comes from the fact that we are regional. We operate in an area where we have 4 currencies. We are truly regional. We are probably the only regional bank operating in all of the countries as a lead bank and 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. And 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.
And in our global business, which is shipping and offshore, we are probably one of the top 2 or 3 players in the world. So we have that scale. And since having the scale, we have done everything to build a product and service platform to actually compete with the best. And 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. And since forming Wholesale Banking now actually exactly 4 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 one player there.
I also argue that it's only up here where you actually can generate returns that are attractive for us. So it's very simple. Then 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. But it's very simple.
Then of course those are kind of the strategies, the words we should of course say, so have you delivered? Have we actually driven value over the last 3 years? And 3 years I take because 3 years is the full 3 years that we had actually operated as a wholesale bank. As I said, we formed Wholesale Banking in summer 2011. So since 2011, 3 years.
Of course, you have to put performance into perspective. When you look at the environment where we have operated in the last 3 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. CRD4, lot of new capital coming in. Not an easy environment for a traditional banking model.
So 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 used to look at the key drivers and the key levers in judging if you are successful. Let's admit that that's exactly what we did certainly 4, 5 years ago. How have we done?
Lending down minus 15, income down minus 5, net interest income minus 7%, fair value minus 15%, cost income up 2% points. Now it's silent. You look at what the hell is he doing there. That's not very on those traditional metrics not very good. But 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 plus 15. Cost flat. That's the only reason why cost income has changed. Ria down 30% despite increased capital from regulation and loan losses down almost 50%.
So what's the net result then? Top line drivers, what I call value drivers. We actually have improved return by almost 4% points. And 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 not 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. But more important what you don't see here is that this business today consumes $3,000,000,000 less in capital than it would have done if I would have had the original business, dollars 3,000,000,000 so more valuable business and $3,000,000,000 less in capital. Now 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 1 or number 2 in this business. You need those capabilities.
So, how did we do it? We actually I think we delivered or I know we delivered on what we said 2 years ago. If I would use one word to say how we delivered and that word would be reposition. We repositioned the wholesale business over the last 3 years. We talked about relationship strategy, global product capabilities and cross sell.
Those were the words that I used 2 years ago. And that's what we've done. We have achieved the number one position and 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. And the other half or more than half is fifty-fifty fair value and fees and commissions.
So 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 1 Nordic or let's call it global model. I have a tight management team running the model and we've actually improved our capabilities without increasing cost. I see Martin pass on here, so I will take equities as just one example.
Martin actually runs our equity business, so I chose that. So as one example of what we have done really in less than 3 years, 2011, we were probably number 5 in the equity business in the Nordics, if you listen to somebody 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% and 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 and that's really what I call a return driven culture. And I think by disciplined pricing, you saw the numbers, business selection and capital reduction, we have actually delivered on that. So is there something we haven't delivered?
Yes, so there is something. It's always good to be honest. We've done what we said, but what we have not done and I think Elena said the same in some areas, we have not delivered income growth. But we could not have done income growth with the return. Could I actually have increased interest?
Yes, I could have, but not by creating value and not getting the returns that I have. And I think that's not the right way to run a business. And we will keep that discipline also going forward. And 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.
So return is what we measure. We are changing the culture to a culture of teamwork because that's the only way you can deliver. And 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 3 years, but it's quite clear that kind of the shift in focus has been as we have moved along. For the 1st 2 years, it was all about forming the business, getting the management, getting the structure in place, organization in place.
The last 2 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. And 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 longer time, but we are working very hard because that is really what makes a difference. So 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. But yes, there are things we need to do and those are leveraging the customer franchise. And I say leveraging the customer franchise because it's only now we actually have a product and service capability that 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 one position. And 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. So we have that now in place. So we can now serve our customers.
95% of the customers in the region actually bank in kind of my target market, large corporate and institution actually bank with Nordea. But I would say only 60, that's actually a high number, but only 60 view us as a core bank. So we can actually increase that core bank relationship, but we can also go much deeper in with the existing customers. And 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. So we can do a lot more with this.
Capabilities,
it's quite clear a regional wholesale bank needs to be an integrated model. We're 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. And 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 alternative. But I've always said that's a bad proposition. We should always aim to be better. But yes, relationship will give you the opportunity to sometimes be as good and still win the deal. But 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 positions number 1 pretty much in everything. But when you look at sub segments, sub segments in terms of country or products, we may not be number 1 or number 2. So there are many areas where we can actually improve and increase our position or improve definitely also the revenues.
But 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 3 other countries, but we will get there. I mean that's being deliberate as well. In our FICC business, there is a definitely a secular and cyclical transformation taking place. So we need to invest in digitalization, e markets well positioned there, but needs investments.
And then in our core transaction banking business particularly with simplification, we will have opportunity to improve that offering too. So yes, there are areas where we will invest, but the platform is in place. So it is about building on that platform. And 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 3 years that has been driven driving the returns of Wholesale Banking.
You saw that on my kind of performance slide. And it's probably fair to say that a lot of the big gains have probably been had, but I still think capital going forward will be something that we can do more of. Of the three levers to drive return, which is income, capital and then cost, Income actually 1% improvement in return requires 4% improvement in income or increase in income minus 6% in capital, but minus 12% in cost. So 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.
We never really control your income side. Income is dependent on market environment demand etcetera but capital. So we can do more on capital. It will probably not be as Thorsten said on model improvements. That's I think a journey that is pretty much over.
But 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. And it is also about hedging. And I would actually argue that capital management is a core competence that you need to learn. And I think we're getting better and better and better at it.
We've now been working on capital management actively for the last 4 years. And 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, but 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, but we will not increase risk. We will manage risk in a prudent way the way we have always done. And now I say not only credit risk, market risk, but overall business risk, operational risk, compliance risk and reputational risk, a big focus. But 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. So 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. But what I do promise is that we will drive 2 things. 1 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 one position. And I emphasize again, I think these two things are interrelated. You need both. We need the number one position to drive the returns. That is what we will 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. And I think that's prudent because if I can show you that with flat income, I would improve returns. I think that's discipline. And if that demand is there, so if we actually get the demand, yes, we will capture it because we have the platform.
I think the Q1 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. So we will capture whatever demand is there, but I will not actually build my business plan on increased income.
I need to be able to drive return without that. And that's where capital comes in. I already spoke. Cost, not a key driver, but we need to be cost competitive. And 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. Now I'm saying that may not be possible anymore that we do with flat. We probably have a slight increase because we need to make those investments. But our cost income also a demonstration of efficiency at 33% to 35% probably will not change. So we can operate at that level.
And then of course risk I already talked about. So I'm confident that the journey continues. And if there's one message, it is about us being relentless on customers to maintain that number one position and also driving returns. There's nothing else that actually matters. Now I give the word to Gun.
Now you see now you get some growth.
Thank you, Kasper. I have the privilege of serving you the last part of this Capital Markets Day presentation. So I hope you're ready for some nice dessert. The asset or the Wealth Management area consists of 3 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 assets under management, we are 47% larger than the 2nd 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 and 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 segments.
And 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 2.90 $1,000,000,000 in assets under management, 18% is international, the 82% comes from the 4 Nordic countries or you could split it in the business lines, dollars 194,000,000,000 in Asset Management, dollars 93,000,000,000 in Private Banking, dollars 62,000,000,000 in Life or if you would slice and dice it differently customer segments, it's 32% Private Banking, 18% Retail, 17% Institutional Clients, 8% global fund distribution. And if you wonder where the last 23% is, it's life pension customers. So just to prove the point, it's a well diversified business.
And not least, it's also a growing business. Since last Capital Markets Day since 2012, we have delivered a profit growth of 43%, which is a CAGR of 19.5 percent delivering $903,000,000 in profits last year. So what we made some strong commitments in the last Capital Markets Day in March 20 12. And the question is what have we delivered? And I'm proud to say that we have delivered on the commitments.
Income CAGR 9.5 percent profit CAGR as I mentioned on 19.5 percent and we're close to flat cost. The cost income has decreased by 9 percentage points and was last year 46%. The return on capital 32%, which is an increase of 10% and the share of group profit for Wealth Management has increased from 16% to 21% over this same period. And personally, I like to focus on flow, because flow is the net positive flow is not only indication of future income growth in the form of increased assets under management, but it's also an indication of the competitiveness and attractiveness of our offering. And we are proud to say that our customers have trusted us with more assets both existing customers and new customers.
And the last 3 years an accumulated flow of $35,000,000,000 and if you add up the flow of the Q1 this year $42,000,000,000 in net flow. Counted on the assets we started this period with is 18%. So this is a strong growth. And the cost income we delivered in Q1 was 42%. I would like to elaborate a bit more on this flow because the 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 2,003. The largest drop we saw was in 2,008. Was a drop of 20%, but it was regained the year after. And even if you had had no growth in this period, we would still have doubled the assets and the management due to the flow.
So flow has proved to be a stable contributor to our growth in assets under management. And there are several drivers behind this. I will mention only 3. 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. So the sales through these channels has increased 2.5 times since 2012. 2nd part of the growth contributor has been bank assurance. This has proved to be a strong success to sell insurance via distribution in Nordea Private Banking and Retail Banking as well. And more than 77% of our premiums now come from bank distribution, so low acquisition cost.
And the 3rd 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. So this was what I would like to highlight on the looking back on what we have promised and our commitment. And 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, concentration increased concentration of wealth and we also see generation shift in companies where the owners sell their business and convert these into investable assets. So based on the strong platform we have demonstrated, we and also in alignment with the Nordea platform and the Nordea business priorities as presented by Christian earlier today, these are the 3 focus areas that we have decided will be key going forward. Client relationships with 3 headlines.
It's sales advisory service excellence. It's increased international distribution. Via distribution partners its leading digital offerings its advice and solutions again with 3 headlines advisory capabilities to deliver superior investment returns not least in the low yield environment and leading digital offerings. And 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.
So 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. And let me start with asset management. Asset Management is by far the largest Nordic asset manager, but also a leading European asset manager. Actually Nordea Asset Management was the only European asset manager that has been on the top 10 list of fund sales the last 3 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. And 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 3 years and a cost level which is 30% below European peers according to the last McKinsey survey
on asset management.
And not only delivering strong financials, 99 basis points investment outperformance the last 36 year and a high number of high ranked funds. So 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 and especially addressing the low yield environment and to benefit from the strong offering we have on the multi asset management solutions. The 2nd business unit Life and Pension also holds the number one position Nordic. And in this business, we do drive this for focus on ROE not on volumes.
So for the traditional business, we actually had a negative figure of 26% on premiums over the last years. But 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. And in 2008 less than 50% of premiums was in market return. Today, 89% of premiums is market return business.
So this is transformed from a traditional life company to a market return company as of today. As I already mentioned, focus on bank insurance, low distribution costs and also here strong financials with close to 30% CAGR on profit and a quite strong decrease in cost income 21 percentage points reduction in the last 3 years. And moving forward, the priority for the life company will be to build next generation retirement offerings. We see 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 and not least also lower expectations to state and government pensions.
So these drive the need and the focus on long term savings. So 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 seize cost reductions. And on the capital side, today we have or as of end March a solvency of 199 percent, no lower than 186% in any countries and we expect to do the Solvency II transition with no equity capital injection. We did a very clear commitment on the ROV to be delivered from life on our last Capital Markets Day, 15% in 2015, which was actually delivered last year.
And we also this time commit ourselves to a target of ROE 18% in 2018. 3rd business unit, Private Banking, again a unit which holds the number 1 position in Nordic and number 1 to 2 position in each country. We also have an international business domiciled in Luxembourg and in total 100 and 10,000 private banking customers. And 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 private banking potential are referred to private banking.
And we see clearly that this generates increased volumes due to the fact that some of these bank via asset shift in asset mix and not least also the customers see higher returns due to the same reason. So 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. And not only to measure on financials again, this is an area where word-of-mouth is very important. And we measure customer satisfaction both after each meeting and also on an annual basis.
And this customer satisfaction on the annual basis has actually improved with 8 percentage points since 2,008. So going forward in this area, it will be a focus 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 Norway and Sweden where we do see that we have a lower market share than for other parts of the bank. So 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 these customer segments as well.
And 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. But it's also important for increasing the efficiency of our advisers alike. Enhanced solutions for wealth planning and investment advice and continued shift to manage solutions.
It's still interesting with the low interest rate environment we have in the Nordics still 12 percent of our assets from private banking customers are in deposits. And we see a potential to increase the managed solution further. Our flagship offering the Private Banking Portfolio Management has a penetration rate of 18% of AUM and it's a good example of 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. So going forward, we will and expect to deliver growth according to the plans and initiatives we have taken.
And if we see on the last year's 4.7% is the growth we have seen in flow measured in assets under management. And 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. And 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.
And as we have shown over the last years, this will be focused on profitable growth. 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 0 cost increases. But there will be increased cost efficiency. So cost income will come down and we expect it to stabilize around the 40 level. So summing it all up, what can you expect from Wealth Management?
1st 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 in 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. So we expect this to be flat and to be leveled out. On cost, as I have said, there will be cost increases, but again to underline increased cost efficiency and lowered cost income. And on capital, Wealth Management only consume 8% of group economic capital.
And it's the Life business which consume the ballpark of that capital. And we have harvested the lowest hanging fruit by migrating traditional business to the market return business. But still it will be high on the agenda to have a capital efficiency and as I have mentioned the transition to Solvency II without capital injection. So 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 and A session. You will lead it?
On the webcast. And then also on stage, we have a new member in Group Executive Management, which is Eva Lotte Rosenquist. And as Head of Group Compliance, she is responsible for one of the growth areas in the bank. So let's start please Jan. And Jan, if you can state your name and company, you will soon have
Thank you for taking the question Jan Wolter from Credit Suisse. So four questions really and that and they are on capital and REA. And the first question is the target is unchanged rea for the next 3 years or 4 years or so. And the capital level is already in line with the company's stated target more or less 15.5%. So 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? So the payout ratio would then be significantly above the 75% that the company has highlighted. So 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 by 1 because
No, yes, I agree.
And it was almost a question as if you were close to conclude, but I think you got it right.
And is this also the management and the board's ambition to pay out that amount of capital? And do you see any political hurdles to this or if you could view this?
But I think it's exactly why we have chosen to formulate as we do this time. You could have chose 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 through 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 REA as we indicating I.
E. Largely unchanged. And yes, the strategy is on profitability on making excess capital, being very efficient on capital. So it will free up a lot of excess capital. It will mean that we will be able to repatriate a lot of capital.
And 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. And the other question is on the ambition to keep the rea unchanged. If you could elaborate a little bit how that is achieved. It feels like there is an implied target yet to deselect a number of clients to keep the level stable more or less. So 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. So 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 1st 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. And I mean, we are supporting it with a set of internal performance management frameworks that measures how much dividend capacity to each business area fee of.
We establish ROE card ratios, I. E. ROE equivalent internal ratios. We allocate all funding liquidity and capital cost etcetera. So 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.
So trying to make a top down quota on who should be taken out or not I think is close to impossible. But 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 won't 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 VIA figure.
I think it's important you phrase it in another way that 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. So we cannot allow ourselves to commit capital to a customer that only borrows money and does do nothing else and the return will be too low. The margins are simply too low. So that we cannot afford ourselves to do.
So 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. And we will not push customers out. We will simply have the proposition to our customer is that when we allocate capital, we need to do all the other business available. And that's the reason why we emphasize so much in 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.
So 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. So 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. So it's more the business model I will look at it. And therefore, of course, when we then talk with customers, we discuss this with them and we of course also discuss each individual part the capital commitment. And particularly for the corporate segment, as I said, we will use the capital market as a source of providing capital as well.
Thank you. And just a 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 SEK 3,000,000,000 in mitigation that we could see to keep Ria 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 regulation that will some house clean even house clean. So we will do it now. This is around maturity.
It's around collateral, data quality, etcetera, etcetera. More of the same we have already been conducting. Much of this could hopefully be done without too much disturbance from regulation or supervisors. But it's the majority is coming from what we just discussed.
Okay. Thank you.
Andreas, next to you.
Hi. Thanks. It's Andreas Hakansson from Exane BNP Paribas. Just basically following up on Jan's questions here. On the future regulations, I mean, we're all looking at the proposals of the RAA Fluor 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 today?
1st of all, we fearfully agree with the Swedish regulator that these proposals are wrong. So we are lobbying intensively together with them. It will take a lot of time before you can say what ultimately will become Basel for something. It requires a long process. We don't know if it should materialize at some point in time.
It will as you say, it will punish not the Swedish banks, a couple of other countries will be severely hit. And we have to lean towards the understanding that they had with the Swedish regulator that this will be unacceptable for Sweden and they will take all measures to neutralize any effect I. E. Adjusting
risks and market risks where we also see potential changes, have you factored that into your flat RWAs?
We have not. We have factored in all capital regulation that we can kind of quantify with a decent amount of certainty. That means also that the whole standardized approach calibrated, how it will be calibrated, how it will be defined, whether or not we'll be kind of these more aggregated measures or they would allow some kind of granularity, it's a material means that we can arrive at all kind of outcomes. So no pending regulations that we cannot quantify with a decent amount of certainty is not included.
Then 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?
It's a total view. I mean, we have been ramping this up since 20 12/13. And as you correctly point out, the Swedish regulator made an inspection in 2013, which we now got the verdict of. But we have ramped up through 2014 or 2015, but it's clear that it is not only Know Your Customer 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. So it's a broad spectrum of regulation. And as I said it has been ongoing, but there's still more to
be done. Thanks. And just last questions. You put in €76,000,000 as an unexpected performance pay this year. Is that only then related to the Q1 trading or the
This relates to the updated full year, which is basically, as you know, we were positively surprised about Q1. And there we won around €30,000,000 to €40,000,000 effect. Then we have updated our full year budget, which is basically that we never really have strong opinions about net fair value for example. So the full year effect of what we said in Q1 is the $46,000,000 And then we and I did on top of that we had the as we updated the full year forecast, we had this effect on the profit sharing scheme. So you should expect as of what we know as of today for the full year this should be included.
Okay. So if we can go to Pavel followed by Peter and then Johan and Jacob.
So yes, hi. Paul here from Danske Bank. A couple of questions. First one restructuring cost in Q3, would that be for personal reduction, IT write downs? Kind of what magnitude we expect?
And also how would that impact the dividend base for 20
15? First of all, it will probably include provisions for more or less everything you mentioned. And we are in the process of detailing the extent of the program including the pace and the sequencing of the cost efficiency program. So 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 form 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 else equal should go down from 15% to 16% and again from 16% to 7% after which they will kind of flatten out. And you can discuss what is sizable. But we have pretty we have redemptions of around $15,000,000,000 a year and then you can make certain assumptions around the $1,000,000,000 a year and 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. Then two more just questions. On fund fees, we've a lot of fund fees pressure in Sweden. We're also having something going on in Norway.
How would you expect it to go through? Do you expect we saw the slide that funding costs are going to remain flat.
But do
you think that will remain flat all the time now or one pressure?
This is a presentation of the 2016 to 2018 plan. So my statement was for that period of time. And yes, we do observe the media tension. 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. So what we see as key is to deliver value add to customers.
That is what really matters. And of course, as we are an active manager, to us it's very important to deliver value add. However, as I said, we do believe there will be margin pressure, but that will be compensated due to shift to higher margin products and also distribution channels with higher margin. So net effect 0.
And then the last question just to Casper. You're stating flat income costs up. So could you just say anything about capital rea? How much do you expect it to come down in order for ROE to continue increasing upwards?
We talk about I mean we talk cost I mean we talk about marginal increase in cost and I said that cost income probably one of the most efficient and leased banks that I know in Wholesale Banking at 33% to 35% costincome ratio will stay. So capital will go down enough to increase returns. We're not going to give a number, but as I already showed the last 3 years, it was you don't plan I mean, you manage for returns and you have the levers and then you use them. If I would have presented 3 years ago those numbers, most people would have said don't do it, they wouldn't have believed it. So it is about dynamically managing and believing and coming back to the culture we are able to do it.
And I said flat income as a result of flat or very low growth And I think it's the right way to plan. And if there is more demand, we'll get it.
All right. Thank you.
So Peter?
Thank you very much. Peter Ketskov from Carnegie. I have two questions. First of all, I think Torsten you mentioned that the IT investment program that you've that you will be undertaking for the coming years, which is quite ambitious that it could potentially have some P and 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?
And then secondly, just on the compliance costs, Christian, you mentioned that it's relating to various items, the SEK 27,000,000 that will be taken front loaded today or this year. But just following the warning that you received from the Swedish FSA relating to 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 because in reality a lot of compliance issues has to do again with simplicity in structure and simplicity in data. So the more data we have available readily available the easier it is to solve the compliance equation. Ultimately, as I said, then the regulation the operational regulation will be about screening all transaction against all customers in all sorts of dimensions. That's actually what we're looking into because we have to add in the consumer protection directives which are also coming.
So 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. But the compliance is a general thing. As I say, we have been ramping it up since 2013. So we knew that we had a catch up to do.
We have done it. But it adds on 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. And whereas as Thorsten was saying, it's clearly a growth area for us in the coming period of time. And this is for us in the coming period of time.
And 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. But in order to get ahead of the curve, we have decided to take extra measures.
And then an on simplification, which in reality are many different things. So 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. This requires a lot of business This is not something you can really do for external vendors or consultants to do.
Then we have 4 major IT related type of projects including in the simplification program. We will replace the 4 core banking systems within mainly retail, I. E, the typical banking product, the product for the 10,000,000 customers, that's a huge replacement. A lot of cost there goes to vendors and consultants, etcetera. 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. And the 5th thing we will do is that we will basically transform as Lennox was also alluding to, we will basically transform a lot of our operating model because we want to we will look different as part of this exercise. So many business resources are involved and accounting rules are so that a number of these types of resources is not possible to capitalize 100%.
So as we are now ramping up fully and we will peak in 2016 2017, a lot of people will be involved, a lot of business resources will be involved. And some of these costs can simply not be capitalized. So that is why there will increasingly be a pressure also on P and 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 So that's why.
And 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 large portion of that will be more front end loaded than you previously had expected. And 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. But we are ramping it up in a faster speed as I just said and that probably will run into 2016 as well. But we have given the guidance now and we are detailing plans right now. So 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, but I mean we stay with the CAGR guidance. But 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 benefit you can say. You cannot completely rule out that 2016 will be a slightly more difficult year than 2017 2018.
If you can hand it back to Johan please.
Thank you. Johan Ekblom 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? Or 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? And then 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 1000000 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 3 years not to go well below $40,000,000 What am I missing there?
Should you take the should we start with the question relating to dividend policy? I think I would answer in more or less the same way as I have done once before. I think we have found a good way of formulating it, setting a certainty of a the fact that we don't believe we will need to use also 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. So we have now supplemented with I think an elegant way of saying that we want to grow absolute dividend by 10%. And 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 euro terms. I think
in the very long run that's the reason why we 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. And 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. Then we have a new equation. But we expect that we do not grow our lending book that much and thereby we don't need the capital.
And 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 and the dividends will increase. And I will answer before Gun 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. Then will they have the luxury that we risk our cost increment and we'll go below 40.
Johan, what would you say?
I think that was a very good answer Christian. First of all, the number I mentioned was for Q1. And of course, there will be cost increases. But given the scalability of our model, it will be marginal cost increases. And this is not disclosed per business area what the cost CAGR will be.
So stabilizing around €40,000,000 is the guidance you will get for the 2016 to 2018.
Thank you.
So Jacob followed by Daniel.
Thank you. Just two quick questions. Firstly, on the Wealth Management, I think on Q1 on the quick Q1 call, you discussed historical growth of 8% to 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, ma'am? I didn't get the first part.
Yes, yes, 8% to 9% revenue growth I think was discussed at the Q1 call. 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. And then just my second question was, we talked about this CAGR growth of 10% of dividends. Is that versus 2014 or versus 2016 dividends? That is versus 2015.
2015 dividend. Okay. 2015 dividend.
Daniel Dottoy, JPMorgan. 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? And then secondly, on the management buffer, the 0 to 90 basis points, I guess part of that refers to variation in the countercyclical buffer. Just wondering whether that would be that would absorb any increase in the countercyclical cyclical buffer going forward because at the moment it looks like that's on top of the requirements there? Thank you.
I forgot the first question actually.
The first one was on the 75 percent payout minimum payout. That's the total of the ordinary?
Yes. Well, it's total dividend CAGR and its total dividend payout guidance. It's deliberately that we are not using phrases like ordinary or special. So at the end of the year, you will know that at least there will be a 75% payout and then you'll be waiting to see what will come on top. But 10% is a good guidance.
Now on the countercyclical buffer,
the numbers we
are showing is the Swedish FSA numbers. And they have calculated based on Q1 data that the minimum capital the 70 basis point on the 3 types of Pillar 2 risk. It's a the 70 basis point 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, they don't include the Norwegian countercyclical buffer.
So if you add that on top, you add 14.9 and then they have said that the Swedish countercyclical buffer should increase to 1.5, you add another 13 basis points. But then 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 threat process how big a part of the 80 basis points as they have not said anything else than 14.7.
So I think that it's
as we said, it's fair to assume that it will be it will probably maximum be 14.7 and hopefully the minimum capital requirement will be somewhat lower, but we don't know yet. But at least, I think you should see it as a very positive outcome that these three specific Pillar 2 risk only came out at 70 basis points, which was actually close to what we have assessed all along. And now we are just prudent and park these 80 basis points you can say as a reserve you can say for this rep process. So unfortunately, we cannot say exactly the number
yet. So we have room
for one final question and please keep it to 1.
It's Heinrichs from Goldman Sachs. My question is, like you're dealing with sort of your 4 core markets with 4 different regulators and a lot of your strategy seems to be built around sort of synergies, efficiency of scales. And basically at the same time you're probably going to be faced with more and more complexity given you have 4 different regulators looking for different ways. So is this one of the risks that you think would be sort of 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 do are you dealing with actually?
We are dealing with when we talk simplification, we talk about everything. We have specified a lot and been discussing a lot the IT and process part, but there are other structures which we are simplifying. So we're actually simplifying much more than we have talked about. And one of them will be legal structures where we are in the process of simplifying our legal process as well and ensuring that we have a more simplified approach to regulators and so on, but also getting this one common platform with one system and one process and 111. And of course that ultimately comes up towards regulators.
We are in that discussion right now. I'll come back later in the year how that develops. But I strongly expect that simplification to be possible, because the learning point in financial stability about has been that resolution recovery resolution is only possible if you simplify structures. If they are too complicated, you can simply not do it. So we are just pursuing what financial stability for what and others want us to do to simplify the whole thing.
And 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.