And welcome to the Nordea Fourth Quarter Report 2014 International Telephone Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to our Head of Investor Relations, Mr. Rodney Alvine. Please go ahead, sir.
Thank you very much, operator, and welcome all to this conference call where we will start with a short introduction of Group CEO, Mr. Christian Clausen and then we will open up for questions and answers. And we have also CFO, Torsten Haid Jorgensen as well as Group CRO, Arne Capri as well in the room. So please Christian?
Thank you and welcome everyone. And just a few opening remarks in three sections. The first one is the financials. You have seen it today. I think we are very pleased that we actually managed to deliver exactly as we have planned for.
And revenues, especially the most important revenue lines on commission and fee income, which have been our plan for several years to build those businesses. We can come back to that. So revenue is up 2%, costs are down. Underlying they're actually down 2%. There's some seasonality and other things, but we are following our cost plan exactly and we're going to deliver in 2015 as well.
Loan loss is down to a level below the 10 year average and we expect to fluctuate around this. And this means that operating profit is up 9% in euros and 12% in local currencies, so a strong underlying profitability. We also built a lot of core Tier 1 in this core in this year. We have built nearly 2 percentage points, which gets us to 15.7 percent after we have paid out a proposed dividend of €0.62 per share which is somewhat of an increase. So financially, I think we have a very strong capital position.
We have well control on risks. Costs are following the plan exactly and revenues are up and we are actually happy to see the progress in the The second section of this few minutes will be our business development. I think the forward pointing indicators are of course we get more new customers. Our execution, our relationship strategy continues to deliver which is an important part. Our assets under management or Wealth Management business are delivering assets under management growth, which is in top league of European peers with €18,600,000,000 of inflow, also strong performance in general.
And then on the large corporate sector, it's very pleasing to see we keep developing. We are leading in the league tapes on the capital market transactions, which is an important part of our strategy to ensure that we finance the corporates in the Nordics through the capital market when we talk about the equity or the longer term exposures. So that is also very good. And on retail in general, we increase efficiency and get new customers as I mentioned. And the 3rd section is of course that I'm personally very pleased to see that Withinstus 10.11 has delivered on the plan more or less on the 2nd digit or the last digit.
So we are delivering revenues, costs, capital and everything. And this quarter, we can then also deliver the dividend we have guided for. And I think we have quite a lot of forward looking elements in our report as well with the think points well into the future. So with these words, I will hand over to Q and A.
Thank
We can now take our first question from Matti Akas from Danske Bank. Please go ahead. Your line is open.
Hi, yes. Good afternoon. It's Matti Akas here from Danske. Two questions, if I may. Firstly, regarding the cost program.
A year ago, when you announced your cost cutting program, I think the revenue outlook for all of the Nordic banks was totally different to what we've seen, especially taking into account the decline in interest rates. I'm just wondering, shouldn't you be a bit more aggressive in terms of the cost program going forward because it looks like that the net impact and the profit outlook is different when you announced this? And the second question is regarding the Danish agriculture loans. Could you tell us what is your exposure to pig and milk producers in particular? And how much loan loss provisions have you taken against this exposure?
Thanks.
If I start on your cost program question. I think you are right that the income assumptions changed somewhat from our initial guidance and that was exactly why we accelerated the program and more just doubled the expected gross cost savings. So I think that the program we are set to deliver in 2015 is exactly addressing that and will to a high degree compensate for the expected lower income by the 6% down in euro terms from 14% to 15%. And the program as you know has been prepared for a long time. It's running in very specific schedules.
It's not a program you change that fast. But what we discovered during the program was of course that there will be another level of efficiency and that is related to more fundamentally changing some of our core processes and systems. And that was why we during this period have also ramped up another program, which is called the simplification program that will deliver efficiency in a longer term perspective. So I think we have put up quite adequate cost programs to address the somewhat lower income program.
So is it fair to assume that the second program will actually be on top of this 5%? Or is it included in the 5%?
So how should one look at it?
So the simplification program, of course, will deliver smaller improvements as we go along, but the real benefits of the simplification program will be somewhat later, I. E. Far beyond 15. But it will improve in cost containment and it might also have as we go along some smaller benefits, net benefits, but the real benefits are long term.
So sorry, if I just may remind you also that when we launched this program a year ago, we actually had a revenue outlook of 2% in local currencies. And if you look for 2014, it was 2.2%. It's actually following our scenario quite closely.
Our interest rates are down now quite a lot from that. So I think 2015 looks even more challenging.
Yes. The top line is following the scenario.
And then this Danish Agriculture portfolio, I give you total numbers. We have not disclosed the sub segments within this total number. But approximately our total exposure to Danish agriculture is 7 point €5,000,000,000 One can split that into 2 parts. €5,600,000,000 is in the mortgage bank with very low LTVs. And then 1.9 percent is so called bank lending, which is it's more risky one you could say.
Our impaired loan ratio out of this total portfolio is roughly 10% currently. And then our provisioning level is if you take it from the total exposure this 7.5, we are talking about some 3.50 basis points in terms of total provisions compared to total exposure. But it's perhaps more relevant to this dimension is that out of this bank lending which is €1,900,000,000 our provisioning ratio is 14 percentage points. And if you compare this 14 percentage points to these 10% impaired loans, we can say that actually we have impaired or we have provided more than currently we have impaired loans in this bank lending portfolio. But we feel that at least in the under current environment, we are enough provided for these coming low losses because we increased also collective provisions in this quarter.
But of course, needless to say that this will change every quarter and we are following up closely the development every quarter and change our provisions accordingly. But currently, we are comfortable that our provisions are at the required level.
Thanks, Harry. That's all I needed to know, very clear.
Thank you. We will now take our next question from Johan Ekblom from Bank of America. Please go ahead. Your line is open. Thank you.
Just a couple of
questions from me. Firstly, on the presentation this morning, you continue to refer to increasing the distributable amounts. Should we read anything into this? Is this dividends plus buybacks? Or is this just am I reading too much into it?
And then I guess when you talk about the higher payout, you're at 70 now. Are we should we be thinking about material changes going forward or smaller changes? And then just back sort of to the asset quality issues.
If we look at
the Russian business, can you just give us an update there on what you're doing to safeguard the investments that you do have? It looks in the quarter that we saw some reduction in volumes in particular on the retail side, which appears to have halved. So I'm assuming not all of that is FX effects. But at the same time, we saw deposits drop very meaningfully in the quarter. So how should we think about the evolution of that book over 2015?
Yes. On the question on dividend and the forward looking policy there, I mean, there was a number of questions around it. And I think that, first of all, we are basically reconfirming the guidance we have had until further for 2015, which is that we would increase the payout ratio from 2014 to 2015. And then there was a question around, yes, but and what regarding beyond and that of course we will come back and say something more about. However, what I think is clear from our Capital Market Day 13 communication is that we in general are seeking to optimize the distributable amount.
So whatever payout ratio and whatever regulation, we are set to have a strategy of increasing that. Then exactly what that will lead to in payout ratio or buyback or whatever that is of course not something we can say anything about at this point in time. But I think it's a clear signal that we will continue to focus on optimizing the excess capital as we called it in 2013.
And I can then continue on this Russian question. We can split our portfolio in 3 parts in Russia. The largest part is the large Russian corporate customers, which we manage more or less customer by customer base. So because we have only a handful of those customers and then it's the best risk mitigation is to be very close to the customer understand that what is the status and what is the development and act accordingly. Then we have as you said household portfolio which is relatively small.
The decrease in this quarter is very much because of FX impact because that portfolio is ruble based. That is a portfolio which we where we are now very cautious. So that even if it's a small portfolio, we are very carefully evaluating every single customer and we are not so much open for new household customers because there are some risks included in that portfolio. But of course, the size of portfolio is so small that that's very insignificant in the Nordic group numbers. And the 3rd portfolio is this Nordic large corporate customers who are doing business in Russia and that is relatively small portfolio and quite healthy portfolio.
But I would like to say about our 2015 policy and strategy in Russia and that is then mainly related to this biggest portfolio of large corporate customers, it's likely that it will continue to come down in a controlled manner, so that we are cautious now in our Russian risk saying that we have made this kind of customer by customer stress test analysis in this large corporate portfolio and nothing is indicating that quality would deteriorate materially during this year. But of course, we all know what is the situation in Russia. And there are some refinancing risks related to those customers. Our policy has been that we have never wanted to become any kind of house bank for these Russian corporate clients. Usually our share of total lending or total financing of these customers is between 5% 8 percentage points.
And that allows us this kind of flexibility so that if there's a rapid change for diverse quality among those customers, we can act quite fast and then of course exit from the customer if we so wish. So that in that way, it's sort of a CDKP portfolio we are running and following carefully.
Thank you. Thank you. We will now take our next question from Omar Keanan from Deutsche Bank. Please go ahead. Your line is open.
Good afternoon. Thanks very much for taking the questions. I have two questions, please. I have sorry just another one on payout. So just a question on capital.
You made a very clear statement that you plan to run the bank with a core Tier 1 of 15%, which includes a management buffer. And you reported 15.6% at the end of 2014. So you're already 60 bps above that and we can perhaps safely assume that you add another 100 bps for that in 2015. So when you say that the payout will increase next year, I mean consensus already has 75% payout ratio in any way. So are you suggesting that you might be able to increase payouts above that with some sort of buyback?
And or are you expecting kind of any negative surprises around capital floors calibration at the end of the year for instance? But kind of you do look better positioned than peers on that front. So that was my first question. I just had a second question on revenues after that. Thanks.
Yes. But you're right that we are getting more and more comfortable around the guidance of a culture 1 ratio of around 15% as we say based on the dialogue we have with Swedish FSA and what they regard as adequate capital level. The end of year quarter 1 ratio was 15.7 percent. And you're right that we have said that we can increase the payout ratio and we feel comfortable about that. And we have I think it has served us well to guide in the way we have done from 2013 to 2014 that we would increase it and we have exactly increased it.
And we are basically sticking to the guidance we set out more than a year ago that and we reconfirmed that we will be able to increase. And now exactly the level, I think, is of course interesting to put a number. However, what we can assure you is that we are by all means seeking to exactly what we'll also do beyond to maximize the distributable amount. And then of course, we have uncertainties. We have uncertainties on macro outlook on volumes and we have a potential also some uncertainties that are not Swedish related, but Europe related on regulations.
So I still think it's a prudent way to guide the way we are doing it for 15.
Okay. Thanks. That's very clear. And just a second question on revenues. If I look at net interest income, it's been fairly flat year on year if I exclude FX effects despite volume increases.
I just wanted to get your outlook on the group margin given that we have more negative rates in Denmark and next month we could see the Swedish Central Bank follow suit. Kind of it is something that's very topical. So could you give us any kind of hard numbers or any updated sensitivities around what the impact of a kind of flat yield curve low for longer negative rate environment could be for your NII? That would be very helpful. Thanks.
I don't think we can put very specific numbers as of course this is something that is developing. And as you say we are entering a slightly new territory the extent of negative rates as we are operating with now. What we can say is that until further, I think that we from a business perspective have been successfully mitigating much of this effect by constantly being able to improve our lending margins compensating for the lower rates. And Q4 exactly demonstrated that that we have lending margin improvements in basically all the markets except from Denmark where it's slightly down and it's both on the household and the corporate side. So I think we will of course seek to mitigate the effect.
And I think we can we have also attempted and successfully mitigated some of the deposit margin pressure. And now, of course, we have a situation in Denmark and partly in Finland, where we have negative rates. And I think it's a whole new situation for the industry. We will have to figure out how exactly to handle the situation of this character. And obviously, it puts a short term pressure on the NIM.
And it does it from a customer perspective and it does it of course from our short term funding positions. But we are as I said, we are looking for ways to mitigate it to the high degree possible.
Do you think you'll be able to sustain the current margin level then throughout the rest of the year? As you've said, you've been able to mitigate that pretty well. But at least my understanding is that it's going to get harder and more difficult going forward. So do you think we can expect sort of flat margin this time next year? Or will there inevitably be sort of margin pressure given that backdrop?
I hope the sector in general will try to adapt to this. So I hope we will be somewhat successful in mitigating the deposit margin and pressure by constantly continue to improve our lending margins and try to find ways of compensating for deposit margins. Do however think that we have to be clear that of course on our short term funding operations are handling our basically our excess liquidity. We are having we are talking about the very short end of the curve and of course we have curve positions and it is a fast rollover. So when rates are down, we are suffering.
So I will not rule out that we will from a treasury perspective you can say we will be under pressure also in 2015.
Okay, great. Thanks. Very clear.
Thank you. We will now take our next question from Heine Lutz from Goldman Sachs.
Hello. I got a question on maybe a bit more detail on Russia. Like this quarter you took €12,000,000 of collective provisions. And I think given sort of the risk level associated with Russia, I think I can see where it's coming from. But just if you could give us an idea if you will continue to book collective provisions even if you're still feeling sort of happy with your sort of individual customers in Russia?
And the second thing on Russia is, if there's sort of any change in the funding structure you or in the targets how you want to fund this because you basically see deposits coming down. So it seems like you have more and more group funding into Russia something is more and more perceived sort of as a risk. So the question is to what extent would you be planning to move the Swedish customers you have written the book sort of outside the Russian entity? Or to what extent you are able to sort of acquire funding into this entity sort of to reduce sort of the worst case exposure for the parent? Yes, that's the question.
About these loan provisions and collective provisions and why did we make those or increase those in Q1? They are mostly to cover potential risk in this small household portfolio. The size of that portfolio is currently €300,000,000 so that is €300,000,000 so that it's not significant. But nevertheless, there we see some risks and that is more or less the background for these collective provisions. I don't foresee that there is at least the amount of collective provisions we should provide on a quarterly basis would go up so much from this quarter's levels.
But we will continue to build up those if necessary. These collective provisions they were not allocated to this large corporate portfolio because as I said currently we don't see any kind of bigger risks in this large Russian corporate portfolio based also on this kind of customer by customer analysis. So that is the way we are thinking, so that we don't expect that this level of losses would go up in Russia in the coming quarters. And perhaps Thorsten you could elaborate on this funding policy?
Yes. No, we are trying carefully and gradually to reduce the net you can say funding cap or the group funding of Nordea Bank Russia operations. And we have actually done that because if you adjust on the asset side for the dollar appreciation, the underlying asset number is down. And if you adjust for the on the liability side, we have all of the deposits in ruble. So more or less all of the reduction of deposits you have seen in Russia is relating to FX effects.
So the underlying funding gap is coming down and we will constantly seek to reduce it. The domestic funding market is not very available. So it will be by gradually narrowing it by many things mainly the asset side down carefully.
Okay. Thank you very much. Very helpful.
Thank you. We will now take our next question from Andreas Akyanssen from Exane. Please go ahead. Your line is open.
Yes. Hi. Two follow-up questions really from Stockholm. 1 about the 15% core to 1 ratio target that you talk about. Could you just tell me is that how specific target is that?
Is that the management target you've been discussing for some time? Or has the Board actually taking a decision about the new target? And then second one, just someone told me, I just want to check that you have some loss sharing agreements still in Poland. And do you see any risk that you get some losses coming through from all FX loans and such problems? Thank you.
On the first question on the Core Tier 1 target, it's not a target as well. The target is to increase in the core Tier 1 ratio as much as possible. So it's true that it's in replacement of an updated capital policy. We have agreed and agreed with our Board that the belief is that we should manage the bank with a minimum core Tier 1 ratio of around 15% including a management partner. The minimum capital requirement is 14.8%, so around 15 percent and that is both the internal planning assumption and it's what we externally have communicated and discussed with the Swedish FSA.
We might also choose to update our capital policy at some point in time. And then to your risk sharing question, it's true that we as part of our divestment of our Polish operations, we entered into a risk sharing agreement with the PKO and it relates mainly to Swiss denominated mortgage portfolio. And we have a 1st load protection clause in the agreement. And we have currently a clear buffer to this threshold. And even in a stress test situation, there seems to be a good buffer before Nordea would suffer any direct costs related to the appreciation of Swissbank versus Schlage.
And could you tell us what's the size of those FX loans that you could potentially be on the hook for?
Well, they have in euro terms, of course, they have increased more or less with the appreciation of the Swiss franc versus Swiss logic. And I think we have announced the I can't recall if we have actually at any point in time disclose the size of the portfolio. Mr. Investor Relations says no. We have not but it is of course a sizable portfolio.
But again, remember it's a high quality portfolio. And as I said, it has a very good caution before Nordea is hit, you can say.
Okay. Thanks very much.
Thank you. We will now take our next question from Riccardo Rovere from Mediobanca. Please go ahead. Your line is
open. Good afternoon to everybody. A couple of questions from my side. First of all, can you comment a little bit on the RWA decline, risk exposure amount decline in the quarter, which seems pretty significant to me? And it's always in this context.
I mean, we hear the EBA. We see the EBA will start looking into the risk weighted assets stuff maybe by the end of this year. What is the level of discussion that you see being, let's say, also ahead of the European Bank Association? Is there any discussion out there with the regulators? And second question I have on the Baltics.
The level of provisions in the quarter has been pretty low. Do you see any potential negative spillover in the region coming out from the tensions between Russia and Ukraine or Russia in general? And if I may a third question, would you be able to give us the updated NPL ratio in Russia and the coverage ratio of NPL? Thank you.
Yes. But I should maybe start on the decline we have seen in REA. That is the FX effect is of course obvious and it's mainly stemming from the depreciation of Norwegian kroner. Then we have some market risk related position rolling off that was also around €1,000,000,000 And then we mainly have the REA Efficiency Program delivery of more than €4,000,000,000 Slightly more than €1,000,000,000 was related to the approval of the Nordea Finance Finland retail IRB model and some was related to our Tenant Owner Association Rating Model approval. That was more than €1,000,000,000 Then we have very good development within retail corporate and wholesale banking on the maturity, shortened a number of a lot of maturities having a direct impact on lower RVA.
We have also very successfully addressed off balance sheet items, unused lines, CTF factors, etcetera, etcetera. We have made a number of improvement. We have improved on data quality. And a long list of initiatives delivering the €4,400,000,000 on efficiency. And maybe sorry, maybe on your you had a question relating to CVA, DVA discussions.
And of course, I think there's I don't think it's mainly as a discussion with regulators. It's of course a discussion ongoing in Europe and in the Nordic area on what is market practice is around that? No,
no, no, no. The question was not on CVA and DVA. It was on risk weighted assets RWA harmonization with if there is any discussion with DBA out there between the EBA and the European Bank Association?
That I am not fully updated on.
Can you please repeat that question? Because I don't understand you. Between EBA and
and And the European banks and you said the European banks community, the European Banks Association, is there any discussion how this topic could evolve over the next 12 months?
On the rear floors and RVA floors?
Is that Yes. WA floors. Yes. Whatever you are discussing as banks with the regulators on this topic, which is not irrelevant in the Nordic space?
No. But it is I mean, there's been proposals on the table and there's a huge discussion how active to handle this. And there will be quiz studies and things going on and so on. So it's a pretty long journey of at least some years. But secondly, each country will have a stance.
And as you may know, the Swedish regulator is not supporting this movement as an example and actually indicated that they feel they have done what needs to be done on the Pillar 2. So if new floors come in, they will they might compensate on Pillar 2 because they think the Swedish banks are sufficiently capitalized. I don't think this is a walk in the park how this is going to be. I still think more that some more calibration on the models. And that's also the stance from SSM, which comes a bit in across these units with their views that they don't actually care about what others are doing.
They want to make sure the models are right. And if you calibrate the models better, then why do you need the floors and so on. So in reality, I think it's very uncertain where this is going to end. And particularly in Sweden, it's absolutely not sure as the regulator directly thinks they have done what needs to be done.
Correct me if I'm wrong. Whatever being part of Europe, whatever is decided in Brussels one way or the other has to be incorporated in the Swedish legislation too? Yes. So what you think?
Yes. That's correct and that's correct. But there's still a lot of discretion in Pillar 2. But you're right. I'm just saying it's not clear where this is going to end according to the discussions, which I think was your question.
Okay. All right. Thanks. And on the Baltics and Russia, if I may?
Yes. The Baltic the loss levels in Baltics as you said it has now come down to closer to the normalized levels. And all in all, we don't see very big risk of increased telos levels in Baltics. All in all, the macro situation and the economic situation in Baltics currently seems to be more stable than pre crisis in Baltics in terms of how employment has developed and NOI cheese and private consumption and house market and commercial real estate and so forth. Naturally, these Russian sanctions, they have some negative impact in Baltics, mainly to agriculture sector as well as transportation sector.
Perhaps those are the 2 sectors I would like to mention. Our loan exposure to the Baltic agriculture is very small, so that will not impact on our portfolio. And also transportation, we are talking about a few individual companies, so that that is not any kind of significant risk driver. So all in all, we don't see very big issues in our Baltic grade portfolio. Then in for NPL ratio in Russia, we have a currently between 30 40 basis points NPL ratio.
So that's very, very low as you can understand. And that makes also the fact that our provisioning ratio because we have made these collective provisions on top of some small individual provisions is taking our loan loss provisioning level more than 200% out of these impaired loans. So that currently we don't see any individual the amount of individual risks is very, very small.
What is the coverage ratio of the 35 basis points and 30, 40 basis points?
It's 200 it was 2,000 basis points. It's so we have twice as many provisions compared to the amount of impaired loans.
So allowance are 2 times the amount of let's call it impaired loans in Russia? Exactly. Okay. All right. Thanks.
Thank you.
Thank
We will now take our next question from Anton Krayatje from UBS. Please go ahead. Your line is open.
Thank you and good afternoon to everybody. I have two questions please. The first one is on capital. In 2014, your capital generation was helped a lot by the capital efficiency measures, which you have I was wondering whether you have any more capital efficiency measures in the pipeline? And can you please quantify those?
And how long do you expect them to play out? And the second question please on provisions. You have mentioned that you expect provisions to be broadly at around current levels in the coming quarters. But at the same time, we talked about worsening macroeconomic backdrop in Norway and specific risks in Russia. So how do we reconcile your view on broadly flat provisions with risk of pricing provisions in those two countries?
Thank you. Yes, you're right. We had a very strong delivery on our REA efficiency program in 2014 actually around €22,000,000,000 of efficiency, meaning that we are approaching €30,000,000,000 of the total €35,000,000,000 program. So that leaves us €5,000,000,000 of IAEs efficiency in this program. And of course, this program have been challenged by FSA approval is getting more and more difficult.
So we are of course seeking all kind of measures mitigating that issue. So we are going into more capital management exercises, housecleaning exercises etcetera. We can at least confirm that we have €5,000,000,000 remaining for 15,000,000 and we believe we can deliver that.
This loan loss provisioning guidance as we have said that we don't expect clauses to increase so much from the current levels in the coming quarters. And that is simply basing to the fact that when we take a look what has happened, these kind of quality indicators in our loan portfolios, for example, in Q4, they are showing actually positive direction. So that average PDs, level of impaired loans, expected losses calculated through our models, risk weights, data more or less in all major portfolios still come down so improved. So that in that way there are no indications that our individual clients would now, let's say, be in worse shape than previously. But then as obviously mentioned is that we do see some areas of higher risks coming from the macro situation.
You mentioned Norway and then Russia. Of course, we have mentioned also Danish Agriculture and partly also Finland. And then those are the portfolios that we are naturally analyzing closely. And if we see increased risk levels, we are making collective provisions increasing those as we did for Danish agriculture. And that's the way to prepare for the future.
But then the way we see is that if this macro environment will start to have a negative impact on individual clients that will happen over time. So that's not so much in short term at least based on our own customer analysis. So that is the background of our guidance. But of course, the visibility is quite poor under these circumstances, so that it's meaningless to start to talk about guidance towards coming years. It all depends what is happening in the macro environment.
That's very clear. Thank you very much.
Thank you. We will now take our next question from Christopher Roskruist from Barclays. Please go ahead. Your line is open.
Yes. Thank you very much for taking the questions. Two questions. 1 first on the deposit margins and then secondly on credit quality in Norway. So the first one is, I've just been looking at the statistics coming out of the Swedish Riksbank and Norgasbank around the spreads between deposit prices and STIBOR and NIBOR and seeing that it seemed that there'd be some risk or sorry some repricing going on.
So I was just wondering how that reconciles with the fact that at least in a group level falling deposit margins completely absorbed the benefit from the widening asset spreads or lending margins. Could you just give us some color on the mechanics? Is this because you have a lot of transaction deposits where they're already priced almost at 0 before rates start to fall in Sweden and Norway? Or there if I think you mentioned before when there was a question around deposit margins that there was a short term negative impact here and that we should see some more strength as repricing of sound deposit products come through. Then the second question is really on credit quality in Norway.
And just a follow-up on the previous question there as well.
I suppose if you could just
within Norway, which areas you would be most concerned with? And also if the oil price would continue to fall, I think we've heard some statements from various parts of OPEC around them accepting $20 per barrel as well. If the sensitivity sort of the credit worthiness of your clients is exponentially sensitive to
the oil price I. E.
That at this price they're still profitable and can service their debt, but that they're increasingly sensitive or that that increase deteriorates more rapidly as the oil price falls further? Thank you.
I will try to answer what I believe was your question on deposit margins by saying that I think we have been relatively successful in the way that you cannot you can say that in most of the markets deposit margins are actually not that much down from Q3 to Q4. However, not least in Sweden, of course, we do have a negative deposit margin effect. However, not at the magnitude of the underlying market development. So of course, we are seeing some pressure on deposit margins, but not fully, I'd say, full pass through of what is happening in the market. So we are capable of compensating somewhat.
And of course, we do have as in Denmark, where we have also lowered a number of accounts as below, which is 30 basis points. So there are opportunities on different type of accounts to of course mitigate somewhat the pressure on the margin.
So should I interpret that as that in since the NII contribution from lending margins versus deposit margins was net almost neutral that that's actually a satisfactory result given that the loan to deposit ratios that you have?
Yes. That is true. That is more or less compensated, yes, each other. And I think that is an acceptable that's an acceptable outcome in the current environment.
Okay. Thank you.
And then Norway, I can elaborate on that. So the direct sectors, which are impacted by this oil price decline, of course is oil and gas companies which are also in our clients. It's this oil services companies which are subcontractors that deals these oil and gas companies and then its offshore segment I. E. These drilling rigs and then this going to supply vessels to those.
If you take a few words on each of these three segments or sectors, we are not worried about these oil and gas companies. They are large, let's say, strong companies, well rate deal and then they will manage these forms. We are sure that even this level of oil price that will mean that in these two other segments, these oil services and then offshore segment, we will see some downratings even in our clients. But also the starting level of our portfolio or ratings in our portfolio is so good and high. So that we have a good margin before they are even close to default risk of those companies with these prices, if the price level doesn't last too long.
So that then it's more about the question that how long period we will see this type of oil price levels rather than that what could be the absolute minimum if the peak to the low end is relatively short. So that then I would say that after 12 months 8 to 12 months, we start to see then perhaps more negative implications if the oil price remains at this level. But currently we don't see any kind of short term increased risks in these segments. Then of course, there are some indirect impacts to the Norway, for to the commercial real estate in especially some of the cities which are very much exposed to these oil sectors, cities like Stavanger and Bergen. We have analyzed also those commercial real estate cases and we don't see any kind of bigger risks at least in short term in terms of increased losses.
Those would be the segments I would perhaps mention at this point.
Okay. Thank you very much, Hart.
Thank you. We will now take our next question from Jakob Khruz from Autonomous. Please go ahead. Your line is open.
Hi, thank you. Just two quick questions. Firstly, on the Polish FX mortgages, could you indicate something about what the size of the first loss protection is relative to the loans? And secondly, just on rate sensitivity. To what extent does your negative rate sensitivity increase as rates go negative?
Do you find that a lot more of the deposits that were probably previously repricing now gets sort of caught in the bucket of deposits that can no longer be repriced downwards? Thank you.
On the 46x mortgage portfolio, first of all, protection there, well, I don't think we have disclosed that either. I can say that the current loan loss provision level of this portfolio is in the is below 20 basis points. And as I said, we have a good platform. On the rate sensitivity, we have seen a somewhat lower sensitivity to lower rates. So we are having a bit of a situation where we are protecting us somewhat more for lower rates, somewhat more than before and how we will have a fully exposed for any pickup in rates.
Okay. So you get less sensitivity to falling rates now?
Yes. Yes. We have lowered it over the last 6 to 9 months. We have carefully and gradually lowered the sensitivity for lower rates, but of course
Is that head shift being in place or is it just structurally?
Yes, yes. Okay. Thank you.
Thank you. We will now take our next question from John Walther from Credit Suisse. Please go ahead. Your line is open.
Thank you. Jan Walter here, Credit Suisse. Just two follow-up questions from the press conference this morning in Stockholm. When Nordea say that you steer the bank towards 15% quarter 1, we know this could change. But since the de facto quarter 1 requirement is 14.8%, is the principle now that management buffer is only around 20 basis points going forward?
So that's the first question. And the other one is if Nordea's ambition is that all capital over and above 15% or any other target will be returned to shareholders or if you want to hold on to some of that for new business growth? Thank you.
We have I think we have said now for quite many quarters that we are applying a target of around 15 basis points, which allow for a buffer of between then also somewhat above 20 basis points. But I don't think that Nordea needs to keep a management buffer of any particularly high magnitude as we have very, very low volatility in our earnings. So we have an ambition of being able to operate with quite a low buffer, probably not 20 basis points, but still. And I think the ambition is the same as communicated back in 2013 that we want constantly to maximize the distributable amount. And that is of course then means that if we do that successfully that leaves management and Board with a decision at the end of the year of when you look into the next year based on profitability, based on opportunities, based on different kind of circumstances to decide how much to be repatriated shareholders in that particular year.
So I think from a management perspective, we do the only thing that we have promised all along and that is to maximize this amount.
Okay. Very clear. Many thanks for that.
Thank you. We will now take our next question from Ronit Voss from Citi. Please go ahead. Your line is open.
Great. Thank you. It's Ronit from Citi. Just a couple of follow-up questions, please, in your comments that you made already. First of all, on the oil exposure, the shipping option oil exposure, I truly appreciate that a short term oil price correction is not that relevant.
But what if oil price stays at around $45 per barrel for the next 3 years? What kind of provision number would you be looking for? Or what do you think is reasonable to expect? Secondly, on the banking, the Russia division, I think you said that it's mainly Russian large corporates. There any chance you could give us numbers or if I gave numbers I might have missed it in terms of how much of that €5,900,000,000 exposure at year end is to Russian corporates and how much is to Nordic subsidiaries in Russia?
And finally, on Norway, you seem to have had a good margin performance. How sustainable is that NIM you had in Norway in Q4? I mean how much downside do you think there is on that NIM from Q4 levels? Thank you.
Yes. First question that if this oil price continues many years what would be the magnitude of losses? I will not start to guess about those. But what I would say is that our total exposure to these sectors, I mentioned is representing only roughly 2% of Nordea's total loans. So that here again we are coming to this kind of strength of our Nordea's diversified loan portfolio and diversified business model.
So that however severe situation in these portfolios we would see over the years then from Nordex context that is manageable. And of course, if this oil price level continues then both companies and then we as a bank, we start to take actions. So that of course then it's not just simple straightforward calculation of all the current disposals that were with the losses. So of course we are then managing dynamically this portfolio. But I will not start to give or indicate any kind of numbers.
Then from this Russian portfolio, roughly 85% of this total portfolio is for these large Russian corporate clients. Less than 10% is for Nordic clients and then rest is for the small household portfolio.
Yes. To answer your question on the margin situation in Norway, I think that now you have a little difficult I mean, if you calculate according to our disclosed numbers in local currency, Then you will maybe get to a result where you can see that margins in general are looking quite good in Norway. It's true that we the mortgage side, we do see somewhat of a pickup in competition. However, we have been again, we have protected our lending margins. They are slightly up in Norway both on the household side and on the corporate side.
And despite the rate cuts in Norway, we have also in Norway been quite successful in defending our deposit margin. So I think in Q4, I think we have seen a relatively strong picture. And then of course, yes, there is a tough competition on the mortgage side in Norway. So it's of course to be seen if we can continue to protect it also during 2015, but at least based on 14, we don't see the pressure you are talking about fully.
Now we need to finalize, but we have room for one short question operator.
Thank you. We will now take our next question from Daniel Dossoy from JPMorgan. Please go ahead. Your line is open.
Hi, good afternoon. Yes, very short question for me actually, and it's on the very strong fee income in the Q4. And if I just take that and adjust for the performance fees, it seems to me like the delta against previous quarter seems to come from, as you mentioned in your report, continued high levels of PCM activity. So really I was just wondering whether there was any lumpiness here in the quarter or whether that should be able to be sustained over the coming quarters given the pipeline that you're currently seeing? And that was it.
Thank you.
No. I think the strong contributors is on the savings investment side and it's on the corporate advisory side and it's on our life operations. And I think they have all performed very well and I think that we are seeing very strong inflow and a very strong position on the corporate side. So I don't see any reason for why this would not continue to be strong contributors to the income.
Okay. And just to follow-up on that, the very strong inflows that you mentioned, again, is there any lumpiness here? Is it more a reflection and perhaps a more sustainable trend given the fall in interest rates? Thank
you. There's no extraordinary, I think, issues around it. It's very well distributed among the distribution channels and products and so on. But of course, there is a correlation of the success with which we migrate cash into managed products. So that is of course a correlation to very low rates.
But as long as rates stay low or may become even lower then I don't see any reason for this trend to change either.
Great. Thanks very much.
Okay. So thank you very much for attending this listening into this conference call. We are now moving ahead to London and there is an open lunch there at the Langham at 12:30. So if you want to join, just
let us know. And then obviously you can call us anytime. Thank you. Thank you. That will conclude today's conference call.
Thank you for your participation, ladies and gentlemen. You may now disconnect.