Good day, 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 Alfvén. Please go ahead, sir.
Thank you very much, operator, welcome all to this conference call, where we will start with a short introduction of Group CEO, Mr. Christian Clausen, then we will open up for questions and answers. We have also CFO Torsten Hagen Jørgensen as well as Group CRO, Ari Kaperi as well in the room. Please, Christian.
Thank you, welcome everyone, 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 on 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. Revenue is up 2%. Costs are down. Underlying, they are actually down 2%, there is some seasonality and other things, but we are following our cost plan exactly, we are going to deliver on 2015 as well. Loan loss is down to a level below the 10-year average, we expect to fluctuate around this. This means that operating profit is up 9% in EUR and 12% in local currencies. A strong underlying profitability.
We also built a lot of Core Tier 1 in this year. We have built in nearly two percentage points, which gets us to 15.7% after we have paid out a proposed dividend of EUR 0.62 per share, which is somewhat of an increase. Financially, I think we have a very strong capital position. We have well control on risks. Costs are following the plan exactly, revenues are up, we are actually happy to see the progress in the business. 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 relationships really continues to deliver, which is an important part. Our assets under management, our wealth management business are delivering assets under management growth, which is in top league of European peers with EUR 18.6 billion of inflow.
A strong performance in general. On the large corporate sector, it is very pleasing to see we keep developing. We are leading the league tables 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 on the equity of the longer-term exposures. That is also very good, and on retail in general, we increase efficiency and get new customers, as I mentioned. The third section is, of course, that I am personally very pleased to see that {audio distortion} has delivered on the plan, more or less on the second digit or the last digit. We are delivering revenues, cost, capital, and everything in this quarter.
We can then also deliver the dividend we have guided for. I think we have quite a lot of forward-looking elements in our report as well, which I think points well into the future. With these words, I will hand over to Q&A.
Thank you. If you would like to ask a question at this time, please press *1 on your telephone keypad. Please ensure the mute function on your phone is switched off to allow the signal to reach our systems. Again, please press *1 to ask a question. We will pause for a moment to allow everyone to signal. We can now take our first question from Matti Ahokas from Danske Bank. Please go ahead. Your line is open.
Hi, yes, good afternoon. It is Matti Ahokas here from Danske. Two questions, if I may. 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 have seen, especially taking into account the decline in interest rates. I am 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 to when you announced this. 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.
I start on your cost program question. I think you are right that the income assumption has changed somewhat from our initial guidance, and that was exactly why we accelerated the program and more or less doubled the expected gross cost savings. 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 EUR terms from 2014 to 2015. 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.
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 we just call the Simplification Program that will deliver efficiency in a longer-term perspective. I think we have put up quite adequate cost programs to address the somewhat lower income forecast.
Is it fair to assume that the second program will actually be on top of this 5%, or is it included in the 5%? How should one look at it?
No, 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 2015. It will improve in cost containment, and it might also have, as we go along, some smaller net benefits. The real benefits are long-term.
And-
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. If you look for 2014, it was 2.2%. It's actually following our scenario quite closely.
Interest rates are down now quite a lot from that, I think 2015 looks even more challenging.
Yes. The top line is following the scenario.
This Danish agriculture portfolio, I give you total numbers. We have not disclosed the sub-segments within this total number, approximately our total exposure to Danish agriculture is EUR 7.5 billion. One can split that into two parts. EUR 5.6 billion is in the mortgage bank with very low LTVs. EUR 1.9 billion is so-called bank lending, which is more risky, one could say. Our impaired loan ratio out of this total portfolio is roughly 10% currently. Our provisioning level is, if you take it from the total exposure, this EUR 7.5 billion, we are talking about some 350 basis points in terms of total provisions compared to total exposure. It's perhaps more relevant to mention is that out of this bank lending, which is EUR 1.9 billion, our provisioning ratio is 14 percentage points.
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. We feel that at least under current environment, we are enough provided for these coming loan losses because we increased also collective provisions in this quarter. 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. Currently, we are comfortable that our provisions are at the required level.
Thanks, Ari. 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 continued to refer to increasing the distributable amounts. Should we read anything into this? Is this dividend plus buybacks, or am I reading too much into it? Then, I guess, when you talk about a higher payout, you're at 70% now. Should we be thinking about material changes going forward or smaller changes? 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. I'm assuming not all of that is FX effects.
We saw deposits drop very meaningfully in the quarter. How should we think about the evolution of that book over 2015?
On the question on dividend and forward-looking policies there was a number of questions around it. 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. There was a question around, yeah, but regarding beyond, and that of course, we will come back and say something more about. However, what I think is clear from our Capital Markets Day strategy communication is that we in general are seeking to optimize the distributable amount. 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.
I think it's a clear signal that we will continue to focus on optimizing the excess capital, as we called it in 2013.
I can then continue on this Russian question. We can split our portfolio into three parts in Russia. The largest part is the large Russian corporate customers, which we manage more or less customer by customer base. Because we have only a handful of those customers, and then it's to be very close to the customer, understand that what is the status and what is the development, and act accordingly. 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 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. Of course, the size of portfolio is so small that's very insignificant in the Nordea Group numbers. The third portfolio is this Nordic large corporate customers who are doing business in Russia, and that is a relatively small portfolio and quite a healthy portfolio. What I would like to say about our 2015 policy and strategy in Russia, and that is then mainly related to this biggest portfolio 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. Nothing is indicating that the quality would deteriorate materially during this year. Of course, we all know what is the situation in Russia. 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% and 8% percentage points. That allows us this kind of flexibility so that if there's a rapid change for, say, worse quality among those customers, we can act quite fast and then, of course, exit from the customer if we so wish.
In that way, it's sort of a syndicated portfolio we are running and are following carefully.
Thank you.
Thank you. We will now take our next question from Omar Keenan 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 just another one on payout. 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. You reported 15.6% at the end of 2014, you are already 60 basis points above that, and we can perhaps safely assume that you add another 100 basis points to that in 2015. When you say that the payout will increase next year, consensus already has 75% payout ratio anyway. Are you suggesting that you might be able to increase payouts above that with some sort of buyback, or are you expecting any negative surprises around capital flows calibration at the end of the year, for instance?
You do look better positioned than peers on that front. That was my first question. I just have a second question on revenues after that. Thanks.
You are right that we are getting more and more comfortable around the guidance of a Core Tier 1 ratio of around 15%, as you say, based on the dialogue we have with Swedish FSA and what they regard as an adequate capital level. The end of year Core Tier 1 ratio was 15.7%, and you are right that we have said that we can increase the payout ratio, and we feel comfortable about that. 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. We are basically sticking to the guidance we set out more than a year ago, and we reconfirm that we will be able to increase. Now exactly the level, I think it 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 will also do beyond, to maximize the distributable amount. Of course, we have uncertainties. We have uncertainties on macro outlook, on volumes, and we have potentially also some uncertainties that are not Swedish-related, but Europe-related on regulations. I still think it is a prudent way to guide us the way we are doing it for 2015.
Okay. Thanks. That's very clear. Just a second question on revenues. If I look at net interest income, it's been fairly flat year-over-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 Sveriges Riksbank follow suit. It is something that's very topical. Could you give a sense Any kind of hard numbers or any updated sensitivities around what the impact of a kind of flat yield curve, lower 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. As you say, we are entering a slightly new territory with 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 actually improve our lending margins, compensating for the lower rates. Q4 exactly demonstrated 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, on the corporate side. I think we will, of course, seek to mitigate the effect. I think we have also attempted and successfully mitigated some of the deposit margin pressure.
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'll have to figure out how exactly to handle a situation of this character. Obviously it puts a short-term pressure on the NIM. It does it from a customer perspective, and it does it, of course, from our short-term funding positions. As I said, we are looking for ways to mitigate it to the highest 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. 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 on lending margins and try to find ways of compensating for deposit margins. I do, however, think that we have to be clear that, of course on our short-term funding operations are handling basically our excess liquidity. We're talking about the very short end of the curve, and of course we have curve positions, and it is a fast rollover. When rates are down, we are suffering. 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 Heiner Lutz from Goldman Sachs. Go ahead, Heiner.
Hello. I got a question on maybe a bit more detail on Russia. This quarter you took EUR 12 million of collective provisions, and I think given sort of the risk level associated with Russia, I think I can see where you're coming from. 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. The second thing on Russia is if there's sort of any change in the funding structure or in the targets how you want to fund this, because you basically see deposits coming down. It seems like you have more and more group funding into Russia, something which is more and more perceived sort of as a risk.
The question is, to what extent would you be planning to move the Swedish customers you have within 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 the worst case exposure for the parent? That's the question.
About these loans 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 EUR 300 million, so that it's EUR 3 billion, so that it's not significant. Nevertheless, there we see some risks, that is more or less the background for these collective provisions. I don't foresee that there is at least that the amount of collective provisions we should provide on a quarterly basis would go up so much from this quarter's levels. 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.
That is the way we are thinking, we don't expect that this level of losses would go up in Russia in the coming quarters. Perhaps Torsten, you could elaborate on this funding policy. We are trying carefully and gradually to reduce the net, you can say funding gap or the group funding of Nordea Bank Russia operations. We have actually done that because if you adjust on the asset side for the USD appreciation, the underlying asset number is down. If you adjust on the liability side, we have all of the deposits in RUB. More or less all of the reduction of deposits you have seen in Russia is related to FX effects. The underlying funding gap is coming down, and we will constantly seek to reduce it.
The domestic funding market is not very available, 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 Håkansson from Exane. Please go ahead. Your line is open.
Yes, hi. Two follow-up questions really from Stockholm. One about the 15% Core Tier 1 ratio target that you talk about. Could you just tell me, how specific target is that? Is that the management target you've been discussing for some time, or has the board actually taken a decision about the new target? Second one, someone told me, I just want to check, that you have some loss sharing agreements still in Poland. 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 such. The target is to increase the Core Tier 1 ratio as much as possible. 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 buffer. The minimum capital requirement is 14.8. Around 15%, 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. 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.
It relates mainly to Swiss-denominated mortgage portfolio. We have a first loss protection clause in the agreement. We have currently a clear buffer to this threshold. Even in a stress test situation, there seems to be a good buffer before Nordea would suffer any direct cost related to the appreciation of the Swiss franc versus the zloty.
Yeah. Could you tell us what's the size of those FX loans that you could potentially be on the hook for?
Well, in Euro terms, of course, they have increased more or less with the appreciation of the Swiss franc versus the zloty. I think we have announced the I can't recall if we have actually at any point in time disclosed the size of the portfolio. Mr. Investor Relations says, "No, we have not." It is, of course, a sizable portfolio. Again, remembering it's a high-quality portfolio, and as I said, there's a very good cushion 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. 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 Banking Authority? Is there any discussion out there with the regulators? The second question I have on the Baltics, the level of provisions in the quarter has been pretty low. Do you see any potential negatives spillover in the region coming out from the tensions between Russia and Ukraine or Russia in general?
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, I should maybe start on the decline we have seen in RWA. The FX effect is of course obvious, and it's mainly stemming from the depreciation of Norwegian krone. We have some market risk-related position rolling off that was also around EUR 1 billion. We mainly have the RWA efficiency program delivery of more than EUR 4 billion. Slightly more than EUR 1 billion 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 EUR 1 billion. We have a very good development within retail, corporate, and wholesale banking on the maturity. Shorten a lot of maturities having a direct impact on lower RWA. We have also very successfully addressed off-balance-sheet items, unused lines, CCF factors, et cetera. We have made a number of improvement.
We have improved on data quality. A long list of initiatives delivering the EUR 4.4 billion on efficiency. Yeah. Sorry. Maybe you had a question relating to CVA, DVA discussions, and of course, I don't think it's mainly a discussion with regulators. It's of course a discussion ongoing in Europe and in the Nordic area on what is smart practice around that.
No. The question was not on CVA and DVA. It was on risk-weighted assets, RWA harmonization. If there is any discussion with EBA out there, between the EBA and the European Banking Authority.
That I'm not fully updated on.
Can you please repeat that question because I don't understand you, between EBA and?
The European banks and the European banks community, the European Banking Authority. Is there any discussion how this topic could evolve over the next 12 months?
On the RWA floors? Is that the question?
Yeah. RWA floors. Whatever you are discussing as banks with the regulators on this topic, which is not irrelevant in the Nordic space.
There's been proposals on the table, and there's a huge discussion how actually to handle this. There will be QIS studies and things going on and so on. It's a pretty long journey of at least some years. Secondly, each country will have a stance, and as you may know, the Swedish FSA 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. If new floors come in, 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. That's also the stance from SSM, which comes a bit in cross 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. If you calibrate the models better, then why do we need the floors and so on. In reality, I think it's very uncertain where this is going to end. 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. Being part of Europe, whatever is decided in Brussels, one way or the other, has to be incorporated in the Swedish legislation, too.
Yeah.
Regardless of what you think.
That's correct. There's still a lot of discretion in Pillar 2. 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. On the Baltics and Russia, if I may.
Yeah. The loss levels in Baltics, as you said, it has now come down to closer to the normalized levels. All in all, we don't see very big risk of increased loss 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 wages 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. Those are the two sectors I would like to mention. Our loan exposure to the Baltic agriculture is very small, so that will not impact on our portfolio. Also transportation, we are talking about a few individual companies, so that is not any kind of significant risk driver.
All in all, we don't see very big issues in our Baltic credit portfolio. For NPL ratio in Russia, we have currently between 30 and 40 basis points NPL ratio, that's very low as you can understand. 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 lowest provisioning level more than 200% out of these impaired loans. That currently, we don't see any individual. The amount of individual risks is very small.
What is the coverage ratio of the 35 basis points, 30, 40 basis points?
It's 2,000 basis points. We have twice as many provisions compared to the amount of impaired loans because we have.
Allowance are two times the amount of, let's call it impaired loans in Russia.
Exactly.
Okay. All right. Thanks. Thank you.
Thank you. As a reminder, to ask a question, press star one on your telephone keypad. If you find your question has already been answered, you may remove yourself from the queue by pressing star two. We will now take our next question from Anton Kriuchkov from UBS. Please go ahead. Your line is open.
Thank you, good afternoon to everybody. I have two questions, please. First one is on capital. In 2014, your capital generation was helped a lot by the capital efficiency measures which you have implemented.
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? Second question, please, on provisions, you have mentioned that you expect provisions to be broadly at around current levels in the coming quarters. At the same time, we talked about worsening macroeconomic backdrop in Norway and specific risks in Russia. How do we reconcile your view on broadly flat provisions with risk of pricing provisions in those two countries? Thank you.
You're right. We have a very strong delivery on our {audio distortion} efficiency program in 2014, actually around EUR 22 billion of efficiency, meaning that we are approaching EUR 30 billion of the total EUR 35 billion program. That leaves us a EUR 5 billion of IAE efficiency in this program. Of course, this program has been challenged by FSA, who was getting more and more difficult. We are, of course, seeking all kind of measures of mitigating that issue. We are going into more capital management exercises, health cleaning exercises, et cetera. We can at least confirm that we have EUR 5 billion remaining for 2015, and we believe we can deliver that.
There is lowest provisioning guidance, as we have said that we don't expect the losses to increase so much from the current levels in the coming quarters. That is just simply basing the fact that when we take a look what has happened, this 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, they have more or less in all major portfolios still come down, so improved. In that way, there are no indications that our individual clients could now, let's say, be in worse shape than previously. 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. Those are the portfolios that we are naturally analyzing closely. If we see increased risks levels, we are making collective provisions increasing those as we did for Danish agriculture. That's the way to prepare for the future. 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. That's not so much in short term, at least based on our own customer analysis. That is the background of our guidance. 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 Ranquist from Barclays. Please go ahead. Your line is open.
Thank you very much for taking the questions. Two questions. One first on the deposit margins, and then secondly on credit quality in Norway. The first one is, I've just been looking at the statistics coming out of the Sveriges Riksbank and Norges Bank around the spreads between deposit prices and STIBOR and NIBOR, and seen that it seemed that there'd be some risk, or sorry, some repricing going on. I was just wondering how that reconciles with the fact that at least in a group level, falling deposit margins completely absorb the benefit from the widening asset spreads or lending margins. Could you just give me some color on the mechanics? Is this because you have a lot of transaction deposits where they're already priced almost at zero before rates start to fall in Sweden and Norway?
If 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 some deposit products come through. The second question is really on credit quality in Norway. Just to 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? 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 creditworthiness of your clients is exponentially sensitive to 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 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 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. Of course, we are seeing some pressure on deposit margins, but not fully, say, full passthrough of what is happening in the market. We are capable of compensating somewhat. Of course, we do have, as in Denmark, where we have also lowered a number of accounts below with 30 basis points. There are opportunities on different type of accounts to, of course, mitigate somewhat the pressure on the margin.
Should I interpret that as that since the NII contribution from lending margins versus deposit margins was net almost neutral, that's actually a satisfactory result given the loan-to-deposit ratios that you have?
Yes, that is true. That is more or less compensated, yes. I think that's an acceptable outcome in the current environment.
Okay. Thank you.
Norway. I can elaborate on that. The direct sectors which are impacted by this oil price decline are, of course, these oil and gas companies, which are also in our clients. It's these oil services companies which are subcontractors that deal with these oil and gas companies. It's offshore segment, i.e., these drilling rigs and these kind of supply vessels to those. If you go 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 when rated, they will manage these storms. We are sure that even this level of oil price, that will mean that in these two other segments, these oil services and offshore segment, we will see some down ratings even in our clients.
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 being default risk of those companies with these prices if the price level doesn't last too long. It's more about the question that how long period we will see this type of oil price levels rather than what could be the absolute minimum if the peak to the low end is relatively short. I would say that after 8-12 months, we start to see then perhaps more negative implications if the oil price remains at this level. Currently, we don't see any kind of short-term increased risks in these segments.
Of course, there are some indirect impacts to Norway, for example, 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, Ari.
Thank you. We will now take our next question from Jacob Kruse from Autonomous Research. 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? 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 get sort of caught in the bucket of deposits that can no longer be repriced downwards? Thank you.
On the Polish FX mortgage portfolio, first loss protection level, I don't think we have disclosed that either. I can say that the current loan loss provision level of this portfolio is below 20 basis points, and as I said, we have a good buffer. On the rate sensitivity, we have seen a somewhat lower sensitivity to lower rates. We are having a bit of a situation where we are protecting somewhat more for lower rates, somewhat more than before. However, we have a fully exposed for any pick-up in rates.
Okay, you get less sensitivity to falling rates now?
Yes. We have lowered it over the last six to nine months. We have carefully and gradually lowered the sensitivity for lower rates. Of course-
Is that hedges being in place, or is it just structurally that-
Yes.
Okay. Thank you.
Thank you. We will now take our next question from John Walter from Credit Suisse. Please go ahead. Your line is open.
Thank you. John 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% Core Tier 1, we know this could change, but since the de facto Core Tier 1 requirement is 14.8%, is the principle now that the management buffer is only around 20 basis points going forward? That's the first question. 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.
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. I don't think that Nordea needs to keep a management buffer of any particularly high magnitude as we have very low volatility in our earnings. We have an ambition of being able to operate with quite a low buffer, probably not 20 basis points, but still. I think the ambition is the same as communicated back in 2013, that we want constantly to maximize the distributable amount.
That of course means that if we do that successfully, that leaves management and the board with a decision at the end of the year of when you're going to the next year based on profitability, based on opportunities, based on different kind of circumstances to decide how much to be repatriated to shareholders in that particular year. I think from a management perspective, we do the only thing that we have promised all along, and that is to maximize this amount.
Very clear. Many thanks for that.
Thank you. We will now take our next question from Ronit Ghose 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 offshore and oil exposure, totally appreciate that a short-term oil price correction's not that relevant. What if oil price stays at around $45 per barrel for the next three 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. Is there any chance you give us numbers, or if you gave numbers I might have missed it, in terms of how much of that EUR 5.9 billion exposure at year-end is to Russian corporates and how much is to Nordic subsidiaries in Russia?
Finally, on Norway, you seem to have had a good margin performance. How sustainable is that NIM you had in Norway in Q4? How much downside do you think there is on that NIM from Q4 levels? Thank you.
Your 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. Here again, we are coming to these kind of strengths of Nordea's diversified loan portfolio and diversified business model, however severe situation in these portfolios we would see over the years, then from Nordea's context, that is manageable. Of course, if this oil price level continues, then both companies and then we as a bank, we start to take actions of course then it's not such a simple, straightforward calculation of all the current exposures that would be the losses. Of course we are then managing dynamically this portfolio.
I will not start to give or indicate any kind of numbers. 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 rest is for the small household portfolio.
Ron, to your question on the margin situation in Norway, I think that now you have a little difficult. If you calculate according to our disclosed numbers in local currency, 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 are on the market side, we do see somewhat of a pickup in competition. However, again, we have protected our lending margins. They are slightly up in Norway, both on the household side and on the corporate side. Despite the rate cuts in Norway, we have also in Norway been quite successful in defending our deposit margin. I think in Q4, I think we have seen a relatively strong picture. Yeah. There is a tough competition on the mortgage side in Norway.
That, of course, will be seen if we can continue to protect it also during 2015. At least based on 2014, we don't see the pressure you are talking about falling.
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 Doheny from JP Morgan. Please go ahead. Your line is open.
Hi. Good afternoon. Yeah, a very short question from me actually, it's on the very strong fee income in the fourth quarter. If I just take that and adjust for the performance fees, it seems to me like the delta against previous quarters seems to come from, as you mentioned in your report, the continued high levels of DCM activity. 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. That was it. Thank you.
I think the strong contributors is on the savings and investment side, it's on the corporate advisory side and some our life operations. I think they have all performed very well, I think that we are seeing very strong inflow and a very strong position on the corporate side. I don't see any reason for why this should not continue to be strong contributors to the income.
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. Of course, there is a correlation of the success with which we migrate from cash into managed products. There is, of course, a correlation to very low rates. As long as rates stay low or maybe become even lower, I don't see any reason for this trend to change either.
Great. Thanks very much.
Thank you very much for attending this call and listening in to this conference call. We are now moving ahead to London, and there is an open lunch there at the Langham at 12:30. 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.