Welcome to the Third Quarter Results 2014 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rodney Elvino, Head of IR. Please go ahead.
Thank you. Thank you and welcome to this telephone conference where we will make a short introduction by our CEO Mr. Christian Clausen and then we are prepared for a Q and A session. Then we also have our group CFO, Larsen Hahn Jorgensen as well as Group Chief Risk Officer, Mr. Ari Katharine.
So Christian, please? Yes. Welcome everyone. I will just give
a few remarks. The report today is actually quite simple. We have increase in our income of 2% in local currencies. We have lower costs. We have lower loan losses and we have increase in operating profit of 9% in local currencies.
On top of this, we have some one offs. We have the gains the gain the big gain from net from the sale of nets in Denmark, euros 378,000,000 and then we have an IC impairment, which we're doing because we are gradually changing our core IT systems of $344,000,000 where we write off some of the old IT systems we replace. That of course gives some figures small figures to look at, but the underlying picture is fairly simple. We're also confirming that we're delivering on our plan we launched last year. We are building capital.
Again, this quarter our capital generation is significant and underlines the fact that we are building capital. We have by now enough capital to meet regulation as it stands and we also have enough capital to increase the dividend payout ratio this year and next year. We're also confirming we're on track on our cost program, which will take down our cost in local currencies by 5% in 2015 over 2013. With the present currencies that would of course mean that the cost in euros would be down maybe somewhat above 7%. But of course, currencies are subject to change.
We also confirmed that we are on track on our RIA program which is delivering very well. So RIA is coming down increasing capital efficiency. So all in all, we are delivering our East Building during the quarter. But then again, we have some headwind mainly from the increased amount of capital we hold, which takes down ROE a little. And then of course the lower interest rates, which again this time when it was lowered actually impacted quite a bit also because the whole yield curve came down significantly to become close to flat.
So all in all, we're delivering on the plan. Then we're also saying that we are in the coming years gradually replacing our core banking systems. The reason for that is the key transformational drivers in banking which we all know about, the balance sheet regulation which is more or less there, There's some unknown on TLAC and Balian and a few other things, but generally balance sheet regulation is in Operational regulation, know your customer, anti money laundering, tariff financing, MiFID, what have you is a huge driver. It will put significant requirements in the way we know our customers. And all the data we have stored around each customer needs to be very significantly enhanced building a full risk profile and behavioral profile of each customer.
And then the 3rd driver is of course digitization and the changed customer behavior, much more digital interrelationship, much more requirements on us to in an agile way meet the customer demands out there. So our response is as we have been saying for the past 8 months that we are doing a simplification program. So we are right now simplifying our products and processes and data. So we are simplifying quite a lot. We are closing old products in a significant way.
We are aligning processes. We are cleaning up data. And that is done by sometime mid next year. And then we have now started the process of replacing our co banking system. This comes in 3 major platforms.
1 is customers and in accounts, which will replace the old legacy customer and account systems. The second platform is a payment platform will be domestic, international and safer payments to doing the whole payment engine. And the 3rd platform will be the core data, which make it possible to combine our data with big data to get a full behavioral picture on the customers and thereby being able to tailor make solutions to each customer electronically. Our changing core banking systems is something that does not get resolved tomorrow. But over 3 to 5 years, 4 to 5 years, we will change the core banking system and that will be a significant change in the way our agility and our ability for us to respond to customer needs in our costs.
It will be much cheaper to implement new customer systems. And in general, it will also allow us to build much more scale because the scale effect of our many customers will make it possible to take down the cost per unit. And then resilience of course it will be much more resilient. It will be a system based on new technology that's fully integrated. All this will be done within the existing cost framework.
And in order to as a consequence of that, we are then impairing some of the old IT systems we are going to replace of the order magnitude of €344,000,000 which will mean that the P and N impact next year will be insignificant, but also in the years going forward, it will not be real P and N impact. We will increase capitalization, but then eventually also we'll get some benefits. So all in all, delivering on the quarter according to plan and building the future. So this was my opening remarks and we can now start on questions.
Thank you. Operator, we are now open for questions.
Thank you. We take our first question today from Matti Ahokas from Danske Bank. Please go ahead.
Hello?
Yes, hello.
Yes, sorry it was muted. Matti Agostanski here. Two questions if I may. Firstly on the NII, the Finnish net interest income actually down quarter on quarter, although the volumes were up and you still say that the repricing continues in Finland. Similar picture also actually in Sweden.
And I was just wondering what was behind it. So is the repricing continuing? Or is there some kind of accounting impact behind this altogether? The other question is also regarding the group NII. When you say that revenues will be up by 2% roughly in the next couple of years, how much of this 2% would be from net interest income?
Thanks.
Yes. I think we're aware on the development in Finland NII that we have a continued improvement in lending margins. However, we have also had a quite significant rate impact. So deposit margins are somewhat down and that's the main reason. So it's mainly a rate lower rate issue we are hit by in Finland this quarter.
On the question of the guidance on the group level on II or on total income in general, I think it's important to make it very clear that when we are guiding on our top line growth, the baseline we are referring to is 2013 full year. So when we have said for now a number of quarters that we expected a top line growth of around 2% in local currency then it refers to 2% compared to 13%. And when we are looking ahead and where we have now slightly adjusted the guidance, we're now talking about 2% to 3% local currency in local currency growth in top line, it's again referring to full year 2013. So it's actually very consistent what we have said all along. And if anything, it's a slight increase of our guidance from 2% to 2% to 3%.
Remembering also that from 14% to 15% there's not as such any major FX effects. So this is all as because this is referring to 13. And the main driver for top line growth will still be net fee and commission income will be the main driver and we only expect very moderate contribution from NII. And then we expect that as we called earlier today that a net fair value line because of hopefully somewhat of a pickup in FICC business that will start contributing somewhat.
Great. If I may just a follow-up on the CIB business. You had a very weak quarter in terms of both NII and commissions. Is this purely seasonal? Or is it an indication of lower economic activity you're seeing?
Or purely a seasonal effect?
No. But I think that the CIB business as such is has been for a number of quarters and are still mainly focusing on capital efficiency. And that means that, of course, we are funding more kind of rail efficiency, but we are also still in the process of being very selective in our in what type of commitments we make and we are even deselecting still certain type of customers and commitments. And then of course in some of the markets there have been some margin pressure. So I think in general for the CFE business, it's going very well if you look on the more the advisory type of the business.
So I think the picture is relatively positive in general for the CRP franchise.
Great. Thanks a lot.
So sorry, Martin. Just to also, I mean, we had also some technical 2nd quarter was fairly high on NII because we had a high level of yield fees and they were lower in this quarter. And then obviously we have some seasonality when it comes to all the transactions, I mean like in your business and IPO M and A and things like that. So you have seasonality there.
All right. Great. Thanks. Very helpful.
Thank you. We now move on to our next question today from Nick Davy of UBS. Please go ahead.
Yes. Good afternoon, everyone. Two questions, please. The first, if I can invite you to make some comments about the Russian business and particularly if you could focus on the trends in lending and deposit volumes, lending volumes up, deposit volumes down. I realize FX has probably impacted that lending volume number on the rise.
But just wondering, if I look at the deposit flows in the last year, it's been quite a significant shift. I just wondered your mentality there if you'd consider pricing up a bit for deposits to try and reduce the amount of intra group funding going into Russia. Maybe just some more flavor please around those volume trends. 2nd question on capital. You made the remark in today's release that you still feel percent of Core Tier 1 as the go to level relative to a current starting point well above that.
I'm just trying to work out what would stop you from shifting towards your 75% target payout ratio from this year. Are there any areas of uncertainty you're waiting for clarity around? Or any reason please why you wouldn't progress to your target dividend ratio this year? Thank you.
Maybe I should try to answer on the volume trends in the Russian business. As you rightfully said, the increase we have seen has for the majority of the region is strengthening of the U. S. Dollar. That explains 70% of the volume increase in Russia.
And the remaining part is existing customer growing up a bit more on existing lines. So what we are doing is of course that we try to manage carefully that we don't expand our commitments in Russia as of now. We are trying to control the amount of good funding. However, the funding situation is quite stable. And the way we conduct our deposit business in Russia is in ruble and it's a very price sensitive market.
So we of course take also a stance on pricing side there. So if prices go too much up, we reduce slightly etcetera. So we have secured very well funding lines for our Russian business. So we are not concerned about the current situation in Russia. On the capital side, I think that the number given by Swedish FSA was 14.7%, which when we translated into our own numbers on Pillar 2, we come to a slightly lower number around 14.3%.
So we have a buffer to the around 15% and that the reason for that being that of course there are still small hopefully uncertainty around full Pillar 2 finish in Sweden and then of course the need for a management buffer on top of the requirement. So around 15 is what we feel relatively comfortable about as of what we know now. And then of course as we have guided all along, we expect payout ratio to go up from 56% this year and again next year, but the levels we have actually not communicated.
Okay. That's very clear. Thank you. Quick follow-up on the Pillar 2 then. You're saying that when you get an increased clarity on the Pillar 2 side, your expectation or your hope is for your own Pillar 2 buffer to be below the standardized level used currently.
Is that right?
Well, we haven't we need to see the proposal the more exact proposal from Swedish FSA on the standardization of benchmarking the model they are talking about on this pillar 2 risks. We need to see more details to be more clear on this. But of course, we hope we have adequately calculated our current Pillar 2 requirements. But as we have not seen the proposal yet from Sweden and we don't know exactly when we will see it, but earlier indications has been that we will see it right before the end of the year, but no clear guidances have been given yet from Swedish citizens.
Very clear. Thank you.
Thank you. We now move on to our next question from Omar Keenan of Deutsche Bank. Please go ahead.
Good afternoon. Thank you very much for taking the questions. I just had a question on net interest income. You pointed out that there's been some headwinds from rates and FX coming through. I'm just wondering if you expect these And then just a question on asset quality.
I can see that Danish asset quality has And then just a question on asset quality. I can see that Danish asset quality has improved a lot, which just seems to drive a lot of the beat. Could you just give us some color around what's going on in Denmark? Is it being kind of driven by higher asset prices? Or just kind of sort of give us some information on what's going on there?
And then just a last question on regulation. In your discussion with the Swedish regulator has any kind of concerns around potential standardization of risk weights? Or what timeline of other pieces of regulation come been discussed that may come through next year or the year after? Thanks.
No. But I think we have said clearly that we do see some headwind on the rate side as of now both not leased in Finland. So we do have rate headwind and I don't think we are structuring on Q4. But I think in general we are quite conservative with regard to the NII development. So I don't think we will indicate that from what we see now.
I can maybe if I jump into the regulation and then I can respond on the I think as we have said in Q2 that the Swedish FSA is quite clear now saying that to their best belief the Swedish banks including Nordea is now adequately capitalized. They don't see a need for higher capital requirements in Sweden. So the Pillar 2 is also to be seen on the sector level. At least they don't look for more capital. They just look for centralization.
However, having said that, they are also warning us that there are schools of thought in Europe including in Basel Community, including even in Sweden that believes that banks are still not adequately capitalized. And they will use either standardized risk weight flows or leverage ratio. They will use whatever measures to seek even higher capital levels for banks. And that of course is something we follow closely. However, it's not material enough so we can make any
line with our it has developed quite much in line with our own expectations, so that we have expected that even in the second half of this year, we start to see more normalized loan loss and credit quality situation also in Denmark. And there's no magic behind that development. It's just simply that of course this quality asset quality is reflecting term development in the Those have now stabilized during the past quarters and then that's starting to be visible in the credit losses. You may remember that in Denmark there's a quite strict regulation that when you have to impair to the customers and our loans and how to calculate the loan provisions, they are very much reflecting the underlying asset values and asset prices. And I said that they have now been stable and in some parts of the country even upwards.
So that then this is a consequence among that type of more normalized situation. And perhaps continuing on that side, we still expect that these loss levels in Denmark will continue to come down in a controlled manner, so that they are still a little bit at the elevated level, so that still we expect that they could come a little bit more down in the coming
quarters.
Thanks very much. That's very clear. But maybe just a quick follow-up on loan losses then. If you expect Denmark to carry on coming down, what does that mean for the 16 bps normalized kind of through the cycle assumption that kind of we're thinking about for 2015? I mean clearly it seems that it will come well below that.
But are you saying the run rate is going to get better from here?
Well, of course, these levels start to be so low in absolute terms already now when talking about the quarter loan losses that there will be a volatility between quarters, so that we should not expect any kind of very clear trend from now on. But what we do expect ourselves is that we should keep or stay within these basis points long term average. So now and given the coming quarters so that we don't see any kind of quick deterioration signals in any parts of our loan portfolio. So that the risk of us starting to show increased loan losses is relatively low. But I said that there would not be any kind of a clear trend from now on.
There would be some volatility between quarters. But nothing very alarming in any parts of the portfolio.
Great. That's very clear. Thank you.
Thank you. We now move on to a question from Johan Ekblom of Bank of America. Please go ahead.
Thank you. I just want to come back a little bit to the cost announcement or the IT investment. Number 1, I guess, can you quantify how big the how big of an investment this is? I'm guessing there will be your IT development budget, which has now been increased by 30%, 35%. But does that capture everything?
Or how much of the expense roughly will be capitalized and impact costs going forward? And then maybe more long term just to get your thoughts. I mean, clearly, this investment should bring some tangible benefits. And you talked a little bit about being able to deliver a better product and better risk management and knowing your customer better. But on the cost side, is there a sustainable long term cost savings?
So does this mean that even after 2015, we should look for another leg of cost cutting?
First of all, with regard to the announced increased investments including in these co banking platforms and systems, We are today having total IT development investments in the level of €400,000,000 this means that we will increase with this 30%, 35% per annum. And this would also mean that the investments in these specific co banking replacements that will mean that we will this will replace other type of investments we are doing today within the 400,000,000. So the investment budget is in the area of 1,000,000,000 plus for the co banking element over these 4 to 5 years, which will partly be financed by increasing development spend and partly by reducing all the investments we would have done you can say any way in systems that was related to this. This program is run as of now in a specific program. It has basically not anything to do with our cost efficiency program that runs in a very specific setting.
So the co banking replacement program will be managed in a way where we will have more or less no cost implications, P and L cost implications for the next 4 to 5 years. And over this period, we will build new systems that will deliver good customer value and they will improve our ability to leanify and simplify our processes and thereby having high operational efficiency. And as we are going closer to finishing the new systems, we will be able to decommissioning all the old systems. And by doing that, we will save a lot of IT maintenance costs. So you are right that over the next 4 to 5 years there will be an increased focus on taking out all the relevant cost efficiency benefits from this program.
But it runs in a separate track and it basically does not impact in any way the current cost efficiency program that is targeted to deliver in 2015. And we're part of the 2015 program will deliver also after 2015. But I think that of course there are many other benefits related to the whole co banking replacement we're doing.
Yes. But it comes in several ways. I think you can actually figure this out very easily because I mean the first obvious one is the efficiency in the customer interaction. So when you interact more digital then we need less people going forward. That's of course an easy way to talk about efficiency.
But there's another one which is equally important is actually that having replaced core banking systems then the cost of maintaining systems will go down and the cost of implementing new systems will go down and the speed will go up. In addition to that a number of processes which are manual today in the banking revolving paper will disappear because they become digital. So there are a number of cost savings in this. So we expect that to be a high efficiency gain at the end of the journey. And as Dawson says, there's also a decarbonization of the old systems.
So of course, there's a cost element, which is very important and very much an efficiency element. But I think we should not under evaluate the value of being able to meet the customer demands because these will grow year by year and they will become more and more burdensome to the old core systems. So without replacing core banking systems, I think many banks and other businesses for that matter will have a difficulty to bear the digital burden on travel systems. And that's the reason why you talk to CEOs in many businesses and many sectors that if you ask them the question, would you like to change your core systems, they will also yes. Many of them will however not make the decision because there's always more short term advantage to building a specific system that creates some value here now or makes savings easy or whatever it is.
But in the longer term, we know the digital curve is pointing upwards very rapidly. So as we have also demonstrated in our presentation today and without having efficient core systems, it will be very difficult to keep building databases and applications on top of the old systems. So this is a forward looking thing. Efficiency, cost savings per very much meeting customer demand. And if do that well, which I'm sure we will, then of course, the relationship strategy can continue to work going forward.
It will become much more digital, but will still be one where we have a very strong and close relationship to customers and thereby maintain the strong franchise we have.
Thank you. Can I just ask a follow-up?
I mean, what drove the decision to make this change now as opposed to 3 years ago or even longer ago?
Yes. But I think it's a strategic analysis we are making on where banking heading. So looking 5 to 8 years ahead, it is by now much clearer. Please remember it's only 1 year and 1 quarter ago I said that very soon our mobile transactions will be higher than our manual transactions in the branch network. That was the understatement of the year because now it's 4 times higher.
So at that time when the curves crossed each other, we didn't realize 1 year later we will have 16,000,000 digital transactions and only 4,000,000 in the branch network. So of course, we believe this will continue. We also believe we will have advice much more online. We have already introduced it as I said last quarter online advice. So it's not only transaction, the whole interaction.
In addition to that, we have to couple our customer data with big data to be much clearer on the customer behavior to tailor make solutions to customers. That also requires new core systems because old databases, old systems are not built for that. It didn't exist when they were built. So it is a strategic judgment that this is where we are heading. But we still believe that relationship banking is also a very strong franchise in digital world because whatever survey we make, whatever customer we ask, they still want a meeting, maybe digital, but they still want a meeting with us if something important happens in the economic life.
And therefore, we will get it all together. The other thing is that it's clear by now that we can actually replace a lot of the manual processes. We are now replacing the Swedish and the Danish mortgage process by a digital process completely paperless completely without paper. Just imagine the pile of paper, I don't know how it is where you come from, but at least in our area, I mean, the pile of paper you get for a mortgage is not insignificant. That will be gone completely.
So there's also this element that is
not only the customization, it's actually digital in, digital out means that we may
be able also to take out significant cost in our core way. We still have 4000, 5000 manual people sitting, people sitting doing manual work on paper we received. So getting rid of the paper and doing the customer franchise customer tax in digital, that is a curve that's only pointing one way. And I haven't heard anybody today arguing that it will turn around and point the other way. And that is simply not possible if you don't have very agile systems.
Then you will drown in complexity, you will drown in building data on data, based on database and system on system. So this is strategic judgment and we strongly believe it's right and we think this can create a much more efficient bank with a much closer customer interaction.
Excellent. Thank you very much.
Thank you. We now move on to Matthew Clark of Nomura for our next question. Please go ahead.
Hi. A couple of follow-up questions, please. Firstly, on the core banking system, I'm just wondering how old the existing systems are? And are these still separate systems from before the various mergers took place? Is it the case that you're running single core systems across the different entities?
If you could give some background on what exactly is being replaced and how old they are? And secondly, do you feel that you're at a competitive disadvantage relative to other banks today? So do you look enviously at the core banking platforms of some of your competitors and that's why you're looking to catch up? Or do you see this as giving yourself 1st mover advantage? And then a final question on a different topic.
You gave some slides last year, I think, looking at the drag from the credit spread on the funding cost and that was expected to
show
Q2 this year. Just wanted maybe you could give some commentary on whether that came through, what the impact was to net interest income this quarter versus last quarter and what the outlook is for that effect? Thanks.
But maybe a few comments. Well, it doesn't really matter how old they are. I'd say older than 5 years they're based on old technology before the app world and before the big data world and so on. So anything older than that, I think I don't we don't have any banks or any very few comments around in general that has newer core systems in 5 years. So they are old.
Some of them are very old, some are less old, some of them are as you correctly point out, a few of them are actually still 4 different versions from different countries. But this is a journey where we will create 1, not only systems but actually process. So we have common processes all over in this because if you build the common system, you will of course put common process on top of it. We have done this already in some areas. And as a management, we did that during the platform selling and distributing the same funds in 20 countries, platform selling and distributing the same funds in 20 countries without any really cost associated to it.
So a very, very efficient platform by European standards. We have also done a significant replacement in our capital markets area. We've also done it in a number of other areas. Our customer facing systems are new and so on. But some of the core systems are still old and some of them very old and some less old.
But in reality, they are all built not in one go to be coherent with the same architecture and integrated well. So it's actually that whether we are better and worse off than others I cannot say. But I would say that to build a coherent core system that is fully integrated in the same architecture is the one that will create the new platform. And there it will give us a strategic advantage. I have no doubt.
I don't think any banks have that system today that type of system today. But whether ours are worse off or not than others, I don't really know. But at least it's clear to us that this is what we need to meet the future demands.
If I may supplement on this, it's a more strategic view on this. I mean, I think basically looking 5, 10 years ahead, there's no doubt that within financial service industry, data will be the most important asset because everything gets digitized. However, having we are today not here today is one of the biggest storage of data. So we have an enormous amount of data. I think all incumbent banks in Europe and in the Nordic today are disadvantaged compared to potential new players with the fact that their old legacy system do not allow them to manage data in a helpful way.
So I think this is our attempt to strategically position ourselves to this new reality where data will be and the ability to use data efficiently will be the new strategic challenge. And I think all banks will have to go this direction however, whole system is there. Then on the funding cost development, yes, we did actually exactly see what we have guided for that our funding total funding cost seems to have peaked in Q2. They are improved with 70 €1,000,000 So we said all along that it would be a modest improvement to begin with. I mean, we have an average duration of slightly more than 4 years.
So it takes some time to roll in new and cheaper funding, long term funding. So we still see funding spreads tightening both on covered or secured funding and unsecured funding. So long term funding will continue to be cheaper or we would continue to see decreased costs. Then on the short term funding, we do quite a lot of short term funding also and there we have funded ourselves Sublifer. And there the lower or sorry the higher the risk appetite the less advantage this is for Nordea because short term money goes to Nordea when everybody is afraid.
So our short term funding advantages have decreased a little. So short term wise, the speed is not as high as it could be. But the funding cost will continue to trend downwards as of from now on.
Can I just check up with that you said €70,000,000 to come in over 4 years? Is that
No, no, no. This was from Q2 to Q3.
Q2, right.
The long end, the short end was?
This was total funding cost.
Total funding cost. Okay.
So The savings are slightly higher in long term. However, the benefit is slightly lower on the short term. So net of this is €70,000,000 reduction.
And when I I mean, how does that play into your net interest income ladder that you relate it because €70,000,000 is quite a large positive impact. Just wondering then what the offsetting negative impacts are looking at the delta?
You are referring to the table we have in the report? Yes. I don't. That we separate out the funding effect, yes.
Sorry, in terms of business areas, we'll mainly see the funding effect in retail banking other and wholesale banking other.
Okay, thanks. Maybe it's one for me to take up with you offline later.
Yes.
Thank you. We now move on to Daniel Doherty of JPMorgan for the next question. Please go ahead.
Hi, good afternoon. I have three questions. The first one is on Finland. If you could just comment on how you see the top line developing there. I mean, you've very clearly said that asset quality looks stable, but I was just wondering how you see or if you see any sort of headwinds from, for example, higher repayments, lower transactions, margin pressure, etcetera.
And just on that last point, do you still see the same sort of 40 basis points difference between the front book and back book margins? Was my first question. The second one is on the oil price and the large decline we've seen in recent months. What kind of impact, if any, should we expect to see going forward, both on volumes and asset quality? And if you could just comment, I guess, in particular, on shipping Russia and perhaps even Norway, that would be very useful.
And then lastly, on costs. If I remember correctly, about a quarter of the current cost saving program comes from branch closures and reduced cash handling. If you look beyond 2015, what is the scope to extract further savings here? That's it.
You. I think on the outlook for Finland in general of course as the economy is relatively flat, we do see that the volume growth in Q3 was quite moderate, slightly up in household and slightly down on corporate. We do expect that there will be some modest volume growth going forward. And we do continue to believe that there are repricing opportunities in Finland. The spread between front end book is coming slightly down, but it's still around 50 basis on mortgages and somewhat less on the corporate side.
And then of course you have the effect of lower rates coming against you. So moderate the positive activity. Remember that we have seen some of the strongest improvement in profitability has been in Finland up until now. And it's of course unlikely that it can continue to expand in the way we have seen.
If I may, I could complement one this kind of positive income driver we have in Finland and that's the savings and investment products because now what is happening in Finland both households and corporates they are very risk adverse. They are not investing, but they are saving. So that in that way wealth is generated in Finland in the private sector. And that is visible also in our fee income when it comes to those products related. So that in that way there is also some positive underlying factors supporting the top line in Finland even if the loan side demand is subdued.
And if I can just follow-up. What is the combined margin difference between front book and back book? So it's 50 on the mortgage side. What is the combined difference between front book and back book?
I think that all in all, we could repeat this 40 basis point difference because corporate is somewhat below 40 and household is somewhat above 40 for the time being. Then if I could say a few words about this one question related to this oil price coming down, so that how do we see the impact in our asset quality in various areas. And then, of course, that will have some negative impact on the shipping market. We have already seen some weaknesses in the tanker segment, especially also partly in the oil and offshore segment of activities investments in oil and offshore, which is then related to our Norwegian loan portfolio and partly also shipping well and offshore portfolio. But still the impacts are quite moderate and at least we don't yet see any deterioration of the quality of our customers and our loan books related.
So that so far the results have been more or less insignificant. In Russia, of course, it's clear that in most of the Russian big corporate customers, which are also in our credit book, they are affected by this oil price decline negatively. But then again, all in all, they are also affected positively in the by the depreciation of the ruble because of course they export their products and that is U. S. Dollar based, so that there are also some kind of mitigating factors.
But still the financial stability of these large Russian customers is very strong and they have buffers to let's say cover this type of oil price declines, so that there are no immediate dangers or risks even coming to our Russian book. But of course, all in all, if this continues in a long perspective, we start to have some signals, but not immediately not in the next quarters.
And then you had a question related to the cost program and the branch closures and reduction of cash handling in the branches. And it's true that this part of the program constitutes around 25% of the savings. And this is a process already ongoing. So branches are being closed as we speak and cash handling are being produced as we speak. But it's also true that this is one of the programs that will reach its kind of full run rate savings by somewhat late 2015.
And this is one of the programs that potentially will deliver savings into 2016. But as I also said earlier today, there's no total cost guidance for 2016 yet. But it's true this will deliver somewhat in 2016.
Thank you very much.
Thank you. Ronit Guz of Citigroup London has our next question. Please go ahead.
Hi. Yes, it's Ronnage from Citi. I just wanted to follow-up on the last question actually specifically on the point of asset quality. I know it's probably still too early given the slowdown we've seen, whether it's in Russia or in the oil price to see an impact in Finland and in Norway. But could you provide some more color around what you're seeing in your on your impaired loan strength?
And I'm specifically thinking about the numbers you've disclosed in your fact book. I mean Finland looks like quarter on quarter, the impaired loan number is down by about 50,000,000, 50,000,000 euros And yet given the sort of the negative commentary around Finland, I wondered if there's any kind of further color you want to provide on what's going on in Finland, that's sort of $50,000,000 down. And in Norway, there's an increase in the corporate space by about $90,000,000 I can see the shipping has gone up. But is there any other sort of one offs or funnies in there? That would be great.
And the second area of question is around the front book, back book. I think you said that the front book in Finland, just correct me if I got this wrong, is about 40 basis points ahead of the back book. In the other markets, are there any kind of when you're thinking about the outlook, are you seeing any sort of material front book, back book trends and the other way as in the front book actually being a problem for you versus the back book? Thank you.
Again, I can start from these impaired loans and credit quality. Those increases we see in Q3 in our impaired loans, they are not related to this discussion we had related to oil price and Russia. These increases are in a way coming from various sources and from diversified sources. So mainly it's retail banking first of all and then coming from both household side and also corporate side. No any kind of specific one offs or specific concentrations in the retail corporate side.
They are coming from smaller commercial real estate customers and then some household customers, some SMEs, but there are no big one offs. In Finland, this development in this quarter was favorable and that is, of course, supporting our message we have given in previous quarters and also repeated this quarter, so that we don't see this kind of immediate signs of deterioration of the credit book in Finland. And on the contrary actually, for example, the rating migration is still positive in the Finnish book. And as you can see that there are no increase in impaired loans. So that is of course an important signal for the future risks we have in our book.
So that no specific news related to development of impaired loans in Q3. It's coming from various sources and from various countries and segments.
Right. So that Norway increase that I'm seeing on your fact book, that I shouldn't read too much into it? Or because it is I mean, it's quite noticeable you have quite a jump. It's just a small number. So it looks like a big percentage jump.
It's like a 20% jump or so in impaired loans in Norway for the corporate sector.
Yes. There is no yes, there is one individual corporate customer, which is a little bit bigger one, but that's the kind of normal issue. So we have a very big loan book. And in each quarter, there are 1 or 2 or few corporate customers, which are impacting both ways. But you should not read any kind of stronger signals on the credit quality development in Norway from this change in impact launch.
Okay.
And just a question on the front book, back book please?
Yes. But I think we can reconfirm the around the 40 basis point spread combined between front and back in Finland. And I don't think we have exactly the same picture in the other countries. I think that we are relatively conservative on repricing opportunities in most of the other markets. There might be some opportunities in certain segments and areas.
But in general, on country level, we don't see huge opportunities. That will of course be the benefit of calculating where lending lending margin from the fact that the funding cost will go down. But we don't have the same material spread as we have in Finland.
Great. Thank you.
Thank you. We now take our next question from Riccardo Rovere of Mediobanca. Please go ahead.
Good morning. Good afternoon to everybody. Just a couple of questions from my side. Just wanted to know your opinion on the pretty low, at least in my opinion, loan losses in Sweden. Should we retail Sweden, should we consider this recurring?
Do you see any reason, especially if this kind of benign situation should all of a sudden revert, maybe not anytime soon, maybe over the course of 2,000 second half of twenty fifteen and maybe twenty sixteen. Then I've noticed a pretty, let's say, significant increase in securities in issue on the liability side in the Q3, while they have been stable for the 1st 6 months of the year. Have you prefunded? Is or why is that reason? Is that going to have an impact on Q4 NII?
And the very final question on the risk weighted assets. Can you please elaborate a little bit on what you think you can still do on the mitigation side? Thank you.
I'll start from the Sweden. So then we don't see any kind of big potential changes in the quality of the Sweden loan book either. So that we have been saying and we have been seeing that the loan loss levels have been low and very stable in Sweden. If you take a look on the amount of in debt loans in Sweden that is very, very low in absolute and also relative terms, so that nothing is indicating that something could happen soon in Sweden. Also the rating migration in Sweden has been positive, so that no risk indicators currently in Sweden.
Of course, it's very difficult to say that what will happen in over the years. So that then of course we are that's very much as a consequence of the macro economy and what is happening in the big picture. But now at least so far we can see in front of us, we still believe that the situation stays more or less as it is in Sweden.
Yes. On the issuance activity, I don't think we have registered any specific extraordinary development. We have had more or less normal issuance activities in the Q1, Q2 and Q3 and expect to have auto normal issuance activities in Q4. Then on REA efficiency or mitigation, we said in Q2 that we believe that we had SEK10 billion, SEK11 billion of RIA efficiency lift from our RIA efficiency program. And we delivered another €1,800,000,000 in Q3 meaning that we confirmed that we now believe that we have €8,000,000,000 to €9,000,000,000 of REA efficiency left of the program and then we would have delivered on the €35,000,000,000 program we talked about in 2013.
So that is the efficiency to begin and an increasing part of it is, you can say, based on internal measures. So we believe we can deliver.
If I may jump in one second. Where is this $8,000,000,000 to $9,000,000,000 Where should it come from at further rollover of modeling, so internal models, IRB models on corporate maybe something that is today under the foundation approach, whatever? There
are still elements of advanced IRB models rollouts. It could be within institutions, markets, treasury, international units. We have also some rating model approvals pending. But the magnitude of it is very much on housecleaning exercises, collateral maturity. It's on the trading book.
It's CVA mitigation that constitutes the majority. So it's more than 15 individual initiatives delivering on this. So it's a broad range of activities.
Okay. Thanks very clear. Thank you.
So operator, we have time for one more question.
Okay. Our final question will come from Jan Walther of Credit Suisse. Please go ahead.
Yes, good afternoon. Two quick questions then from my side. Following the presentation in Stockholm this morning, the bank seems to be guiding towards a 16 bps normalized loan loss level or rather the loan loss level should approach to 16 bps normalized level going forward. What kind of macro outlook are you really using as your base case here, just your top down view here? Do you specifically see a Finnish recession or return to growth next year?
And the second question is going back to your comment on regulation. Have we reached a point where you know enough to contemplate a more decisive increase in dividends for fiscal 2014 compared to a more gradual increase that you have discussed earlier? Thank you.
Start from this credit loss outlook. We are not giving this kind of firm guidance that 16 basis points is the new level of loan losses. What I said in the Stockholm event was that in the coming quarters, it's unlikely that we would go above this average level, long term average level. What is the macro picture we are seeing ahead of us and especially you asked about the Finland, we are not expecting that there would be any kind of way to recover in Finland. We don't believe any kind of collapse either, so that we believe in this kind of gradual slow recovery, so that no collapse, but positive trend from now on.
I think that we have forecasted GDP growth of 0.5 percentage points or something like that. So that's very small 40 users and 15 in Finland. All in all, our outlook macro outlook is relatively conservative, so that no quick growth coming from any of our home countries.
And to your point on regulatory uncertainty, as we discussed, I think that from a Swedish FSA point of view, I think the regulatory uncertainty clearly has come down. So from that point of view, of course, it's more clear. However, I'd also indicated there are other regulatory uncertainties that more relates to the Basel Committee, Europe and other type of regulation that really is not in full control of. So it's a little of a mixed picture. So on one hand, yes, more clarity, but still some uncertainty out there.
So I think still it's premature to be more firm on any capital guidance.
The capital guidance still stands. We will increase the payout ratio this year and next year.
Okay. Many thanks for that.
Okay. Thank you all for calling and having good questions. Please don't hesitate to give me a call if you like any further clarification. And then you're also welcome to our lunch presentation tomorrow at 12:30 at the back end. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now