Good day. 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 Alfvén, head of IR. Please go ahead.
Thank you. Thank you. Welcome to this telephone conference where we will make a short introduction by our CEO, Mr. Christian Clausen. We are prepared for a Q&A session. We also have our group CFO, Torsten Jørgensen, as well as group chief risk officer, Mr. Ari Kaperi. 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. We have increase in operating profit of 9% in local currencies. On top of this, we have some one-offs. We have the big gain from the sale of Nets in Denmark, EUR 378 million. We have an IT impairment, which we are doing because we are gradually changing our core IT systems of EUR 344 million, where we write off some of the old IT systems we replace. That of course gives some small figures to look at, but the underlying picture is fairly simple. We are also confirming that we are delivering on our plan we launched last year. We are building capital.
Again, this quarter our capital generation is significant, underlines the fact that we are building capital. We have by now enough capital to meet regulation as it stands. We also have enough capital to increase the dividend payout ratio this year and next year. We're also confirming we are 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 will of course mean that the cost in euros will be down maybe somewhat above 7%, but of course, currencies are subject to change. We also confirm that we are on track on our RWA program, which is delivering very well. RWA is gradually coming down, increasing capital efficiency. All in all, we are delivering.
ROE is building during the quarter. Then again, we have some headwind, mainly from the increased amount of capital we hold, which takes down ROE a little. 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. All in all, we are delivering on the plan. 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, still some unknown on TLAC and bail-in and a few other things. Generally, balance sheet regulation is in place.
Operational regulation, know your customer, anti-money laundering, terrorist financing, MiFID, what have you, is a huge driver. It will put significant requirements on 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. The third driver is of course digitization and the changed customer behavior, much more digital into relationship, much more requirements on us to, in an agile way, meet the customer demands out there. Our response is, as we have been saying for the past eight months, that we are doing a simplification program. We are right now simplifying our products and processes and data. We are simplifying quite a lot. We are closing old products in a significant way. We are aligning processes. We are cleaning up data.
That is done by sometime mid next year. We have now started the process of replacing our core banking system. This comes in three major platforms. One is customers and accounts, which will replace the old legacy customer and account systems. The second platform is the payment platform, will be domestic, international, and SEPA payments, so doing the whole payment engine. The third platform will be the core data, which make it possible to combine our data with big data to get a full behavioral picture of the customers, and thereby being able to tailor make solutions to each customer electronically.
Changing core banking systems is something that does not give results tomorrow, but over three to five years, four to five years, we will change the core banking system, and that will be a significant change in the way our agility, in our ability for us to respond to customer needs in our costs. It will be much cheaper to implement new customer systems. In general, it will also allow us to build much more scale because the scale effects our many customers will make it possible to take down the cost per unit. Resilience, of course, it will be a much more resilient system and based on new technology that's fully integrated. All this will be done within the existing cost framework.
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 EUR 344 million, which will mean that the P&L impact next year will be insignificant. But also in the years going forward, it will not be a real P&L impact. We will increase capitalization, but then eventually also we will get some benefits. All in all, delivering on the quarter according to plan and building the future. This was my opening remarks, and we can now start on questions.
Thank you. Operator, we are now open for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press the star or asterisk key followed by the digit 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Once again, that is star 1 if you would like to ask a question today. We will pause for just a moment to assemble the queue. We take our first question today from Matti Ahokas from Danske Bank. Please go ahead.
Hello?
Yes, hello.
Yeah, sorry, it was muted. Matti Ahokas, Danske Bank here. Two questions, if I may. Firstly, on the NII, the Finnish net interest income was 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. I was just wondering what was behind it. 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.
Yeah. I think we are 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, deposit margins are somewhat down. That's the main reason. It's mainly a lower rate issue we are hit by in Finland this quarter. On the question of the guidance on the group level on NII 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. 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 2013.
When we are looking ahead, and where we have now slightly adjusted the guidance, we're now talking about 2%-3% in local currency growth in top line. It's again referring to full year 2013. 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%-3%. Remembering also that from 2014 to 2015, there is not as such any major FX effects. This is all as because this is referring to 2013. The main driver for top-line growth will still be net fee and commission income. That will be the main driver, and we only expect very moderate contribution from NII.
We expect that, as discussed earlier today, that a net fair value line, because of hopefully somewhat of a pickup in FICC business, that that will start contributing somewhat.
Great. If I may, just to 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 this an indication of lower economic activity you're seeing or purely a seasonal effect?
I think that the CIB business, as such, has been for a number of quarters and are still mainly focusing on capital efficiency. That means that, of course, we are hunting all kind of rare efficiency, but we are also still in the process of being very selective in what type of commitments we make, and we are even deselecting still certain type of customers and commitments. Of course in some of the markets, there have been some margin pressure. I think in general for the CIB business, it's going very well if you look on the more the advisory type of the business. I think the picture is relatively positive in general for the CIB franchise.
Great. Thanks a lot.
Sorry, Matti. Just to also, we had also some technical impact in this quarter on the NII because as you might remember, the second quarter was fairly high on NII because we had a high level of yield fees, and they were lower this quarter. Obviously we have some seasonality when it comes to all the transactions, like in your business and IPO, M&A, and things like that. We have seasonality there.
All right. Great. Thanks. Very helpful.
Thank you. We now move on to our next question today from Nick Davey of UBS. Please go ahead.
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, there's been quite a significant shift. I just wondered your mentality there, if you'd considered pricing up a bit for deposits to try and reduce the amount of intragroup funding going into Russia. Maybe just some more flavor, please, around those volume trends. Second question on capital. You make the remark in today's release that you still feel percent quarter one 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 that you're waiting for clarity around? Any reason, please, why you wouldn't progress your target dividend ratio this year? Thank you.
If I should try to answer on the volume trends in the Russian business. As you rightfully said, the increase we have seen for the majority of the reason is the strengthening of the US dollar. That explains 70% of the volume increase in Russia, and the remaining part is existing customer drawing up a bit more on existing lines. What we are doing is, of course, that we don't expand our commitments in Russia as of now. We are trying to control the amount of group 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 the pricing side there. If prices go too much up, we reduce slightly, et cetera.
We have secured very well funding lines for our Russian business. We're 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 translate it into our own numbers on Pillar 2, we come to a slightly lower number, around 14.3. We have a buffer to the around 15%, and the reason for that being that, of course, there are still small, hopefully, uncertainty around full Pillar 2 finish in Sweden. Of course, the need for a management buffer on top of the requirement. Around 15 is what we feel relatively comfortable about as of what we know now.
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 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 need to see the more exact proposal from Swedish FSA on the standardization of benchmarking model they are talking about on these Pillar 2 risks. We need to see more details to be more clear on this. Of course, we hope we have adequately calculated our current Pillar 2 requirements. As we have not seen the proposal yet from Sweden, and we don't know exactly when we will see it, early indications has been that we will see it before the end of the year, no clear guidance has been given yet from Swedish FSA on this.
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 effects coming through. I'm just wondering if you expect these headwinds have fallen out and whether you expect a more positive underlying development in Q4 net interest income. Just a question on asset quality. I can see that Danish asset quality has improved a lot, which 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? Just kind of give us some information on what's going on there. 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 been discussed that may come through next year or the year after? Thanks.
No, I think we have said clearly that we do see some headwind on the rate side as of now, both not least in Finland. We do have a rate headwind, I don't think we as such are guiding on Q4. I think in general we are quite conservative with regard to the NII development. I don't think we will indicate that the picture will change from what we see now. I can maybe if I jump to the regulation, then I can respond on the asset quality demand. 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 any need for higher capital requirements in Sweden. The Pillar 2 is also to be seen on a sector level.
At least they don't look for more capital, they just look for standardization. Having said that, they are also warning us that there are schools of thought in Europe, including even in Sweden, that believes that banks are still not adequately capitalized, they will use either standardized risk weight floors or leverage ratio. They will use whatever measures to seek even higher capital levels for banks. That, of course, is something we follow closely. It's not mature enough, so we can't make any assessment at this point in time.
When it comes to asset quality in Denmark, it has developed quite much in line with our own expectations. That we have expected that during the second half of this year, we start to see more normalized loan loss and credit quality situation also in Denmark, there's no magic behind that development. It's just simply that, of course, this asset quality is reflecting to development in the overall macroeconomic situation and asset prices development in Denmark. Those have now stabilized during the past quarters, and 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 loans and how to calculate the loan loss provisions, they are very much reflecting the underlying asset values and asset prices.
I said that they have now been stable and in some parts of the country, even upwards, this is a consequence of that type of more normalized situation. Perhaps continuing on that side, we still expect that these loss levels in Denmark will continue to come down in a controlled manner, they are still a little bit at the elevated level, still we expect that they could come a little bit more down in the coming quarters.
Thanks very much. That's very clear. 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 basis points normalized, kind of through the cycle assumption that kind of we're thinking about for 2015? Clearly it seems that it'll come well below that. Are you saying the run rate's going to get better from here?
Of course, these levels start to be so low in absolute terms already now when talking about the quarterly loan losses, that there will be a volatility between quarters, we should not expect any kind of very clear trend from now on. What we do expect ourselves is that we should keep or stay within this 16 basis points long-term average. Now and during the coming quarters, we don't see any kind of quick deterioration signals in any parts of our loan portfolio, the risk of us starting to show increased loan losses is relatively low. As I said, there will not be any kind of a clear trend from now on. There will be some volatility between quarters, 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 of an investment this is? I am guessing there will be your IT development budget, which has now been increased by 30%-35%. Does that capture everything or how much of the expense roughly will be capitalized and impact cost going forward? Maybe more long-term just to get your thoughts. 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 know your customer better. On the cost side, is there a sustainable long-term cost saving? Does this mean that even after 2015, we should look for another leg of cost cutting?
First of all, with regards to the announced increased investments, including in these core-banking platforms and systems. We are today having total IT development investments in the level of EUR 400 million. This means that we will increase with this 30%-35% right now. This would also mean that the investments in the specific core-banking replacements, that will mean that this will replace other type of investments we are doing today within the 400. The investment budget is in the area of EUR 1 billion plus for the core-banking element over these four to five years, which will partly be financed by increasing development spend and partly by reducing other investments we would have done, you can say, anyway 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. The Core banking replacement program will be managed in a way where we will have more or less no cost implications, P&L cost implications for the next four to five years. Over this period, we will build new systems that will deliver good customer value, and they will improve our ability to unify and simplify our processes, and thereby having higher operational efficiency. As we are going closer to finishing the new systems, we will be able to decommissioning all the old systems. By doing that, we will save a lot of IT maintenance costs. You are right that over the next four to five years, there will be an increased focus on taking out all the relevant cost efficiency benefits from this program.
It runs in a separate track, it basically does not impact in any way the current cost efficiency program that is targeted to deliver in 2015. Where parts of the 2015 program will deliver also after 2015. I think that, of course, there are many other benefits related to the whole core banking replacement we're doing.
It comes in several ways. I think you can actually figure this out very easily because, the first obvious one is efficient in the customer interaction. When you interact more digital, then we need less people going forward. That's of course an easy way to talk about efficiency. There's another one which is equally important, is actually that having replaced core banking systems, the cost of maintaining systems will go down, 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 bank involving paper will disappear because they become digital. There are a number of cost savings in this. We expect that to be a high efficiency gain at the end of the journey.
As Torsten says here, also decommissioning of the old systems. Of course there's a cost element, which is very important and very much an efficiency element. I think we should not undervalue 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 system. 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 top of old core systems. 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 all say 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 things easy or whatever it is. In the longer term, we know the digital curve is pointing upwards very rapidly. As we have also demonstrated in our presentation today, without having efficient core systems, it will be very difficult to keep building databases and applications on top of the old systems. This is a forward-looking thing. Efficiency, cost savings, very much meeting customer demand. If we do that well, which I'm sure we will, of course, the relationship strategy can continue to work going forward.
It will become much more digital, but it 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? What drove the decision to make this change now as opposed to three years ago or even longer ago?
I think it's a strategic analysis we are making on where banking is heading. Looking five to eight years ahead, it is by now much clearer. Please remember, it's only one year and one 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 four times higher. At that time, when the curves crossed each other, we didn't realize one year later we'll have 16 million digital transactions and only 4 million in the branch network. 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. It's not only transactions, it's 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. It is a strategic judgment that this is where we are heading. We still believe that relationship banking is also a very strong franchise in digital world, because whatever survey we make, where we ask customers, they still want a meeting, maybe digital, but they still want a meeting with us if something important happens in the economic life. Therefore, we'll 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, when the pile of paper you get for a mortgage is not insignificant. That will be gone completely. There's also this element that is not only the customer interaction, it's actually digital in, digital out means that we may be able also to take out significant cost in our core, where we still have 4,000 or 5,000 manual people sitting doing manual work on paper we received. Getting rid of the paper and doing the customer interaction digitally, 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.
That is simply not possible if you don't have very agile systems. You will drown in complexity, you will drown in building data on data, base on database, and system on system. This is a 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. 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. Secondly, do you feel that you're at a competitive disadvantage relative to other banks today? 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 first-to-mover advantage? Then a final question on a different topic.
Maybe a few comments. 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 an inflection around the second quarter this year. 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.
Maybe a few comments. Well, it doesn't really matter how old they are. If they are older than five years, they're based on old technology before the app world and before the big data world and so on. Anything older than that, I think we don't have any banks or any very few companies around in general that has newer core systems than five years. 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 four different versions for different countries. This is a journey where we'll create one, not only systems, but actually processes. We have common processes all over in this because if you build a common system, you will of course put common process on top of it.
We have done this already in some areas. As a management, we did that during the past, at least, I'd say five years ago or something, where we today have one fund platform, one legal company, one fund platform selling and distributing the same funds in 20 countries without any really cost associated to it. A 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. Some of the core systems are still old, and some of them very old and some less old. In reality, they're all built not in one go to be coherent with the same architecture and integrated well. It's actually whether we are better or worse off than others, I cannot say.
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. It will give us a strategic advantage. No doubt. I don't think any banks have that type of system today. Whether ours are worse off or not than others, I don't really know. At least it's clear to us that this is what we need to meet the future demands.
If I may supplement on this, a more strategic view on this. I think basically looking five, 10 years ahead, there's no doubt that within financial service industry, data will be the most important asset because everything gets digitalized. However, Nordea today is one of the biggest storage of data. 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 systems do not allow them to manage data in a helpful way. I think this is our attempt to strategically position ourselves to this new reality where data and the ability to use data efficiently will be the new strategic challenge. I think all banks will have to go this direction, however, old systems they have. On the funding cost development, yes, we did actually exactly see what we have guided for, that our total funding cost seems to have peaked in Q2. They are improved with EUR 70 million. We said all along that it would be a modest improvement to begin with. We have an average duration of slightly more than four years.
It takes some time to roll in new and cheaper funding, long-term funding. We still see funding spreads tightening both on covered or secured funding and on unsecured funding. Long-term funding will continue to be cheaper, or we would continue to see decreased costs. On the short-term funding, we do quite a lot of short-term funding also, and there we have funded ourselves up lighter. There, the lower or, sorry, the-
The higher the risk appetite, the less advantageous this is for Nordea because short-term money goes to Nordea when everybody's afraid. Our short-term funding advantages have decreased a little. 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? Was that you said EUR 70 million to come in over four years?
No, this was from Q2 to Q3.
Q2. Right.
The long end. The short end was?
This was total funding cost.
Okay.
Total funding cost. Okay.
The savings are slightly higher on long-term. However, the benefit is slightly lower on the short term. Net of this is EUR 70 million reduction.
How does that play into your Net Interest Income ladder that you publish? Would this be within the other line there or within the liquidity cost line? I'm just wondering how to read it, because EUR 70 million is quite a large positive impact. Just wondering what the offsetting negative impacts are looking at the delta.
Are you referring to the table we have in the report?
Yes.
There we separate out the funding figures.
Sorry, in terms of business areas, we'll mainly see the funding effect in retail banking, other, and wholesale banking other.
Okay, thanks. Maybe that's one for me to take up with you offline later.
Yeah.
Thank you. We now move on to Daniel Do-Thoi of JP Morgan 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. 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, et cetera. 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? That 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?
If you could just comment, I guess, in particular on shipping Russia and perhaps even Norway, that would be very useful. Lastly, on cost. 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. Thank 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 points on mortgages and somewhat less on the corporate side. Then of course, you have the effect of lower rates coming against you. Moderately positive expectation. Remember that we have seen some of the strongest improvement in profitability has been in Finland up until now. 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. Now what is happening in Finland both households and corporates, they are very risk-averse. They are not investing, but they are saving. In that way, wealth is generated in Finland in the private sector. 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.
If I can just follow up. What is the combined margin difference between front book and back book? 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 still repeat this 40 basis points difference because corporate is somewhat below 40 and household is somewhat above 40 for the time being. If I could say a few words about this one question related to this oil price coming down, how do we see the impact in our asset quality in various areas? Of course, that will have some negative impact on the shipping market. We have already seen some kind of weaknesses in the tanker segment, especially. Also partly in the oil and offshore segment or activities, investments in oil and offshore, which is then related to our Norwegian loan portfolio and partly also shipping oil and offshore portfolio.
Still the impacts are quite moderate and at least we don't yet see any kind of deterioration of the quality of our customers and our loan books related. So far results have been more or less insignificant. In Russia, of course, it's clear that most of the Russian big corporate customers, which are also in our credit book, they are affected by this oil price decline negatively. Then again, all in all, they are also affected positively by the depreciation of the ruble, because, of course, they export their products and that is US dollar based, there are also some kind of mitigating factors.
Still the financial stability of these large Russian customers is very strong, and they have buffers to, let's say, cover these type of oil price declines. There are no immediate dangers or risks even coming to our Russian book. Of course, all in all, if this continues in a long perspective, we start to have some signals. Not immediately, not in the next quarters.
You had a question related to the cost program and the branch closures and reduction of cash handling in the branches. It's true that this part of the program constitutes around 25% of the savings. This is a process already ongoing, branches are being closed as we speak, and cash handling are being reduced as we speak. 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. This is one of the programs that potentially will deliver savings into 2016. As I also said earlier today, there's no total cost guidance for 2016 yet. It's true, this will deliver somewhat in 2016.
Okay. Thank you very much.
Thank you. Ronit Ghose of Citigroup, London, has our next question. Please go ahead.
Hi. Yeah, it's Ronit from Citigroup. 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. Could you provide some more color around what you're seeing on your impaired loans trends? I'm specifically thinking about the numbers you've disclosed in your fact book. Finland looks like quarter-on-quarter the impaired loan number is down by about EUR 50 million. Yet, given some 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 sort of EUR 50 million down.
In Norway, there's an increase in the corporate space by about EUR 90 million. I can see the shipping has gone up, is there any other sort of one-offs or funnies in there? That would be great. The second area of questioning 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 in the other way, as in the front book actually being a problem for you versus the back book? Thank you.
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. Mainly it's retail banking, first of all, coming from both the 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 some household customers, some SMEs, but there are no big one-offs. In Finland, this development in this quarter was favorable, that is, of course, supporting our message we have been 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.
On the contrary, actually, for example, the rating migration is still positive in the Finnish book. As you can see that there are no increase in impaired loans. That is, of course, important signal for the future risks we have in our book. There's no specific news related to development of impaired loans in Q3. It's coming from various sources and from various countries and segments.
Right. That Norway increase that I'm seeing on your fact book, that I shouldn't read too much into it? Because 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 one individual corporate customer, which is a little bit bigger one, but that's the kind of normal issue, so that we have a very big loan book, and in each quarter, there are one or two of your corporate customers which are impacting it both ways. You should not read any kind of stronger signals on the credit quality development in Norway from this change in impaired loans.
Okay. Just a question on the front book, back book, please.
Yeah. I think we confirm around the 40 basis point spread combined between front and back in Finland. 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. In general, on country level, we don't see huge opportunities. That will, of course, be the benefit for calculating lending margins from the fact that the funding cost will go down. 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 retail Sweden. Should we consider this recurrent? Do you see any reason, especially if this kind of benign situation should all of a sudden revert? Maybe not anytime soon, but maybe over the course of second half of 2015 and maybe 2016. I've noticed a pretty, let's say, significant increase in securities in issue on the liability side in the third quarter, while they have been stable for the first six months of the year. Have you pre-funded? Why is that reason? Is that going to have an impact on Q4 NII?
Very final question on risk-weighted assets, can you please elaborate a little bit on what you think you can still do on the mitigation side? Thank you.
If I start from the Sweden. 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 impaired loans in Sweden, that's 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 visible risk indicators currently in Sweden. Of course, it's very difficult to say that what will happen over the years. Then, of course, that's very much as a consequence of the macroeconomy and what is happening in the big picture.
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.
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, 2, and 3, and expect also normal issuance activities in Q4. Then on RWA efficiency or mitigation. We said in Q2 that we believe that we had EUR 10, 11 billion of RWA efficiency left from our RWA efficiency program, and we delivered another EUR 1.8 billion in Q3, meaning that we confirm that we now believe that we have EUR 8 billion-9 billion of RWA efficiency left of the program, and then we would have delivered on the EUR 35 billion program we talked about in 2013. There is still efficiency to be gained, and an increasing part of it is, you can say, based on internal measures. We believe we can deliver.
If I may jump in one second. Where is this EUR 8 billion-EUR 9 billion? Where should it come from? Further rollover modelings, internal models, IRB models on corporate, maybe something that is today under the foundation approach, whatever.
There are still elements of advanced IRB models roll-outs. It could be within institutions, markets, treasury, international units. We have also some rating model approvals pending. 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. It's more than 15 individual initiatives delivering on this. It's a broad range of activities.
Okay, thanks. Very clear. Thank you.
Operator, we have time for one more question.
Okay. Our final question will come from Jan Wolter of Credit Suisse. Please go ahead.
Yes, good afternoon. Two quick questions from my side. Following the presentation in Stockholm this morning. The bank seems to be guiding towards a 16 basis points normalized loan loss level, or rather the loan loss level should approach the 16 basis points 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? 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.
I 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 long-term average level. What is the macro picture we are seeing ahead of us, especially you ask about 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. We believe in this kind of gradual slow recovery. No collapse but positive trend from now on. I think that we have forecast the GDP growth of 0.5 percentage points or something like that. That's very small for 2015 in Finland.
All in all, our macro outlook is relatively conservative. No quick growth coming from any of our home countries.
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. From that point of view, of course, it's more clear. However, as also indicated, there are other regulatory uncertainties that more relates to Basel Committee, Europe, and other type of regulation that Swedes today is not in full control of. It's a little of a mixed picture. On one hand, yes, more clarity, but still some uncertainty out there. I think still it's premature to be more firm on any capital guidance.
Well, the capital guidance still stand. 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, you're also welcome to our lunch presentation tomorrow at 12:30 at The Langham. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.