And welcome to the 2nd Quarter Report 2014. Today's conference is being recorded. At this time, I would like to turn conference over to Mr. Ratne Jaffe, Head of Investor Relations. Please go ahead.
Thank you, and welcome all to this Q2 'fourteen presentation. We will start with a short introduction by the Group CEO and President, Mr. Christian Clausen and then we also have our Group CFO, Thorsten Jorgensen and Group CRO, Adi Kapri in the room. So please then.
Yes. Thank you and welcome to this call. I will not go through any presentations just give a few remarks as an introduction. So what we
are saying today is that
we have delivered a solid result. And the word solid is because in the economic environment we're in, we think it's solid in the case that income is actually holding up quite well despite the low loan demand and low interest rates and low volatility. We had the expected development in our ancillary income. So net fee and commission income is showing good trend based particularly on the areas we have discussed previously, which is wealth management broadly speaking and then the Corporate Advisory business and the Corporate Capital Markets business. Costs is developing according to our plan.
Loan losses are down, so we have RIA quite substantially. So core Tier 1 increases to 15.2%, which means that RE it was on 12%. So all in all the financials look charlat and it's actually very close to our plan as we sketched it out a year ago. Importantly is however business is underlyingly developing pretty well. We get new customers.
The trend continues, core relationship customers. In this quarter, we also get quite a few corporate customers. And we get more customers in Europe on our global funds distribution So, still more of our business in a rather fast speed is moving online, not only transaction banking, but also now online advice which we do with our relationship customers is moving in the right direction. So all in all, delivering our plan underlying business developing well and also transforming the bank. So on track.
I think this opens up for questions. Thank you.
Thank you, Christian. And then we open up for
We will now take the first question from Nick Davy of UBS. Please go ahead.
Yes. Good afternoon, everyone. Nick Davy from UBS. Two questions, please. The first on the Rhea and the Rhea and the progress you've made on the capital efficiency side.
No real update in this presentation about how much further efficiency efficiency you want to get from here. So if you could please just give us an update of where your capital ratio stands relative to where you think it would be pro form a for all the efficiency measures you have outstanding? And the second question please, just some observations if you'd be happy to share them about the Swedish retail environment since the rate cut. Just to have an idea whether you're seeing wider mortgage margins since the rate cut came through, whether or not you would see this as an opportunity to take any market share or whether you'd be happy for your margins to follow the system? Thank you.
Yes. But you're right. We had quite good real efficiency deliveries in this And I think we are clear on our program can continue. We have another €10,000,000,000 €11,000,000,000 real efficiency outstanding. And it's more than fifty-fifty between own controlled initiatives and FSA dependent initiatives.
And as we have stated earlier, the concern is on the A dependent ones and we are trying to ramp up a claim B for addressing that. But until further we stick to the ambition of another 10 to 11 vision of rare efficiency and that of course will deliver some further improvements. And we continue also more generally to apply very strict capital efficiency ratios not within our corporate area. So we have a we're somewhat confident that we will continue to deliver improved capital efficiency. And on Swedish retail, yes, but I think that most banks in Sweden have adjusted their mortgages, but are capable of expanding slightly their mortgage margins by the fact that funding costs have come up or down, which is resulting in its ability to mitigate somewhat the effect of the rate cuts.
And what will happen going forward of course is still to be seen. Now the capital requirement for Swedish mortgages is of course quite much higher and as the proposal is now more or less settled. So one could expect this to potentially continue somewhat as long as discipline is maintained in the market.
Okay. Very clear. Thank you.
Thank you. We will now take the next question from Hakan Fuhrer of DNB. DNB.
It's Hakan Fuhrer of DNB. Two questions from me as well please. Firstly on your IT costs, they're down more than 10% in Q2. Is this a sustainable effect of the IT in sourcing you're referring to? Or is it more of a quarter volatility impact?
And then secondly on your quarter one ratio target of 15% barring anything new and unexpected from the regulators is this now your best dividend guidance going forward?
Yes. This is the Q1 where we see the results of the much talk about in sourcing from IBM. And what you should observe is that there is somewhat of a trade off between staff cost and other cost. But it's true that IT cost as such is down and that is a sustainable effect and that's part of as we have also stated, it's an important part of our efficiency program. And we are not even final finally transition all the processes.
We have certain elements of this. Insourcing is still ongoing. So it's a program would continue to deliver good efficiency. And then on Core Tier 1, Jabber, I mean, we have now the latest REIT proposal and we also have the latest joint decision paper from the regulators. And together they constitute a certainty around the 4th Tier 1 capital requirements that I think is relatively firm.
And then in the autumn we will have a few I assume much more detailed issues around the standardizing some of the popular two elements. But as such, we feel relatively confident that around 15% seems to be the new quarter 1 ratio for NIVEA seen from a Swedish regulator perspective. Then of course we have to do the disclaimer that the EU of course or Europe have still there are still views around in Europe of bank having to have even stricter type of rules not least regarding risk weight models etcetera. So of course with that disclaimer we are quite certain about the process we have with this wage rate that we announced.
Okay. Excellent.
Thank you. We will now take the next question from Matti Ahokas of Danske Bank. Please go ahead.
Yes. Good afternoon. Matti Akkers from Danske. Two questions from me as well please. Firstly regarding Denmark, listening to the press conference earlier today Torsten you had fairly bearish comments on the margin outlook on Denmark.
Could you elaborate a bit more on that? Is this something that has happened during the Q2? Because if you look at Denmark, it's still the kind of profitability wise the weakest region in Nordea. Is this a function of you still having the highest prices on the mortgage market? Or some more light on that would be great please?
And then the next question is regarding the shipping portfolio. Obviously, we've had these write backs and the sale of vessels impacting the reported net loan losses. But if you could give us a kind of expectation, what is the current like run rate on the underlying losses that would be really great? Thanks a lot.
Yes. Rich, I should start with the base outlook. Yes, you are right. I was probably relatively embarrassed. First of all, I think that you should be aware that profitability of the in Denmark is actually it's pre you can say risk cost it's actually quite good.
And that also means of course that we do have quite intense competition both on the corporate side and the mortgage side. We have a number of regional banks that are relatively aggressive on especially retail corporates. And we have all the big Nordic names in the large corporate space in Denmark and competition is relatively fierce. Everybody believes that credit quality will go up in Denmark. And remember also as we have said many times that I think that at least we have we both have Nikkadit and Danke that are bigger on us on the mortgage market and I think Nikkadit was into this court case and they have there's this issue around the dynamics in the market.
So let's see if there will be a situation where we can reprice as a sector somewhat on the market side and then of course we will be happy to follow that. But yes, I think overall it looks quite competitive the Danish market for the moment making it very difficult to see significant margin improvements.
And the shipping loan was underlying trend. Now as you could see from the figures the reported net loan losses were on the positive €27,000,000 and that is actually exactly the amount of reversal of one credit which was sold in the secondary market. So meaning that in this quarter or Q2 the underlying other coming quarters. Of course, always you will have hits and you will have reversals from the earlier made provisions. But at least currently the loss level is very low, which is understandable because then when the crisis is over you have put quite substantial provisions.
And then when the situation is improving then of course you should see quite the limited number of net loan losses in the few quarters before they start to normalize so to say. But we don't expect very big increases in the coming quarters.
Great. Very helpful. Thanks.
Thank you. We will now take the next question from Matthew Clark of Nomura. Please go ahead.
Hi. Two questions, please. 1 on the net interest income. I was intrigued to see the lending margin component of the change in net interest income be quite strongly negative this quarter having been strongly positive for many quarters. I was just wondering if you could comment there in terms of what's driving that, what products, what regions, whether you think it's an effect that will persist?
And also there seems to be some offset coming through the fees and other NII line. Perhaps you could just comment on what's driving that? And then secondly, in terms of your restructuring costs, is that it now? Have you taken all the restructuring costs necessary to deliver your 2015 cost cut target? Or what should we expect still to come there?
Thank you.
Yes. No, but it's true that the way we are showing lending margin effect this time, it clearly indicates that it's deteriorating. But you should of course be aware that we have other NII related fees like commitment fees and so on which we would depending on how you calculate the way we have now done it we have split it out. So you have these fees that you could argue should be on top. You have a day count effect with it also to NII and you have the liquidity cost effect that you could also argue should be added on top.
So this is now we are showing it in this way. But you are right that the underlying lending margin pressure has increased. And I mean we have a number of effects in this quarter. We have Norwegian mortgages effect that is somewhat significant. Hopefully, we have seen the most of it.
And then we have, as I said, mainly Denmark. And then for more maybe we have had a combination in Sweden. I mean we have quite a significant lending pressure in Sweden. However, we have also had a little of a mix effect as we have had 2 very large transactions in Q2 in CFE Sweden that was somewhat lower margin type of transactions. But I think that we have also indicated that the lending margin trend I think we have guided for that actually for a while that they were soon to peak.
And I think we are just about the point where they in total are peaking and then we will of course still see opportunities could be within mortgages. It is in Finland and it can be in selected SMERS etcetera. But as a key driver I think we have warned for a while that lending margins have improvements have come to an end.
And specifically on the fee and other NII in business line, should we expect that to be as positive again going forward? Or what specifically led it to be quite so large this quarter?
You're talking about what we call fee and other NII in the table?
Yes, please.
No, I don't think it's as such as extraordinary on the I think we will as we do see more, we participate in more and more transactions and we have quite a lot of refinance activity and we have quite a lot of bridge financing activities ongoing. I don't think these levels are extraordinary in that aspect. So I still think we will see that type of level of NII related fees. Then to your question on restructuring costs, I mean, this is an all inclusive restructuring provision. So it should fully cater for the cost efficiency program going forward the 5% lower cost in 2015 and 2013 and covering 2014 and 2015 activities.
Great. Thanks very much.
Thank you. We will now take the next question from Jacob Kruse of Autonomous. Please go ahead.
Hi. It's Jacob from Autonomous. I guess just two questions. Firstly, on the cost side, on a clean basis, you're just below 1.2 this quarter. And I guess, your comments around volume growth and margin expansion are fairly cautious.
So do you think there's scope to go further than the current targets that you have for 2016 on cost? And then the second question was just there's been a few comments from the other banks about sort of covenant lights or very ease where the terms of the loans have been eased significantly in, I guess, Sweden. Is that something you're seeing? And are you participating in that? Or is that non Swedish banks that are driving that?
Thank you.
Yes. If I should try to comment on the first one on cost. This question was raised earlier and I think the issue is that we are running a very large program. We are aiming at €600,000,000 of gross cost efficiency. And within that program, we have a number of reinvestments program type of facilities running.
We continue to invest in certain of the cost efficiencies, but also in all kind of other initiatives that might be into our savings and investment activities. It might be for investment banking etcetera. Then we have 3 percentage points of FX effects on top some of them have been very material for the moment reading into Q2 for example the current Q2 number. So I think that the total program of €600,000,000 within the next 18 months is a very ambitious program. And I think the net cost effect we have indicated is quite ambitious one.
And remembering within that program you get a lot of change initiatives running, so we would also get a stronger and better bank within this period. So, until further we are firmly focused on delivering on the current communicated program and delivering on that and all the reinvestment
activities. Okay. And in this your second question related to losing credit terms. Have we seen that in various markets? Yes, we have seen that type of behavior when we talk when we are talking about large highly rated customers, there seems to be bigger and bigger appetite from the banks including international banks for these type of healthy credits.
And usually what it leads to is some loosening of covenants and other terms of the loans. We always of course make our risk analyzes. And if we are happy with the risk and happy with the credit then we may from time to time also take our part with the terms with the market standard. But we have also seen many cases that we have just given up so that for our terms of to for our principles the terms have been too loose and we have not taken part of those our deals. Then again, I don't see the same behavior when we are talking about the SME loans.
So that in SME side, I think that still it's a very healthy practice we see in all the Nordic countries. I don't so much see difference between countries different Nordic countries. So that and of course, Daniel already mentioned high competition in Denmark, for example, for good and strong corporate loans. That's right. And also that's the case in Sweden and in Finland and also partly Norway.
Okay. Thank you.
Thank We will now take the next question from Christopher Rothquist of Barclays Bank. Please go ahead.
Thank you. It's Chris from Barclays. Just one follow-up question on the margins. You mentioned, it seems, if I answered it correctly, that most of this lending margin pressure is coming from Denmark and Norway. And you mentioned in Norway that you did not believe that this would continue or persist.
So I don't know if you could just elaborate a little bit on where that confidence is coming from and why banks that have competed with price wouldn't be encouraged to continue to do so. And the second question is just around the fee income from Wealth Management. It now looks like we've had 2 quarters with a level of fee income that previously has been more we've only seen in the 4th quarter where you had performance fees. So I wonder what if there's something that's structurally changed.
It looks like you have
a little bit more equity products in the mix and also AUM inflow. Are those the changes that have driven up the fee income in wealth? Or is there something else that we should be aware of to sort of expect this level to persist even outside the Q4? Thank you.
Jotin, on the margin side, I don't know how much more I have to add. I can say that, I mean, in Norway, we have seen the competition all over the place on margins. We have had this specific issue on the change of list prices in Norway. And I mean we have taken I think we have what I said is that we have seen probably most of the effect. And of course, one can ask you with the new Norwegian proposal and the much higher risk weights on Norwegian mortgages that repricing should happen.
And as we can only say as a market follower in the mortgage market, we would absolutely encourage and we plan to do that based on much higher capital requirements. On the fee income side and savings and investments areas, you're right that not only have we seen very strong inflow and that of course is somewhat is going to materialize over the next coming quarters when you see strong net inflow. The mix is good in many ways. We still have very good inflow from private banking and retail funds. We have the global fund distribution which is also basically also private banking customers typically.
We also have as you do too a very good mix effect. We have both equity, but we have also our absolute return products and balance type of products with good fee structures and good performance and continues to have very good performance. So what we have been trying to say confidently is that I mean both backed by inflow, the composition of inflow both segment wise and product wise by the continued strong investment performance I mean, there's good reason to believe that this can continue. And performance fees, remember, they are mainly always seen in primarily seen in Q4. So of course, we have reason to believe there will be good performance fees also in Q4, 2014, but that's yet to be seen.
So all in all, yes, good and strong indications of a continued good development on this.
Okay. Thank you very much. That's very clear.
Thank you. We will now take the next question from Alvaro Serrano of Morgan Stanley. Please go ahead.
Hi. Thank you for taking my questions. Just two questions around Sweden. There's been increasing talk or at least I've seen increasing talk about amortization in mortgages trying to some sort of forced amortization or encourage amortization. Can you just take us through your views on that?
How probable you think it is that it might happen with the new government? And what might be the consequence obviously for volumes? But if that could at some point reverse the margin trends that we're starting to see improving. And then when you look at the outlook in Sweden in particular, I was just wondering, bearing in mind, if amortization might happen or not, where do you see better prospects in corporates or in retail? Are you seeing any do you feel more optimistic about the corporate pipeline retail volumes?
I'm thinking more looking into 2015. Thank you.
Yes. It's a topical issue because the risk bank lowered the interest rate and at the same time gave the message up to others to do something about the debt levels in households. And so it is a topic now and we have for more than a year said that we think it's a good thing that Sweden gets back to amortization culture which was there 20 years ago where you normally have an amortization plan on your mortgage. Then exactly how it should be done is different difficult to say. We are now in the bankers association in Sweden talking together with the other banks to further a proposal where we don't only amortize it down to a 70% loan to value, but probably to a lower number to give our input to this or our decision to do that of course.
But I think the government is very well aware that the rigid plan to just amortize have a big risk like the Dutch example or the Danish example back in the 80s on the potato cure. So everybody knows this has to be phased in. You cannot just do it. But I think we will have more amortization and different types of loans. And personally, I think this correct because this culture which has come up to into a GIS is not a healthy culture of course.
So things will happen here. I think it will be very gradual. Everybody is super nervous that it's being overdone. But it will probably phase in over time and that will probably be that I would guess for new mortgages we will put in a bit tougher amortization and then that will be the next step. But something will happen.
I'm not sure it will impact margins or anything. It's not and at this rate level it's probably pretty good timing as well. I didn't really get your second question because what more we have in the pipeline to do, I mean
No, but maybe I can just comment shortly on where we see this prospect. I mean if you start with the mortgages you just referred to, I mean we have in general seen quite stable and good growth in mortgage lending in Sweden and it's relatively stable. We have experiences from Denmark when you have stricter amortizations and so on and I mean there might be temporary changes, but there's nothing indicating that we should not continue to see relatively stable growth in household lending in Sweden and also comparing margins and attractiveness of the products between the countries. I mean, yes, with the higher risk weights in Sweden, I mean, there's nothing there. Technically, at least, we should have a repricing I would argue so that we can improve.
On the corporate side, I think there is not that big a net lending demand. However, there is quite good activity. So we have quite good, you can say activity I. E. Refinancing, M and A, ECM, DCM activities in activities in Sweden which and I think the pipeline looks relatively strong in Sweden also in these areas.
So it's not so that I don't think we will have any growth in Sweden. On the contrary, I think that there might be opportunities for low digit type of income growth in Sweden also looking ahead. Are you more optimistic in corporate or in household? No. What you can say, if you it depends a little if you look on NII, I think mainly in household, if you look on fee commission income side, I think corporate.
Right. Thank you very much.
Thanks. Thank you. We will now take the next question from Omar Kinan of Deutsche Bank. Please go ahead.
Good afternoon. Thanks very much for taking the questions. I just have two questions please. Firstly, you've got your lending growth target of about 2%. But I also think in the past you talked about revenue growth of similar levels as well.
And it sounds like you're being a bit more conservative about that on the call earlier. Can you elaborate on that and if your revenue guidance or at least thinking has changed going forward? That seems to be the implied message here. And then my second question, sorry if I missed an early question. I got disconnected from the start of the call.
But how are you seeing the front book on Swedish mortgage margins develop in the past few weeks? Thank you.
Yes. But on our volume and revenue guidance, I think that again remembering if you annualize the numbers, we have an effect of 3 percentage points both more or less when we talk volumes and we talk income. So depending a little on how we see it and that has been our typical is of course in reported currency, it looks somewhat less. But in lower currencies, we are relatively close to the guidance we have given. So depending a little on how we should see this then we are in that area kind of.
So between especially if we talk in we have between something between 0% 2%, I would say, depending on how we view it. And then we have always said that we see probably a more stable improvement in continued potential growth in the fee commission income line. And then we have the FICC area which I mean we are keeping a strong franchise and whenever there is a pickup in activities and hopefully we will benefit from it. But it continues to be a little of a question mark. Front book margins in Sweden maybe Roden you are more open.
Yes.
I mean what you have seen just by the fact is that we have seen approximately 40, 45 basis point drop in seaborne. And then you can see that the banks in general including us have lowered the list price by around 20, 25 basis points. That is the current situation. And then of course that will be subject to change. And we obviously have followed the situation very carefully, but that is how it looks right now.
Okay. Thanks. That's very clear. And you've not seen that discounts have increased. So the list price has gone down by 25 bps, but have you seen kind of any indication what how the effective mortgage rate has changed that the branches are offering to customers in the past kind of 2 weeks?
Is that a 25 bps drop as well or is it more?
And obviously this is we have nasty competitors. We don't want to give them all the information.
Fair enough. So I
think they've given you a fairly good indication of where we're heading in Sweden right now.
Yes. Okay. And just to follow-up on the first question on the revenue guidance. Given that the krona has continued to weaken, could you just talk about kind of the sensitivities going forward? I guess you're kind of sticking by the 2% revenue guidance on kind of on a local currency basis.
But do you expect that's going to keep making things difficult going forward?
Yes. But I think there is a sufficient amount of uncertainty when we are talking especially when we're talking in II. So I think it's close to I mean, 1st of all, we have FX effects which we are not in control of. We have rate changes and also further they have been constantly lower than we had hoped for. We have had GDP revisions that have constantly the downward adjusted rather than anything else also differently than we have expected.
We have dynamics on competition behavior that is not fully in our control as we have indicated. So I mean, I think increasingly especially in NII, it's not super meaningful to have any very strict guidance. Guidance. I can only tell you that we want to grow with the high quality customers and we want to grow the relationships. We want to secure a position where we can earn more in commission income and we want to seek all possibilities to repurchase that all possible.
And that is what we can do. And then I think we have learned that from there on it's quite difficult.
And do you think you can do more than the cost plan if revenues next year disappoint?
But as I said before, I mean, we have a very ambitious plan of taking out €600,000,000 of efficiency over the next 18 months, which I think is a very and remember it's not just that we are cutting costs, we are taking out efficiencies. It's much more complicated and require much more planning. And this is programs of which some of them have been ramped up for several years. So you just don't change these kind of things. Everybody can find out to cut some costs that we don't find any real value in.
But efficiency we like and we will deliver the SEK 600 1,000,000 and we will reinvest carefully some part of this. So for now, I think that is absolutely the best value creation we can do. And with the uncertainty we have, we can anyway not set the horizon we are talking about. We cannot in any intelligent way change very much on this for the period we are looking into. So we stick to our guidance.
Okay. Thanks. That's very clear.
Thank you. We will now take the next question from Adrian Chigi of RBS. Please go ahead.
Hi, there. This is Adrian Chigi from RBC. I have one question on NPLs please. This quarter you've taken your coverage ratio down 1 percentage point to 44%. Some of your peers have their coverage ratios in the 70s.
Do you think at this point in the credit cycle it is prudent to stay with sort of mid-40s levels? Or do you envisage that going higher in the coming quarters? Thank you.
We have not set any kind of path to our coverage ratio. So the way we impair our credit and make loan provisions is customer by customer portfolio by portfolio basis when we evaluate the situation every quarter. Then the outcome is some coverage ratio. Our coverage ratio has been relatively stable in the previous quarters and I believe that that will stay relatively stable also going forward. So I don't expect that that would change a lot.
I'm comfortable with the current level we have so that every bank has its own portfolios and perhaps even on principles how to evaluate the collaterals and what are the credit principles and so forth. So I don't think that this is such a good measure to or ratio to be compared between banks. So that I think that we have the coverage ratio which is enough to cater for our problem loans.
Thank you.
Thank you. There are no further questions.
Okay. Then thank you very much for attending this telephone conference. We will have open lunch presentation in London tomorrow. Please welcome all of you who are in London. And then we are always open for questions at your convenience.
Thanks very much. Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.