Good day. Welcome to the second quarter report 2014. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rodney Alfvén, Head of Investor Relations. Please go ahead.
Thank you. Welcome all to this second quarter of 2014 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, Torsten Hagen Jørgensen, and Group CRO, Ari Kaperi in the room. Please, Christian.
Yes, thank you. Welcome to this call. I will not go through any presentations, just give a few remarks as an introduction. What we are saying today is that we have delivered a solid result. 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. 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, we have an operating profit, which is up 7%. We built more capital.
Capital is well up before we bring down our RWA quite substantially. Quarter one increases to 15.2%, which means that our ROE delivers on 12%. All in all, the financials look solid. 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. If the trend continues, we get 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 platform, which buys our funds. Customer development is very good. We are also transforming the bank, 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.
All in all, delivering our plan, underlying business developing well, and also transforming the bank. On track, and I think this opens up for questions. Thank you.
Thank you, Christian. Then we open up for questions. Please, operator.
Thank you. 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. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. We will now take the first question from Nick Davey of UBS. Please go ahead.
Yes. Good afternoon, everyone. Nick Davey from UBS. Two questions, please. The first on the RWA and the progress you've made on the capital efficiency side. No real update in this presentation about how much further efficiency you want to get from here. If you could please just give us an update of where your capital ratio stands relative to where you think it would be pro forma for all the efficiency measures you have outstanding. 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 mortgage margins to follow the system. Thank you.
You're right, we had quite good real efficiency deliveries in this quarter. I think we are clear on our program can continue. We have another EUR 10 billion to EUR 11 billion real efficiency outstanding. It's more or less 50/50 between own controlled initiatives and FSA-dependent initiatives. As we have stated earlier, the concern is on the FSA-dependent ones, and we are trying to ramp up a plan B for addressing that. Until further, we stick to the ambition of another EUR 10 billion to EUR 11 billion of real efficiency, and that, of course, will deliver some further improvements. We continue also in more general to apply very strict capital efficiency thresholds, not least within our corporate area. We're somewhat confident that we will continue to deliver improved capital efficiency.
On Swedish retail, I think that most banks in Sweden have adjusted their list price on mortgages. Are capable of expanding slightly their mortgage margins by the fact that the funding costs have come somewhat down, which results in its ability to mitigate somewhat the effect of the rate cuts. What will happen going forward, of course, is still to be seen. The capital requirement for Swedish mortgages is, of course, quite much higher, and the proposal is now more or less settled.
One could expect this to potentially continue somewhat, as long as discipline is maintained in the market.
Very clear. Thank you.
Thank you. We will now take the next question from Haakon Fure of DNB. Please go ahead.
Hi, good afternoon. It's Haakon Fure, 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 insourcing you're referring to, or is it more of a quarterly volatility impact? Secondly, on your Pillar 1 ratio target of 15%, barring anything new and unexpected from the regulators, is this now your best dividend guidance going forward?
This is the first quarter where we see the result of the much talk about insourcing from IBM. What you should observe, of course, is that there is somewhat of a trade-off between staff cost and other costs. It's true that IT cost, as such, is down, and that is a sustainable effect. That's, as we have also stated, it's an important part of our efficiency program. We are not even finally transition all the processes. We have certain elements of this insourcing is still ongoing. It's a program that will continue to deliver good efficiency. On Pillar 1, we have now the Data Swedish proposal, and we also have the latest joint decision paper from the regulators. Together they constitute a certainty around the Pillar 1 capital requirement that I think is relatively firm.
In the autumn we will have a few, I assume, much more detailed issues around standardizing some of the Pillar 2 elements. As such, we feel relatively confident that around 15% seems to be the new Pillar 1 ratio for Nordea, seen from a Swedish regulator perspective. Of course, we have to do the disclaimer that the EU, of course, or Europe have still views around in Europe of banks having to have even stricter type of rules, not least regarding risk weight models, et cetera. Of course, with that disclaimer, we are quite certain about the process we have with the Swedish regulator now.
Okay. Excellent.
Thank you. We will now take the next question from Matti Ahokas of Danske Bank. Please go ahead.
Yes, good afternoon. Matti Ahokas 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 second quarter? Because if you look at Denmark, it is still, 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. The next question is regarding the shipping portfolio. Obviously, we have 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 run rate on the underlying losses? That would be really great. Thanks a lot.
Yeah. If I should start with the Danish outlook. Yeah, you are right. I was probably relatively bearish. First of all, I think that you should be aware that profitability in Denmark is actually, it is pre, you can say, risk cost, it is actually quite good. That also means, of course, that we do have quite intense competition both on the corporate side, on the mortgage side. We have a number of regional banks that are relatively aggressive on especially retail corporates. We have all the big Nordic names in the large corporate space in Denmark. Competition is relatively fair, as everybody believes that credit quality will go up in Denmark. Remember also, as we have said many times, that I think that at least we both have Nykredit and Danske that are bigger than us on the mortgage market.
I think Nykredit was into this court case, and there was this issue around the dynamics in the market. Let's see if there will be a situation where we can reprice as a sector somewhat on the market side. Then, of course, we will be happy to follow that. Yes, I think overall it looks quite competitive, the Danish market for the moment, making it very difficult to see significant margin improvements.
The shipping loan loss underlying trend. Now, as you could see from the figures, the reported net loan losses were on the positive EUR 27 million. That is actually exactly the amount of reversal of one credit which was sold in the secondary market. Meaning that in this quarter or Q2, the underlying other losses in shipping was plain zero. It will not say that this zero would be the expectation for the coming quarters, of course. Always you will have hits and you will have
Ourselves from the earlier made provisions. At least currently, the loss level is very low, which is understandable because then when the crisis is over, you have booked quite substantial provisions. Then when situation is improving, then of course you should see quite a limited number of net loan losses in the few quarters before they start to normalize, so to say. 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. One 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. 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. 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.
No, it's true that the way we are showing lending margin effect this time, it clearly indicates that it is deteriorating. You should, of course, be aware that we have other NII related fees, like commitment fees and so on. Depending on how you calculate, the way we now have done it, we have split it out. You have these fees that you could argue should be on top. You have a day count effect, which is also through NII, and you have the liquidity cost effect that you could also argue should be added on top. Now we are showing it in this way. You are right that the underlying lending margin pressure has increased. 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.
We have, as I said, mainly Denmark, and we have had a combination in Sweden. We have quite a significant lending margin pressure in Sweden. However, we have also had a little of a mixed effect as we have had two very large transactions in Q2 in CIB Sweden. That was somewhat lower margin type of transactions. I think as we have also indicated that the lending margin trend, I think we have guided for that actually for a while, that they will soon to peak. I think we are just about the point where they, in total, are peaking, and we will of course still see opportunities. Could be within mortgages, it is in Finland, and it can be in selected SME areas, et cetera.
As a key driver, I think we have warned for a while that lending margins improvements have come to an end.
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 are talking about what we call fee and other NII in the table?
Yes, please.
No, I don't think it as such is extraordinary. I think 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 financings and activities ongoing. I don't think these levels are extraordinary in that aspect. I still think we could see that type of level of NII related fees. To your question on restructuring costs, this is an all-inclusive restructuring provision, so it should fully cater for the cost efficiency program going forward at 5% over cost in 2015 and in 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. Do you think there's scope to go further than the current targets that you have for 2016 on cost? The second question was just, there's been a few comments from the other banks about sort of covenant- lite or 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.
Yeah. I should try to comment on the first one on cost. This question was raised earlier. I think the issue is that we are running a very large program. We are aiming at EUR 600 million of gross cost efficiency. Within that program, we have a number of reinvestments program type of activities 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 into investment banking, et cetera. We have 3 percentage points of FX effects on top. Some of them are very material for the moment reading into Q2, for example, the current Q2 number.
I think that the total program of EUR 600 million within the next 18 months is a very ambitious program. I think the net cost effect we have indicated is quite ambitious one. Remembering within that program, you get a lot of change initiatives running. We will also get a stronger and better bank within this period. Until further, we are firmly focused on delivering on the current communicated program and delivering on that and on all the reinvestment activities.
Okay. Your second question related to loosening credit terms. Have we seen that in various markets? Yes, we have seen that type of behavior 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. Usually what it leads to is some loosening of covenants and other terms of the loans. We always, of course, make our risk analyses. If we are happy with the risk and happy with the credit, we may from time to time also take our part with the terms which are to the market standard. We have also seen many cases that we have just given up, so that for our principals, the terms have been too loose, and we have not taken part of those other deals.
Again, I don't see the same behavior when we are talking about the SME loans. 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 different Nordic countries. Christian has already mentioned the high competition in Denmark, for example, for good and strong corporate loans. That's right. Also that's the case in Sweden and in Finland and also partly Norway.
Okay. Thank you.
Thank you. Again, as a reminder, if you would like to ask a question, please press star one. We will now take the next question from Kinner Lakhani 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 understood correctly, that most of this lending margin pressure is coming from Denmark and Norway. You mentioned in Norway that you did not believe that this would continue or persist. 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. The second question is just around the fee income from wealth management. It now looks like we've had two quarters with a level of fee income that previously we've only seen in the fourth quarter where you had performance fees. I wonder 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 incoming wealth, or is there something else that we should be aware of to sort of expect this level to persist even outside the fourth quarter? Thank you.
On the margin side, I don't know how much more I have to add. I can say that 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. What I said is that we have seen probably most of the effect. Of course, one can argue with the new Norwegian proposal and the much higher risk weights on Norwegian mortgages that a repricing should happen. As we can only say as a market follower in the mortgage market, we would absolutely encourage a repricing to happen based on much higher capital requirements.
On the fee income side in savings and investment areas, you're right that not only have we seen very strong inflow, and that of course 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 a global fund distribution, which is also made basically also private banking customers typically. We also have actually due to a very good mix effect, we have both equity, but we have also our absolute return products, balanced type of products with good fee structures and good performance, and continues to have very good performance.
What we have been trying to say confidently is that both backed by inflow, the composition of inflow, both segment-wise and product-wise, by the continued strong investment performance, there's good reason to believe that this can continue. Performance fees, remember, they are mainly always primarily seen in Q4. Of course, we have reason to believe there will be good performance fees also in Q4 2014, but that's yet to be seen. All in all, yeah, good and strong indications of a continued good development on this.
Okay. Thank you very much. It was 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 perceived increasing talk about amortization in mortgages, trying to some sort of force 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? What might be the consequence, obviously for volumes, but if that could at some point reverse the margin trend that we're starting to see improving. 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? Do you feel more optimistic about the corporate pipeline or retail volumes? I'm thinking more looking into 2015. Thank you.
Yeah. It's a topical issue because the Riksbank lowered the interest rate and at the same time gave the message it's up to others to do something about the debt levels in households. It is a topic now, 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. Exactly how it should be done is difficult to say. We are now in the Swedish Bankers' Association, talking together with the other banks to further a proposal where we don't only amortize 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.
I think the government is very well aware that a 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. Everybody knows this has to be phased in. You cannot just do it. I think we will have more amortization and different types of loans, personally, I think this is correct because this culture which has come up to in 20 years is not a healthy culture, of course. Things will happen here. I think it will be very gradual. Everybody's super nervous that it's being overdone, it will probably phase in over time, that will probably be that. I would guess for new mortgages, we will put in a bit tougher amortization, that will be the next step. Something will happen.
I'm not sure it will impact margins or anything. At this rate level is 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.
Maybe I can just comment shortly on where we see this prospect. If you start with the mortgages you just referred to, we have in general seen quite stable and good growth in mortgage lending in Sweden, relatively stable. We have experiences from Denmark when you have stricter amortizations and so on. 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. Also comparing margins and attractiveness of the products between the countries. Yes, with the higher risk weights in Sweden, there's nothing there. Technically at least we should have a repricing, I would argue, so that we can afford it. On the corporate side, I think there is not that big a net lending demand. However, there is quite good activity.
We have quite good, you can say, activity, i.e., refinancing, M&A, ECM, DCM activities in Sweden. I think the pipeline looks relatively strong in Sweden also in these areas. 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 households?
No, you can say 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. Again, as a reminder, please press star one if you would like to ask a question. We will now take the next question from Omar Keenan 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%. 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. Then my second question, sorry if I missed an early question. I got disconnected from the start of the call. How are you seeing the front book on Swedish mortgage margins develop in the past few weeks? Thank you.
Yeah. On our volume and revenue guidance, I think that again, remembering if you annualize the numbers, we have an FX effect of three percentage points.
Both more or less when we talk volumes and we talk income. Depending a little on how we see them, that has been our difficulties. Of course, in reported currency, it looks somewhat less. In local currencies, we are relatively close to the guidance we have given. Depending a little on how we should see this, then we are in that area, kind of. Especially when we talk NII, we are between something between 0% and 2%, I would say, depending a little on how we view it. We have always said that we see probably a more stable improvement in and continued potential growth in the fee commission income line. We have the FICC area, which we are keeping a strong franchise, and whenever there is a pickup in activities, then hopefully we will benefit from it.
It continues to be a little of a question mark. Front book margins in Sweden, maybe Ari, you are more than I am.
Yeah. What you have seen just by the fact is that we have seen approximately 40-45 basis points drop in STIBOR. 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. Of course, that will be subject to change. We obviously are following the situation very carefully, but that is how it looks right now.
Okay, thanks. That's very clear. You've not seen that discounts have increased? The list price has gone down by 25 basis points, but have you seen any indication how the effective mortgage rate has changed, that the branches are offering to customers in the past two weeks? Is that a 25-basis point drop as well, or is it more?
Obviously, we have nasty competitors, so we don't want to give them all the information.
Fair enough. Yeah.
I think they've given you a fairly good indication of where we're heading in Sweden right now.
Yeah. Okay. 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 the sensitivities going forward? I guess you're sticking by the 2% revenue guidance on a local currency basis. Do you expect that's going to keep making things difficult going forward or?
I think there is a sufficient amount of uncertainty, especially when we're talking NII. I think it's close to First of all, we have FX, which we are not in control of. We have rate changes, and insofar they have been constantly lower than we had hoped for. We have had GDP revisions that have constantly been downward adjusted rather than anything else, also differently than we have expected. We have a dynamics on competition behavior that is not fully in our control as we have indicated. I think increasingly, especially in NII, it's not super meaningful to have any very strict 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 fee and commission income, and we want to seek all possibilities to reprice it where at all possible. That is what we can do. I think we have learned that from there on, it's quite difficult.
Do you think you can do more than the cost plan if revenues next year disappoint?
As I said before, we have a very ambitious plan of taking out EUR 600 million of efficiencies over the next 18 months, which I think is a very Remembering it is not just that we are cutting costs, we are taking out efficiencies. That is much more complicated and requires much more planning. This is programs of which some of them have been ramped up for several years. You just do not change these kind of things. Everybody can find how to cut some cost that we do not find any real value in. Efficiency we like, and we will deliver the EUR 600 million, and we will reinvest carefully some part of this. For now, I think that is absolutely the best value creation we can do. 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. We stick to our guidance.
Okay, thanks. That is very clear.
Thank you. We will now take the next question from Adrian Cighi of RBC. Please go ahead.
Hello, this is Adrian Cighi from RBC. I have one question on NPLs, please. This quarter you've taken your coverage ratio down one 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 mid-40s levels, or do you envisage that going higher in the coming quarters? Thank you.
We have not set any kind of target to our coverage ratio so that the way we impair our credits and make loan provisions is customer by customer, portfolio by portfolio basis when we evaluate the situation every quarter, 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. 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 own principles how to evaluate the collaterals and what are the credit principles and so forth. I don't think that this is such a good measure or ratio to be compared between banks. 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. 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.