Good day and welcome to the Nordea Bank first quarter report 2014 conference call. 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.
Thanks very much, welcome all to this presentation of the first quarter 2014 result. With us today we have Group CEO and President, Christian Clausen, Group CFO, Torsten Hagen Jørgensen, and Group Chief Risk Officer, Mr. Ari Kaperi. We will start with a brief presentation, then we will open up for Q&A. Please, Christian.
Yes. Hello everyone, welcome to this meeting. I will not go through the presentation. I'm sure you're already pretty updated on what we have been saying during the day. Just want to say that for this quarter, we have delivered according to our plans. Maybe more importantly, we have also delivered in building the future relationship model, which we believe is very important, also lays the foundation for delivering going forward. It has been a quarter with low lending growth as expected, more or less stable, we have been successful in especially our corporate advisory business and our savings area, also in retail in attracting new customers. Especially our net fee and commission income is actually up quite a lot year-on-year. All in all, we deliver a result which has a small growth in the top line. Costs were under control.
Loan loss is down, operating profit is up sort of 10%, with a good result on return on equity. We built quarter one ratio, which now including fully CRD IV is 14.6%. We're also saying that we're delivering according to our plan. Our three commitments, which we launched one year ago: To build capital, increase payout ratio to reach 13% ROE on the required quarter one ratio and keep our volatility low through our well-diversified business model. To that, we launched three buckets of initiatives, they're all delivering. The capital initiatives are clearly delivering with a core capital ratio higher than we guided for one year ago, very much in line with what we're doing on our risk exposure also very much in line with what we have planned for. Income initiatives following also our plan. Built some repricing. New core customers continue to happen.
We have now for many years in a row delivered between 3% and 4% growth in net number of core relationship customers. The accelerated income very much dominated by the strong activity in the big corporate market, capital markets. We are leading ECM, DCM, and all these things. The whole wholesale platform is delivering very well. Also, we are delivering well on savings and asset management. The highest inflow for 10 years we had this quarter. Broad debate throughout Europe, international institutional business, but also the very strong foundation in the Nordic retail markets where we are very strong in gaining market shares. The cost initiatives also delivering. We are delivering another EUR 45 million of our total cost efficiency. We are also finalizing the plans here in Q2.
We are actually executing them, part of them already, but finalizing them, and we will after Q2 come back a bit more precise exactly how, but we will deliver 5% lower cost in 2015 than we had in 2013. All in all, delivering on the plan, delivering on the quarter, and building the business model for the future. This was my opening remarks. Now the floor is open for questions.
Operator, please open up for questions now.
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 keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will pause for a moment to allow everyone to signal. We will now take our first question from Håkan Fure from DNB. Please go ahead.
Yeah. Hi, good afternoon. Two quick questions from me. Firstly, I noted that your coverage ratio on shipping improves quite substantially in the quarter. How surprised would you be to see continued reversals on the shipping side in Q2 and Q3? That's the first question. Secondly, in terms of your remaining REA efficiency, could you provide a figure for how much of that's related to FSA approvals? Thanks.
If I start from the shipping, what we have done now in the previous quarters is that we have been active on the secondary loan market. We have sold our impaired loans or distressed credits. Those sales, they have in a way been successful in that way that no single one of these transactions has triggered the need of increasing loan loss provisions we have made earlier for those sold credits. We will still continue to sell in Q2 and maybe some sales in Q3 of the same type of credits. Of course, if we can continue this practice and experience we have been able to conduct in the previous quarters, we may see some recoveries. I'm not able to indicate any kind of precise figures, but
It's fair to say that we can expect more or less this type of development to continue. After Q2 and latest Q3, that type of sales are done from our portfolio.
On our efficiency, we have stated that we have accumulated an amount of EUR 18 billion in efficiency and remaining around EUR 17 billion. Slightly more than half of this is dependent on FSA approvals. This part being dependent on FSA approvals are for a broad range of different applications. We are not any more dependent on any major single application, but around slightly more than half.
Excellent. That's very clear.
We will now take our next question from Nick Davey from UBS. Please go ahead.
Yes, good afternoon, everyone. A couple of questions, please, from my side. Firstly, if I could just ask you to focus a little bit on the Finnish business, which has continued to show some pretty strong momentum despite some of your cautious rhetoric around the macro situation there. Clearly, it's been very dynamic in in-growth in the last year. I think each quarter that we've asked you about it, you said it's relatively isolated parts of the book where you've had some success at repricing, but now we're up 30% year-on-year in net interest income terms. I'm just trying to get a sense really of what continues to surprise you there and for how long this can be a sustainable trend.
Secondly, I don't know if it was just my line, but I missed some of those Risk-Weighted Asset efficiency numbers that were just mentioned there, please, as far as the range left outstanding. The pro forma Core Tier 1 range that you used to give, if you could just update us on those two numbers, please. Thank you.
I guess from the Finnish situation, the macro outlook and development in Finland has been subdued, so that it was minus GDP growth in 2012 as well as in 2013. The macro picture is quite bleak. There is no expectations of rapid upturn. I think the forecasts are indicating between 0 and 0.5% GDP growth this year and a little bit higher in the next year. The market environment is still quite difficult in Finland. What we have been able to do is, as you said, repricing our portfolios, both on the corporate side as well as in the household side, especially on the mortgage book. There are still some opportunities. It is clear that there are opportunities or the average mortgage margin will still go up in the coming quarters with a slower pace, however.
Perhaps a bit positive surprise has been also to us that we have been able to also increase the corporate average margins more or less quarter by quarter. We think that the potential there start to be more and more limited, but at least there are no indications that the margins would start to come down in Finland, perhaps especially explained by this bleak macro environment, so that banks are seeing this risk a little bit increasing perhaps in Finland. When it comes to our asset quality in Finland, I can repeat what I have said in previous quarters that in the short term, medium term, we do not have any kind of indications or signals for deteriorating credit quality.
Of course, we all are mindful about these potential risks the Finnish economy is having ahead of it, especially coming from the Russian situation, so that still we are quite cautious on the market environment.
Just to repeat on the RWA efficiency program, we have earlier indicated that EUR 35 billion of RWA is the efficiency target. We have delivered 18, so 17 is remaining, and that also means that compared to the guidance we have given earlier, that we maintain the view that as the regulatory negative impact are getting smaller and smaller, the net contribution from the RWA efficiency program should mean that we can further improve 1 to 1.5 percentage point on Core Tier 1 within the next seven quarters until before the end of 2015.
Very clear. Thank you.
We will now take our next question from Johan Ekblom from Bank of America. Please go ahead.
Thank you very much. Two areas that I'd like to explore a bit further. Number 1 is on the fee income side, which you and I guess the whole peer group has had a very strong start to the year, where the normal Q1 seasonality has all but disappeared. Just thinking ahead, clearly there's been a positive underlying momentum in most business units, not only this quarter but for all of last year. How should we think about this going forward? To what extent was Q1 the result of some lumpy one-off fees? How should we think about the run rate in the quarters to come? Secondly, if we can just come to Russia. Clearly, you have a meaningful exposure in Russia.
I think you said at the press conference this morning that the business there is a mixture of Nordic corporates, of large domestic corporates that are either state-controlled or strategically important corporates. Aren't these exactly the corporates we should be worried about exposure to if they end up on sanctions lists? Is there any way you can isolate yourself from that potential impact?
Okay. I would like to try put on the momentum on the net commission income line. I think we had a strong Q1. However, as we also elaborated about in the call earlier today or in the meeting earlier today, is that if we look on the drivers behind this, within the savings and the investment business, we have very strong development, a record high level of inflow. There's no single source of this. This is, again, from all the different segments. It's actually with a more healthy composition, retail private banking versus institutional than earlier. We also see a quite interesting change in composition towards the high fee type of products. We see a continued investment in the asset management private banking franchise in the Nordic as well in our international business, the global fund distribution arm, et cetera.
I don't think there's any reason to believe that this should not be able to continue with a quite high and stable delivery. The same more or less goes for our corporate institutional franchise, where we are continuing to build stronger capabilities, meaning that the participation in big syndicated deals, IPO, et cetera, should continue to materialize. Then, of course, you have the more volatile type of, more directly transaction-related fees that everything else equal is expected to continue with a rather stable growth area. Yes, Q1 was strong, but we see a continued strong positive development for these types of income.
I can continue on this. Russia. You're right. That's why you describe our Russian portfolio so that the two main customer segments are the Nordic corporate customers doing business in Russia. That's a minority, and then the majority is the largest Russian corporate customers. Of course, who knows where the sanctions are going to be extended. I would say that, of course, it would be quite extreme to think of that type of scenario, that all these infrastructural Russian companies, government, indirectly or directly by the Russian government would be sanctioned because, of course, the point is that they are exporting companies, and there are, of course, then counter-parties in Europe and all over the world. That, of course, definitely that's one scenario. To me, it looks quite remote scenario that those customers would be sanctioned.
Again, if they would, I think that we would see that type of scenario ahead of us, which we faced and experienced in the financial crisis in 2008, 2009, when the international banks exited from the Russian companies and then those companies, they were refinanced by the Russian government. At least immediately, I would say that as long as the Russian government would have funds available, that would not cause any, this kind of crisis situation for these large Russian corporate customers. Of course, that would be an extreme scenario, and that would not last long. It would be solved in a way or another. Whether we could isolate ourselves from that type of scenarios, it's very difficult because we are running banking business in Russia, and we have these corporate customers, and we don't have any plans now to immediately exit from that market.
That would be, of course, alternative way to think, we are not going for that route.
If I may ask a follow-up on the question on Russia. Have you changed the way you conduct business in Russia? Are you still happy to fund as much of that business from the group center? When you take a five-year view, has your outlook for Russia changed sufficiently that you think that you have to run that business differently today?
We are, of course, still funding it as the majority of business in Russia are conducted in US dollar or partly in EUR and also to a limited extent in RUB. We have secured that the Russian bank is well-funded and well-capitalized to run its business. However, it's also clear that we are very careful in managing extending new credit, and we are very clearly also trying to mitigate, withdraw up on credit facilities, et cetera. Of course, we try to adjust to the situation, but remembering that our Russian franchise, even taking into account the risk level, et cetera, in Russia. Even on a risk-adjustment basis, we have quite healthy profit on our Russian business. Until further, we have seen no reason to fundamentally change the strategy for our Russian business.
Of course, we have a number of short-term mitigating actions in place to control the situation.
Perfect. Thank you very much.
I'll take our next question from Omar Keenan from Deutsche Bank. Please go ahead.
Good afternoon. Thanks very much for taking the questions. I just had a follow-up question on fee income. It may have been answered earlier, but I missed it. You talked at the fourth quarter that you'd be able to maintain the 2013 fee income growth into 2014. Do you see a scenario where the full year can exceed the 2013 growth rate in fees, or should we not be extrapolating this quarter? My second question was just on costs. Are you able to give any indication what kind of restructuring charges and timing as to when you'll take those, and potentially what the distribution of cost-cutting measures between the different divisions is going to be? Thank you.
I think we have guided, and we'll like to repeat that we do see the net commission income as the strongest driver of income, is the strongest income driver in 2014 compared to 2013 on all the different drivers we are talking about, volume repricing, et cetera. We have not, and I don't think we will guide more specifically on any adjusted growth rate. As I said before, we do see Q1 as a strong performance. However, we also see a number of indicators signaling that we might continue to see very good development on this line item. On the cost program, you're right that we will in Q2 not only be more granular on the content of the program, but also including a first estimate on the needed restructuring provision.
Okay, thanks very much. Could I just possibly ask a follow-up question? There were some comments earlier in the day about additional releases in shipping provisions. Are you able to give us any order of magnitude, just put it in the context of the existing stock of provisions? Thanks.
Sorry, I'm not willing to indicate any kind of exact amount or magnitude. That what you have seen now in Q1, Q2 is what we have today, and as I explained a little bit earlier, is that we are still active or have been active in Q2 in selling into secondary market these credits, and that will trigger some recoveries. So far, we have not seen any new problem customers coming in the portfolio. That because the market seems to stabilize, especially in those shipping segments, we are active. Sorry, I can't indicate any kind of specific numbers, but good proxy is what you have seen.
Okay, understood. Thank you very much.
We will now take our next question from Riccardo Rovere from Mediobanca. Please go ahead.
Good afternoon to everybody. Just a couple of questions. First of all, if you can elaborate a little bit more on the residual EUR 17 billion, if I understood correctly, REA mitigation efforts, because it seems to me quite a pretty significant number. Do you expect, I don't know, standardized exposure to migrate to IRB or whatever? If you can elaborate a little bit more. Secondly, on revenues in general, but more specifically fee income. What we have seen in this quarter, how much of this was completely macro-driven and how much was, let's say, managerial effort? Do you see in the coming quarters, let's say macro as the main driver, maybe rates going up, markets to be benign, maybe as the main driver of further revenue growth or let's say stabilizing at these levels? Thank you.
I think I heard you correctly on the first question is more details on the REA program and what did they conclude. As we said before, slightly more than half is related to a long list of applications. It's both the rollout type of models for advance or foundation, or it's on specific rating models. That's a long list of these type of elements. Then there is a big part of a number of housecleaning exercises, reclassification, data quality, collateral-related, provisions-related type of initiatives that constitutes the other half. Then I'm sorry, I didn't fully get your second question, actually.
I was just wondering how much of the revenue growth that we have seen in this quarter is macro-driven, and how much was managerial effort. If you think that going forward, do you think macro is going to be the main driver of further revenue growth from the level that we have seen in Q1, especially, I don't know, rate possibly to go up one day, markets to be benign. Is there any particular area, specific area, where you think management on revenues can have a significant impact?
Yes, I think we may have answered the question, but to be a bit more precise, on the fee commission income, it's an integral part of our strategy to build our wholesale platform and to grow on the savings side. The savings side has now grown three or four years in a row by double-digit CAGR. Whether it continues or not, of course, relates a bit to the investment climate and so on. What we know for more or less certain is that the savings among our household customers is going up, and that's not only in our area, that's throughout Europe. I think on the savings area, we will see savings inflows, and then what happens on the investment performance is of course depending on the markets. Growth is certainly something we expect here.
On the wholesale side, we have built this platform. We are part of more or less all deals happening. Of course, it's partly macro-related how many deals is happening. We still see a huge activity in the corporate side where they do M&A, they purchase or merge with companies, close gaps on product side or geographical side. They're also strengthening their balance sheet. They do bond issuance, they do equity issuance, and so on. We have quite a lot of activity, and it's of course partly macro, but not really because the cycle is as you know. In reality, we do expect this growth to continue, maybe not on the same speed. That remains to be seen. This is an integral part of our strategy, so it's not macro, I would call it.
When you start to talk about interest rates changes, then of course, the biggest driver for top line we have at all in the group is, of course, if interest rates start to move up when deposit margins start to normalize. We have indicated sensitivity towards that, and that's significant. Obviously, it is a situation where any pickup in macro, especially interest rates, will be very meaningful to us on the top line. All in all, we are not expecting in the short run any major pickup in interest rates. We're not expecting any major pickup in growth. We could expect the present environment to continue, at least for some quarters, and that's what we're doing. Low lending growth, some corporate activity, and quite a lot of savings activity. That's what we expect to happen.
Of course, at the end, a lot of things will become macro-oriented because behavior of customers change when macro change.
If I might just add, we are talking about specifically in Q1 performance, remembering that the factors we control the least, the FX and rates, that has actually been more of a headwind in Q1. It has been despite FX development and despite continued very low rates that we have delivered the result we have delivered. I think macro headwind in Q1 is probably more the effect.
Okay, thank you. If I may abuse five seconds of your time. When you say we're talking about interest rate sensitivity, I remember previous guidance of roughly EUR 500 million for 100 basis point parallel shift of the yield curve. Is that still roughly valid?
Yes.
Okay, thanks.
We will now take our next
Riccardo, what you can add to that is that we are getting more sensitive when interest rates goes down because we're getting basically close to zero. The upside is still the same.
Yeah. Of course. I'm glad for all this. Thanks.
We will now take our next question from Christoffer Råquist from Barclays. Please go ahead.
Yes, hello. A couple of questions from my side. First of all, when I look at your volume growth, it looks like it is lower than what some of your peers have reported last Friday and this week, as well as the public statistics for the nations as in aggregate. I appreciate that it is difficult for you to compare yourself with your peers. Would this reflect a deliberate prioritization within Nordea to prioritize declining or stable RWAs over volume growth, or is it simply explained by lower demand from your customers? My second question is just to elaborate a little bit further on your confidence around the fee income from corporates. Is that confidence based on visibility of a strong pipeline and a strong April so far?
I am asking that as I put that in contrast to if the strong first quarter was due to sort of pent-up demand, which you might have had visibility of a long time discussing with clients, and now it finally materialized as in contrast to a continuous inflow. If you just could perhaps describe a little bit on your visibility of the demand for various corporate transactions. Thank you.
Yeah. I think that as we have stated many times before, we are not so focused on market shares, and I think there's partly a mixed effect here in the countries we are in. We are in the large corporate area. We are still very keen on selecting the right exposures and the right customers, and there you still will see some effect of the deselection. In the retail corporate space and in the household area, I still think we see volume development somewhat more in line with the market. No, we don't aim to be lower, but I think mainly within the CIB business, we still have this effect in there.
Plus the fact that many of the customers we are targeting, they are currently very active in the off-balance sheet type of financing. On the corporate fee business in Q1, I don't think we can say we had any extraordinary type of either transactions or issues impacting Q1. I think currently the pipeline looks strong, but we don't have visibility, of course, very far ahead on this type of pipeline. It very often will change in character, but we can only refer to the point we have made that we in general think we have very strong capabilities within the corporate advisory area.
Thank you. If I can just follow up on the deselection that you mentioned. What is it that drives that deselection? Is that because some of your peers price lower and you choose not to compete because the macro is unfavorable in those segments, or any other decision rationale?
Yeah, the decision rationale is that we also, for large corporate institutional clients, increasingly apply a relationship attitude and that we are increasingly deselecting a type of standalone customers where we can only use our balance sheet, do lending, and if there's not an adequate amount of ancillary income and total fee to be generated from the customers, they are deselected. That exercise has been going on for a while, and I think we quite successfully have executed on big part of that being through the totality of our portfolio of corporate customers. That is still the case in certain markets and segments more than others, but that's the work still ongoing.
Yeah, thank you very much. That's all from me.
We will now take our next question from Sophie Petersen from JP Morgan. Please go ahead.
Yeah, hi, here is Sophie Petersen from JP Morgan. I had three quite short questions. One was about Denmark. Losses are still relatively high at 42 basis points, and also I noticed that your impaired loans were up a little bit quarter-on-quarter. How should we think about Denmark going forward, and when should we start to see a little bit more normalized losses in Denmark? My second question is around your capital. You will get 50 basis points of capital improvement in the second quarter from Nets and Poland. That takes your kind of pro forma Basel III to 15.1%. Then you mentioned that you still have around EUR 17 billion of spending RWA reductions, which means that your pro forma Basel III Core Equity Tier 1 is almost 17% versus 14.5% target. What are you going to do with all this excess capital?
Lastly, there is a Bloomberg article this morning or today saying that you're potentially considering selling some of your units. I was just wondering which units would you potentially sell? Thank you.
Was I? Was it me? Who was quoted on Bloomberg? I don't think we have said that at all. Anyway, we're not expecting to sell anything right now. As we said when we exited Poland that was one business unit which we had difficulties in producing a plan that would deliver the expected or the required return. We said this was the one. Now having done that, we said that we had plans for other units which would deliver on our return targets over time. I don't think we have said anything around wanting to sell. Denmark, I can elaborate a bit on our thoughts. Yes, you're right, still the loan losses are at elevated level, and we have said in previous quarters that they still will be in the coming quarters.
Of course, the question is that when that will be changed. I think that it's fair to say that this type of stable reduction will continue for a while, I'm not expecting this kind of very quick drop in the level of losses, but that this trend will continue. The reason for these elevated losses is still that there are these kind of buckets of portfolios where there are customers in problems. It's in agriculture, there are some asset prices coming down in remote areas, and still there are some domestic SME clients who have suffered from this environment. Again, all these macro indicators are relatively strong in Denmark. There has not been any kind of negative surprises, that is the reason that we don't expect any kind of change in this reduction of loan losses.
Still we should be expecting continued decrease in the coming quarters. If I should make a short comment to the capital issue you brought up, you are right that we have guided that Poland will improve or lower our REA with something equivalent to 25 basis points. Nets remembering that we now have a dividend accrual of 56% of profit and gains, and as Nets will come in as a gain, the net contribution to Q1 and Q2 from Nets, if it closes, will be more in the level of 11, 12 basis points. Then, as we have also warned a little, of course, quarter from quarter, be careful about the REA efficiency program will not come in a smooth way. It will be from quarter to quarter. You can have deviations.
As we have also indicated, we have some unfortunate small delays in some of the FSA-dependent approvals. You're right, everything else equal, we do expect to build quite a lot of excess capital in the next couple of years. I think we have also been relatively clear that our ambition is to pay out an increasing share of our own profit as we are building this excess capital.
Okay. Great. Thank you very much.
Can I just add on to this Bloomberg, which I now have had the chance to read? There has been quite a few articles to date. I haven't read them all, but I can just say that everything in the article that is saying that we have 20 business units, we have plans for them all, they are all delivering the returns we require in the plans. We are monitoring closely, if they do not deliver, we will take action. That is correct. We will take action if they do not deliver. We will cut cost or work on capital and restructure or even sell or do whatever it takes. As I said, there is no such unit today which do not have a plan that do not deliver on our required target. Most of the content is right, but not all.
Okay, excellent. Thank you very much.
We will now take our next question from Matthew Clark from Nomura. Please go ahead. Your line is open.
Good afternoon. A few questions, please. First one, could you let us know the group loan growth in local currency terms? It may be in one of the presentations. I'm afraid I haven't found it. Second question is on the roll forward of your Basel III Common Equity Tier 1 ratio. There was a 35 basis point headwind from other effects. Can you just elaborate on what those were? Clearly they ate up the benefit of risk-weighted asset efficiencies this quarter. Final question, there seemed to be quite a nice increase in fees within the Bank in Denmark division in the first quarter compared to the fourth quarter. Could you just tell us what was behind that pretty chunky increase? Thank you.
Yes. The loan growth in Q1, is that?
Yes, it's a very stable trend. It's largely unchanged, both in corporate and household. If you look in local currencies, it's very unchanged in local currencies. You can say we have If you look at the average corporate lending volumes, they were down 1%, but the outstanding loan numbers are more or less the same level.
In local currencies.
In local currencies.
That's how it is.
Just following on from that, do you stick to your 2% full-year loan growth expectation?
Yeah, you can say that the FX headwind has, of course, that is difficult to plan with. Around this level, as we are now calling a very low single-digit growth is what we expect, and it will be hopefully in the area of 2%.
Thanks.
On your capital question, the 35 basis points headwind you are referring to is partly related to the annual PD valuation, where we have a need for an equity reservation there. Around 20 basis points of the 35 is relating to this temporary rule of having to deduct unrealized gains from our available-for-sale portfolio. These 20 basis points will basically be reversed Q1 2015.
Thanks.
Finally, your question to the fee development in Denmark Q1 compared to Q4 is actually that the big December auction in Denmark, there's a lot of fees related to that refinancing going on in December, and they are booked in January. You also have the same effect Q4 over Q1 last year or in 2013. This is a recurring type of event to contain.
Okay, great. Thank you.
We'll now take our next question from Jacob Kruse from Autonomous. Please go ahead.
Hi. Thank you. Just two questions. Firstly, there's this expectation that the FSA will publish a paper on Pillar 2 requirements and buffers. I just wanted to ask, is it your sense that this is the final building block for your capital requirements, or do you feel that this is another halfway point and they will add additional rules and initiatives post that point? Secondly, just on margins, if you could say something about what kind of dynamics you're seeing on Danish and Norwegian mortgage margins. Thank you.
Yes. We have reason to believe, at least based on the feedback that we received from Swedish regulators, that they will attempt to come with a finish on regulation. We do expect that we will be able to settle on our capital requirements when we get the paper, most likely in the mid to end of May. On mortgage margins in Denmark and Norway, remembering in both of these markets we are not the market leader on mortgages. I think there are reasons to believe that both in Norway and in Denmark, the market leaders have all the incentives to find ways to reprice. We will, in most instances, be more than happy to follow quickly after if repricing is materializing in these markets.
Okay. Thank you.
We will now take our next-
Sorry, what I may add there is in Norway now we have reduced mortgage margins with effect from May, that we will also improve our deposit margin slightly. The net effect will be marginally negative, but we're talking very few million EUR.
Okay. Thanks.
We will now take our next question from Jan Wolter from Credit Suisse. Please go ahead.
Yes. Jan Wolter, Credit Suisse. Just a couple of questions from the conference earlier today in Stockholm. First one, in what business do you see the largest incremental revenue growth in EUR terms next two years? Private banking, wholesale banking, wealth management, or where do you see it? That's my first question. The second one is just could confirm the quarter one impact in the second quarter from the divestment of payment company Nets and the Polish deconsolidation. Thank you.
Yeah, I think that in nominal terms is, of course, an interesting way of looking at it. As we discussed this morning, my view is that with the highest certainty, I think we should expect if we're talking about 2014 to see it from Wholesale Banking, where we have quite big numbers already, and we have a strong momentum. We as such don't guide on business area level. What I said on quarter one impact from Nets and Poland in Q2 was that you should expect a quarter one impact of the EUR 25 plus around EUR 11, EUR 12 from Nets as the gain of Nets of the EUR 25, 56% of it is accrued for dividend.
Thank you. In terms of your expectation or your ambition at least to grow the Wholesale Banking operation, can we say that the risk-weighted asset growth and capital consumption here, which is probably a bit higher than in the Retail operation, is that captured in the more optimistic view that the company have to move to closer to a 70% payout ratio or about, please?
If I just may remind you that the board's ambition is to raise the payout ratio both in 2014 versus 2013, then 2015 versus 2014. Then we will come back with more details on that once we have the regulatory clarity.
Okay. Thank you.
We will now take our next question from Håkan Fure from DNB. Please go ahead.
Yeah. Hi. Quick follow-up question on that in terms of the board's ambition to raise payout ratios in 2014 relative to 2013. Does that include the Nets gains?
We are saying that we will raise the payout ratio on the net profit. Obviously Nets will be part of the net profit.
Okay. Makes sense.
Nets, of course, will not change the payout ratio.
No.
It will increase the amount.
Yes.
Yeah. Thank you.
We will now take our next question from Omar Keenan from Deutsche Bank. Please go ahead.
Hello. I just had two follow-up questions on net interest income. The first one was just on funding. You talked in the past about the second half being the inflection point in funding costs. I was just wondering if you can give us some color around that. Kind of related to that question, do you see any kind of headwinds in the Group Treasury division that you saw in Q1 carrying on in the next couple of quarters? I just had a second question on mortgage repricing in Denmark. You've had one of your competitors already have a round of repricing on the 1st of January. I was just hoping to get some of your views as to structurally what do you think type of margins that the market is moving towards?
Is the kind of magnitude we're talking about 10 basis points further margin increases on adjustable rate mortgages, or do you see an outcome of Swedish style mortgage margins over a number of years? Thanks.
Yeah. You are right that we have indicated that funding costs during first half of 2014 would start benefiting NII. I think we can confirm that is the case as we have for the first time in a long period, we have more or less a neutral effect in the Q1. I think we can confirm the view that from Q2 it will start taking a positive contribution. I don't think we as such had headwind in Treasury in Q1. I would rather say on NII we had
Some very good spread-related deals that went very well in Q4, which was not repeated in Q1. I think actually we had a quite good level in NII in Treasury in Q1. Finally, on mortgage repricing, we have seen an improvement on mortgage margins in Q1 that was small. As we also have discussed earlier, we are not the market leader, so we will of course carefully watch what the others are doing on this. I don't think we can say much more than if opportunities arise or for more significant repricing, we will of course be inclined to look into that. As I think we have also indicated, we don't see repricing neither on the corporate side or on the household side in general being the same strong driver of income driver in 2014 and 2015 as it has been in 2012 and 2013.
May I just remind you also, Omar, that the Group 4%, you don't have the funding cost there. That's fully allocated to the business area. The trend in the funding you will basically see there.
Yeah. Okay. Thank you very much.
We will now take our next question from Christoffer Råquist from Barclays. Please go ahead.
Hi. Just one follow-up question from me, please, on the shipping portfolio. You mentioned before that you're divesting credits in distressed shipping assets. I just wondered if you're also disposing of the equity holdings you have. I think TORM in Denmark is one such example. If you could provide us with a number for the current balance of equity holdings and also if you see demand for equity in shipping that you can dispose of.
Yes, of course, always when we have equity holding coming from our credit portfolios, it's a workout case then it's a temporary situation and we want to exit as soon as possible whenever it makes sense. That goes very much with these few cases we have equity holding in shipping. There are not so many so that in a way it's not any kind of significant source of potential gains or further losses, so to say. The values have written off to zero in all of these type of cases. That will not be any kind of significant driver for any P&L impact there going forward, so that then we are not talking about big amounts as such.
Okay. Understood. Thank you.
We will now take our next question from Riccardo Rovere from Mediobanca. Please go ahead.
Yes, thanks for taking my further question. Just clarification. Is the consolidation of Nordea Bank Polska part of the EUR 17 billion REA reduction that you're planning? Just want to clarify this. In general terms, what kind of wage inflation you expected in 2014 and 2015 across the group? Thanks.
On your first question, no, it's not included in the REA efficiency program consolidation of the Polish activities. Sorry, I did not catch your second question.
Is an idea of wage inflation across the group for 2014 and 2015.
I think it's around 2%. Blended in the Nordic it's around two. It's somewhat higher in Norway and lower in Denmark, you can say.
Around two. Okay.
Yes.
As a reminder to ask a question, please press star one on your telephone keypad at this time. We will now take our next question from Andreas Håkansson from Exane. Please go ahead.
Yes. Hi. Just a quick follow-up from the Stockholm conference. Again, back to the economic capital that we discussed. I'm just doing the numbers and the 24.9 that you put on page 47 in the fact book, that's 15.6% of your risk-weighted assets. If I take the 14.5, which is your target Q1 ratio, that gives you a capital of EUR 23 billion. Could you tell us the economic capital, what form of capital do you envisage that that's going to be? Second, Rodney, did you check if the EUR 24.9 billion includes any sort of buffer, countercyclical or your own type of buffer? Thanks.
I don't think you can completely do it that way around. I think what we try to say is that part of the increase is of course due to REA increasing. What I forgot to say this morning was that we have actually somewhat adjusted what is including in our EC calculation. As we from 1st of January have included intangibles of around EUR 800 million and short book adoption of EUR 200 million. Comes the effect, as I said, of the increased REA, and finally, we of course have the scaling issue, and that's the remaining part. We have not guided so specifically, so we say exactly what the scaling factor is, but that is of course the residual.
We are very close now to having allocated basically all you can say the required capital is very close to having everything allocated down to business areas.
The economic capital, yeah.
Yeah, the economic capital is we have basically allocated all capital now, close to all capital is allocated.
Okay. Yeah, I think we can follow up on that later on.
Yes.
There are no further questions at this time.
Okay. Thanks very much for listening in to this telephone conference. Please don't hesitate to give us a line or a call if you have further question. We have a plane to catch in an hour's time, but before or after that. We hope to see some of you in London tomorrow at 12:30 P.M. for the lunch presentation. Many thanks.
Thank you very much. Bye-bye.
Thank you. That concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.