And welcome to the Third Quarter Report 2013 International Telephone Conference Call. Today's conference is being recorded. At this time, I would like
In the room today, we have our President and Group CEO, Mr. Christian Clausen Chief Risk Officer, Ari Kapolei and Chief Financial Officer, Torsten Torsten Hagen Jorgensen. So we will start with a brief presentation, which will then be followed by a Q and A. So please Mr. Clausen.
Thank you very much and welcome to this call. I will do it briefly because by now you have all seen the numbers. So I will tell a little about our plan going forward. But the key message today is in reality that we are delivering to our plan. Income is up, costs are down, our VAs are down and we build the core Tier 1 to 14.4%.
So all in all, we are delivering according to the plan. So I will not take you through the numbers, but rather go through the slides where we present how we deliver on the plan and give a bit more flavor to this. And this starts on page 20, where we just reiterate our target and then the initiatives, the capital initiatives, income initiatives, cost and risk initiatives. First of all, we reiterate our capital target of about 13. Nothing much has changed except the fact that some countries have warned that they would put in a countercyclical buffer from the beginning.
So our blending minimum margin with the systemic risk buffer and capital conservation buffer still adds up to something like 11.3 in that area. Countercyclical is uncertain. Some countries have said they will and some will not. So an average around 1, 1.5 is plausible here. And then a pillar 2 add on, which we don't know the full effect of, we have now we know some of it, but not all.
But still we believe that 13%, maybe 13.5% is not all wrong. And that will probably be our planning assumptions. So we have been 14.4% capital as you see 2 20 basis points in a year. When we then adjust this for the Norwegian risk ratio and the CAD 4 effects when they come then we have a fully loaded Basel III today at 13.4%. We still have our initiatives on plan and we are also here delivering according to our plan and all the things we are doing our many efficiency initiatives, our various kinds of risk initiatives.
And so we still have a pro form a guidance now around 15% to 16% including these initiatives excluding profit and everything. So that's the capital part of it. And we also repeat the slide on page 23 now updated of course that we built significant capital. And as you can see we have during recent years built quite a lot of capital and also paid out dividends. And now the room for dividend is of course increasing as we approach the capital level we need.
So dividends is very likely to go up this year for this year a decision we will take in the beginning of the New Year. Our income initiatives are actually delivering now. It's a bit difficult to see in Q3. Q3 is seasonally weak, but we are repricing to a good extent. And it's not to say more over, still have more to do, but actually it's delivering quite well.
The number of new customers coming in is important for the future of course not least private banking, but also the gold customers consist a base underlying base growth in income which we expect to see some few percent points. And then the ancillary income is really delivered and we expect that to continue. We have invested in this. The whole savings area and asset management area is delivering very well. We see growth of some 18% year on year.
We still believe also going forward we'll probably see double digit there. We also see our Capital Markets Investment Banking initiatives delivering. So even though volume is down slightly down on the large corporates, then we actually do quite a lot of business and activity has picked up. So we expect going forward we will see some accelerating income growth at all the lines we have seen and that will carry some top line growth also going forward not huge. We are saying that the worst is behind us in terms of recessions.
So now we see positive growth in our countries, by the way, also in Europe next year, but low growth. So efficiency initiatives and capital discipline will be the core themes going forward. The cost reduction and the unchanged cost is in reality cost reduction program, but it we manage in the way that we keep costs unchanged and then working on all processes, products and distribution processes in the way that we drive out efficiency all the time. So we take out close to 4% in cost per year add in the cost inflation and our investments and mandatory stuff and then we come to the more or less flat cost actually slightly down. And that's the way we've done it for 3 years and we expect to continue here.
So the cost initiatives are delivering. We also highlight the regulation as a key cost driver. We have a lot of talk around Part III and CD4 that's of course super important. But there are large a very large number of other regulations. But they all have the same thing in common.
They all want to do something knowing our customer, our transactions or our accounts. And then we do that. It's actually 48 regulations. And it's similar things, which they want to know more about the customer, the risk profile, the transactions whatever. But of course, it's a huge change than actually changing the complete banking sector in a very short period of time, which is of course a drain on costs and investments.
Loan losses have come down and we are saying that shipping is very low and we see clear improvement in shipping. We also see good underlying development in Denmark, but still some credit losses in these quarters. But the underlying development is positive for consumer confidence and house prices. Then on the RE side, we restate that we have our plans intact and we are delivering on the plans. So we think we'll deliver on the ROE target.
And we can also see it from what happened in the recent year. We actually drove our initiatives business ROE quite much higher. But then we have the low interest rates and the extra capital and stuff which actually got taken it down again. But we will still drive these ROE numbers up. So we still expect to reach our target by 2015.
So that was a very short version delivering on our plans. Q3 seasonally weak, but stronger much stronger than the year before 15% of our operating profit and a large number of initiatives delivering on income cost per capita. So that was my introduction.
Thank you, Christian. And operator, we'll now open up the floor for questions.
Thank you. We'll take the first question from Matti Iokis from Handelsbanken. Please go ahead.
Yes. Hi. Good afternoon. Two questions, if I may. First one on the capital.
You obviously present quite a number of core Tier 1 ratios. What is the actual figure that you are looking at when you and what we should look at when we compare to the above 13% target at least in the Q4? If you could shed some light on that, that would be great. The other question is regarding the shipping side. We obviously saw that the individual provisions were down quite a lot, but still you seem to be booking quite a lot of collective provisions.
And when I look at the Baltic Dry, for example, that has increased quite dramatically. So I was wondering that shouldn't the dynamics be that you would be writing back some of these collective provisions because at least looking at the rates, the shipping market seems to be doing a lot better than it has for a long, long time? Thanks.
Yeah. I think if I can start on the capital and the requirements. The starting point is as I said that we think the formal capital requirement for Nordea's amount is 11.3%. And then we have a number of uncertainties. We have uncertainties on systemic risk buffer calculation.
We have on countercyclical buffer. We have MPL2 treatment. And then we have some pending approvals which is quite important of course for our capital efficiency initiatives. So for prudent reasons, you can say that we think we will maintain the capital policy of 13%. However, we will until we have more clarity on all of these issues, we will target a CoTier 1 level somewhat above 13%.
It might be around 15 to 100 basis points higher than the 13%, which we can then scale up and down depending as we get more clarity on these outstanding
issues. But where do you believe you are? And what's the real core Tier one ratio we should look at the kind of 14 target?
That's what I'm saying. It's the target we are operating with as we are waiting for more clarity is something above 13%. It's more in the area of closer to 14%.
And I can take the shipping question. You are right that we have still continued to build up these provisions. And you're also right that definitely the need of building those further is coming down as it looks like. But still our principle has been that we want to be on the conservative side because we want to see clear signals of this kind of sustainable recovery in the problematic shipping markets. And our biggest problem market is tanker market.
And yes, there is some recovery especially in the product tankers, but not in the difficult or large front as such. We also one reason for these collective provisions is that we have a few bigger workout cases, day out cases. We have made individual provisions for those cases. But we have been we want to be sure that whatever the outcome of these cases are in the future, then we are fully covered. But the indication is that we don't continue to build up these collective provisions for a very long time going forward.
That's great. Thanks a lot.
The next question comes from Per Gromberg from Danske. Please go ahead.
Yes, good afternoon. It's Per Gromberg from Danske. Three questions a bit aligned with Matti's question. The first one being on the IRB advanced approval on Corbus, which still is pending. Can you give us any indication where the bottleneck is?
Is it specific if you say that is blocking it? What's your impression what is needed to get it through before year end? The second one is basically to give us an update on what's happening to the FSA order you've got on risk rates in Denmark back in March. Are there any progress on getting those models finally approved? And finally on shipping, you stated it looks better.
Does this imply that the cash burn especially the bulk segment has stopped? Or does it just imply that the cash burn has been reduced among the ship owners? Just give us a feeling of how much it has improved? Thank you.
If I could try to start on the EIB approval process, I don't think we can shed very much light on it. What I think we can say is that we are of course in frequent dialogue and no doubt that the process ongoing is a Nordic calibration process of risk weights and there are potentially many routes and many alternatives probably that are evaluated. What we are firm on is that we stick to our expectation that we will get the approval. We will get it before year end and we will get a positive outcome.
If I may add in, looking at the impression of the Nordic FSA, it looks like the Swedish banks generally have no major problem getting approved from the Swedish FSA. Finland, we don't really have a strong impression of as you are one of the few banks under Finnish regulation. In Denmark, you previously told that there were modest RBA reductions in the IRB advanced models for the Danish portfolios, whereas DNB has been complaining about the Norwegian regulator for quite a long time. Is that the same picture you are seeing? And wouldn't it be an idea just to go forward without the Norwegian part if that is what really is blocking this approval?
No. But I think you are right in the way that we have we have 3 big approvals pending 1 in Norway and 2 in Sweden. And then there have been a number of discussions in of course also. So I think these three countries are the 3 actual ones discussing these risk weights. And as I said, there are many different alternatives and routes to this and we are of course in discussion with that.
But I don't think we can we cannot be very much more transparent at this point in time.
Okay. Fair enough.
Then your second question was related to this Danish FSA approval as you call it. I think that what you mean or refer to must be this that we changed the way we treat the OIV customers. So that earlier we defined all of those customers as defaulted customers. But then according to market practice, we also changed our definitions and interpretations, so that those OIV customers who are not defaulted, they are now classified as defaulted. And then we made this application to FSA to get their approval for this.
We have not yet got the approval. But meanwhile, we have to have Pillar 2 capital to cover this change, but the approval is not there yet. Then I'm sorry can you repeat the 3rd question?
Can I just add on this one? Do we expect
to have that one as well
as well before New Year?
It's very difficult to say. We don't know when we get the approval. But as I said now we have covered that in Pillar 2 requirement. And But in the Danish
company or also on the group Pillar 2? Danish. Only in that and no impact on group Pillar 2? No. Okay.
And my final question was related to your shipping exposure. You say that things are moving better. My question is, Maur, you have seen some rate improve. Does this mean that your clients are now facing a situation where they don't burn cash any longer, but it's starting become cash flow negative? Or is this too early?
Yes. Still in the tanker market, parts of the tanker market, some customers are still burning cash. But it has the rates are not declining anymore, so that there has been bottom reach according to our understanding and observations. But not all the shipping companies are performing well in that segment. And that is one reason that we have been prudent in these collective provisions, so just to cater for potential, let's say, new problem cases.
But the likelihood is very low in my opinion that we will have major new work out cases coming.
And what about bulk?
The bulk side has recovered somewhat more, so that then there we have a little bit better situation. And then now we don't have a different pipeline, many customers who would be in problem in that segment.
Okay. Thank you. Thank you.
Next question comes from Jan Walther from Credit Suisse.
Yes. Good afternoon. Jan Wolter here, Credit Suisse. Two questions if I can. The first one is to Christian.
I think you said earlier on the call that you could see higher dividends this year. What political risk if any do you see with higher dividends or payout ratios in this climate? That's the first question.
Well, I think the political risk, I think is fairly low. If we do it in a prudent way I. E. That we build the capital we have to have and we do all the things we need to do and we gradually increase dividends to a level a sustainable level. I don't think that will meet any political any constraints politically.
So I think we are ready to increase dividends at the end of this year. We don't know how much of our share, but that's our expectation. But clearly a dividend capacity in our figures.
Okay. Thank you. And the next question regarding on the operational side. The Finnish NII is coming up nicely in the past couple of quarters. Is the repricing trend the driver there?
And if yes, is that still ongoing? Or have we seen most of it in the Finnish NII already please?
I think on repricing, we have seen very strong repricing in Finland. However, Finland is still one of the markets and it goes for both segments where we still are expecting to see further repricing. In general, of course, we must expect looking into 2014, we will still see repurchasing in general as a driver not least coming from Finland, but of course through to a somewhat lesser degree than we have seen in the last 12 months.
Thank you. And if you look at the group as a whole then since you had the opposite development in Sweden this quarter at least on the NII level, would you still see that the combined margin for the group is coming up going forward? Or has something changed in the market for you
to step back from that?
No. I do think that's a fair assumption knowing that we do still believe we can do some repricing on the lending side. And I think that the development in rates even though we don't control it of course, but I think the downside risk on the short rates are now very much lower than it was last year. So also the effect of negative deposit margins is also expected to be much smaller if not more neutral than again in the last 12 months.
Okay. Very clear. Many thanks a lot.
Next question comes from Ronald Hughes from Citi. Please go ahead.
Hi. I had a couple of questions. The first question is about your balance sheet, Specifically on the sort of GAAP accounting for derivatives that came down about €50,000,000,000 odd last year. You're on a kind of similar run rate this year. And I'm just wondering how much more kind of accounting or nominal optimization is there you can do on reducing that amount?
Are we sort of there or is there a lot further to go? Just to sort of remind the numbers, there were like 172,000,000,000 dollars endo11, dollars 119,000,000,000 N12 and that was about €75,000,000,000 And a sort of general question related to that. And obviously, we've been all watching your core Tier 1 ratios rise, not just Nordea, but across the industry. But I'm just wondering how much more work do you think from here you're going to be doing on nominal balance sheet optimization as well as RWA optimization? Thank you.
Yes. I think on the balance sheet and the derivative portfolio, you're right that we have taken full advantage I think more or less of the CCP opportunities and we have done a lot of compression. And I think the levels we are at now are probably where we can go. And then from here we have more natural you can say development in the derivative portfolio. And sorry
So just to be clear, you're saying we're basically you're kind of done there in terms of optimization in terms of how you account for derivatives. Is there more to go?
Well, of course, that is how we see it now. But then of course, we have we might have a whole new framework of course depending on things like leverage ratio and regulatory changes that we cannot completely foresee now. But as of now, I think we have seen the effect of the measures we have taken like CCP and Compression has been taken more or less to more or less let's just put it that way to the for now. Yes. And sorry the second question was It
was a related question because when I look at the overall size of your balance sheet, total assets has come down since 2011 to 2012 and now by about the same amount as your derivative portfolio came down. And then there's also other moving parts as well, but that seems to have been a big driver of the reduction in your total asset size. And I know the main regulatory metric is risk weighted assets. I'm just wondering how much more kind of GAAP asset optimization you can do outside derivatives in your balance sheet?
Well, I think that we have been extremely strict on what we call on the volume discipline. So we have been extremely strict on using the capital and using the balance sheet. You can see that we have been re pricing significantly. And I think it's fair to say that we have more now of a normalized balance sheet. And from here, I think it would be fair to expect that volume as a driver, which was a kind of a negative driver for income in 2013 will be a slightly more positive driver of income in 2014.
And therefore, you can also say that the balance sheet will probably modest grow intact with that from here. Right. And
Brandon, I think their question is also on the because of course we have had 2 limitations. We have worked on the RVAs to get them down to get our capital ratios up. And then we worked on the derivative side and we worked on everything related to the framework we know. We also worked on long term funding and these things, but we have not worked on leverage ratio at all.
Right.
There are so many things we can do there, but we haven't started because we don't really know where it will come. And I'm still skeptical to David getting a leverage ratio in as a front stop, because if you start to do that then there's several things we need to do. And there are actually quite a lot of things we can do. We have already sort of looked at it, but we do not really want to take that step because obviously then we start to take out the liquid low risk part of the balance sheet which we can of course do. So there are quite a lot of maneuvering in the leverage ratio.
But as long as that has not been decided we're not really doing it. We have very cheap access to funding. So we have actually some business on the balance sheet, which makes sense on a risk weighted average asset approach, but which may not make sense on a leverage approach. So that we have to come back to, but there's more to be done. That's obvious.
But let's see where the leverage ratio takes us because if it becomes a real backstop
then it's another thing. But if
it becomes something which upfront gets limitations then we will initiate that. So far we have worked very focused on the IRAs and there are much more to be done. We still have a number of initiatives and we have guided for quite a lot of RVA efficiencies still to come.
Sure. No, I can see that. Obviously that's the primary metric. But I was just curious on the I guess on the leverage ratio also nominal assets because it looked like a big driver of the reduction balance sheet had just been the derivative line item. But it sounds like you've got a lot more up your sleeve there.
Just got a couple so maybe one final question on the business. When I look at the NII development, there's been a small pickup in Denmark, but another further pickup in Finland. I mean, assuming interest rates and the yield curve stays where it is, how much more upside do you think do you have on your Finnish NII from repricing or other measures absent major changes in interest rates?
Yes. But I think we to take this repricing issue, I still think we have pockets of areas where we can do more repricing. Finland in basically in all the segments, but there are also other more specific areas and segments in other countries. So we are still not ruling out repricing as a key driver for net interest income development. However, we agree that it will be a lower impact than you saw in 2013.
And we will see volume ticking up slightly more as a positive driver of income in 2014 and in 2013. So yes, I'm also doing Finland. I'm also doing certain other subsegments on repricing. And then volume will start hopefully supporting incoming.
Right, right. And the volume you're hoping to see is this a sort of broad macro pickup or are there specific areas you can identify you're gaining market share?
Well, first of all, as you alluded to the general expectation is that we will see a macro driven pickup in 2014 basically more or less in all the Nordic countries compared to 2013. So this is something we expect to be more or less balanced across the across household and corporate and more or less growth countries also.
Great. Thank
you. It's quite modest volume expectations we are operating with. Okay, great. Thank you.
The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.
Hi. Thank you. I have two questions please. In Sweden, first, you lowered your pricing in mortgages in May. I believe there's been a few months since then and obviously the NII is down quarter on quarter in Q3.
Could you give us your thoughts of now that you've been a few months into that pricing movements what the impacts are and what you're seeing in the market and what the NII might do over the next few quarters? And the second question is on Denmark, What the earnings progression has been? It seems like the macro is getting better, but the P and L development is a bit slower. In particular, I'm thinking about what could margins do the next few quarters and what your expectations are for reduction in provisions, which seem pretty stable overall? Thank you.
Yes. I think we actually managed to change the list price on our mortgages in Sweden with 20 basis points, I should say. At the same time, we also changed our margins from savings deposits. What we have seen is then this decline in margins. However, if you look into the development since then, we are starting to see a pickup.
So the net effect has not been 20% and margins are somewhat picking up again, but of course from a slightly lower level than we saw on average in Q2. And what we wanted to achieve with this was to gain more momentum in volumes in mortgages in Sweden and that we also clearly see improvement in trends. So we had had a decline in volumes and that has now turned around. So I think from a business case perspective, I think the changes we did on savings deposits and on mortgage margins and the effects we have seen on volumes and the pickup in again slightly in mitigating the full effect of the 20 basis point reduction is all coming out in a good way. So this we see as a success actually.
And now of course we hope to see the full line effect in the quarters to come of this particular action. On Denmark, as you say, the repricing potential is more modest and volume there is expected to pick somewhat up as we will hopefully start seeing the pickup in the macroeconomy in Denmark taking off during 2020. And then you had a question on
Yes, the provisioning how obviously you still have I think it's 46 basis points loan loss charge on my count in the quarter. Obviously, that's still high for Nordic standards. How do you see that coming down? Or how quickly do you think it can come down to what of levels?
I can comment on that. We expect these loan loss provisions coming down they are coming down in Denmark in 2014. It's very difficult to forecast that when it's what is the quarter it's starting to be visible. We believe that in the coming quarters. However, we still are seeing these elevated levels there.
We have to understand that there are still customers who are in problems especially in the SME type of segment, some agriculture or farms and some real estate cases. But all in all, all the fundamentals in the end markets you have seen from the macro figures, they are now they have been stable for a long time now. They have started to show positive development trends. And then we also see the reduction of flow to defaulted customers and our this kind of leading risk indicators have been stable for many quarters. So that impact loans, breakeven migration, past due loans.
Everything's pointing out that quality is improving, but it's impossible to give a very clear guidance that when does it happen and what will be ultimately the levels in 2014 we will end up. But we expect that the than Fusion 13, but the coming quarter is still elevated.
Thank you very much.
Next question comes from Riccardo Rovere from Mediobanca.
Good afternoon to everybody.
I have 2, 3 questions. First of all, I wanted to follow on what Ronit was asking before. What is the leverage ratio under Basel III in this quarter? If I remember correctly, it was around 4% in the previous quarter. And due to the balance sheet reduction, I would like to have an idea what is right now.
And as a kind of follow-up question on the same topic, how long did it take for Nordea to take, let's say, the 4% in the Q2 to kind of 5% working just on the denominators without touching the equity? Would it take, I don't know, 12 months, 24 months, 5 years? If you can give us an idea. And the second question I have on the statement you made before about the political risk you stated, if I understand correctly, that political risk is law. But I'm a bit confused because when you look at the budget law 2014 in Sweden, they clearly say that financial stability is a priority for the country, a mindful of real estate prices, the level of indebtedness and so on.
And they want also to establish the Financial Stability Council, they clearly were the members of this council. Actually, we the head of FSA, the head of the Riksbank, the Financial the Minister For Financial Markets and so on. We have all seen the statements from all these components of the council. And honestly, from outside from the continent, it looks hard to say that the political risk is low. It looks actually the other way around.
So I'm really if you can share a little bit more why you say that the political risk is low. Thank you.
Let me start there because I think obviously, I mean, the statement in Sweden has been the same all along. I don't there's any new statements. It has been 12% capital plus several types of buffers. So the only real uncertainty now is whether countercyclical be 1.5%, 2% or 2.5% in Sweden. That's not a major issue for us because Sweden is only 10%, 20% around over our exposure.
So of course, it will have an impact. It will have maybe 30 basis points or whatever on our capital ratio. Then there's some uncertainty in Pillar 2, but that is not straightforward how that is going to be handled. But again, if they increase the risk rates and stuff like that, again, we only have 7% of our balance sheet in Swedish mortgages. So we don't think there's any material risk on our total capital situation.
Of course, you can always with the uncertainty add in 30, 40, 50 points or whatever, but that's what we are talking about in our opinion unless new things comes out. But I met with the ministers. I met with everyone of course. I do that frequently. And after these meetings, I ask the same question.
Is there any new messages? And the answer has always been no. It is the same. It's becoming more granular. But maybe Sweden will go very high on the capital countercyclical buffer.
Even though most recently they have started to realize that the countercyclical buffer hurts the SME sector significantly more than it hurts real estate sector obviously because risk weights in SMEs are 100% or 200% and in mortgages, as you know, it's right now 15% or a macro to 20% or whatever. But just so you can say maybe that's not the tools to control housing bubble. Might be other tools that are much more efficient. So I don't think there's a major political risk, but you're right all sort of noise is coming out. And that's also the reason why in my presentation said, we still have the same guidance, but there are uncertainty on countercyclical and Pillar 2.
That's actually where we can narrow it down. All the others are not new. We don't have any new messages there as I see it.
And on your question on leverage ratio, it's also for Q3, it's still 4% or 4.3% depending on exactly how you calculate. And on the question on going higher and so on, I think that as also Christian Clausen related to earlier, I mean, if a leverage ratio is enforced at becoming restrictive ratio then of course it would have fundamental impact on the whole industry on the liquidity market etcetera, etcetera. So I think that is premature to speculate too far into this. We still expect this to be a potentially a softer type of ratio to be monitored. But of course this will the actions will be dependent on exactly how this will be implemented.
The numbers are 4.4.3 in Q3 also. Okay. Thank you.
The next question comes from Sophie Pettersen from JPMorgan.
It's Sophie Pettersen from JPMorgan. I have three quick questions. My first question is that on your Capital Markets Day, you guided for €35,000,000,000 of RWA reductions. In your presentation, you say you have done 0.7% in RWA efficiencies. Could you just outline how much more RWA reductions we should expect?
Is it around €30,000,000,000 And also how much if you get the advanced IRB approvals, how much should that help your or reduce your risk weighted assets in the Q4? Then my second question is around IAS 19. 2 of your competitors who have reported today and yesterday, they saw quite big capital improvements from IAS 19. Did that help your Basel III Equity Tier 1 in the Q3? And lastly, could you talk a little bit about the fair value and how we should view the fair value gains going forward?
I noticed that in your corporate center, you had a quite big fair value loss in the 3rd quarter. Should I view this more as a one off? Or will it be is it is that the new run rate? Thank you.
Yes. On your first question the €35,000,000,000 of RVA efficiency that is the number we still stick to. You're right that we have delivered efficiency of around 5, so there are 30 left and that's exactly why we maintain the guidance of the pro form a number of 15% to 16 percent core Tier 1 when we have done all of these efficiency initiatives. And you're also right that the advanced approval is an important part of this. There's the direct effect that of course we are waiting for, but then of course a number of other initiatives are kind of depending on the approval.
But we stick to the numbers we communicated on the Capital Market Day and the exact timing of course of some of the initiatives can vary a little. On the ISS19 effect, we have this is relative to some of our Swedish beer, this is smaller for Nordea. We also had a positive number. It was €76,000,000 in capital gain that goes directly into the Core Tier 1 capital. So relatively smaller than some of our peers.
And on the net fair value adjustments in Q3, I don't think we have any we don't have really any extraordinary items or non recurring items hitting the fair value of the decisions. We have certain issues related to DVA structured products etcetera, but I can't recall any material or extraordinary impacts in Q3.
What you can add is that in the I think you're referring to the minus €6,000,000 in the group functions. And that is €28,000,000 is the structured bonds, which is mark to market. And given that the spreads improved in this quarter, the debt so that they increased there minus 28%. It's not a one off. There's also not a real loss.
And then also within the fixed, you have some eliminations in the business down between pressure and markets, which is then eliminated there. But I mean, we have not received any extraordinary items. It's just been a very, very calm summer especially in July August.
Okay. So I mean this is not your new run rate going forward. We should expect something more similar to 1st and second quarter as a normal run rate for fair value?
No. But what we said today was on the general level of the fair value, we said that July August was very low volatility, but September picked up. So I think that's indirectly our guidance that Q3 was lower than we expect to see going forward. And this development in group corporate center these mentioned by Rodney, I wouldn't call it one off, but it could go both ways going forward. It's sort of a market.
No. I can also it can also in the next quarter be the other way around. So it's not a new run rate.
Okay, great. That was very clear. Thank you.
We'll now take the next question from Christopher Moskowitz from Barclays.
Hi, this is Chris from Barclays. Just one question on the Swedish mortgage market from my side, please. If you could just give us an update on your, so to speak, ambition level on Swedish mortgages. I understand that when you reduce prices in May, that was an ambition to increase your market share. And if I look at the numbers now, it seems like your market share has gone from 15% to 15.1% even though the number of customers has increased percentage wise much more than that.
And also with regards to margins, if the intention actually was to offset that price increase with sort of narrowing the difference between actual prices and list prices or offsetting lower prices with deposit price changes and funding lower funding costs. So if you could just comment on sort of market share and margin outlook for Swedish mortgages please?
Yes. I think actually the market shares of new sales was went up somewhat more significantly. However, it's also very important for us to state that we are basically not really tracking development in market share. So the reason why we did this was that we had simply too low momentum, remembering that mortgage products is a key hook product getting new relationship customers. And this was more an action to secure that we got new and stronger momentum in the growth of relationship customers.
So we don't track. We don't really have we don't have targets for market share and then caustic. But we had the objective to gain more relationship customers in Sweden. So our market share of new sales might go somewhat up and down. That's not something we kind of
If you look in the numbers, you'll likely see that the inflow of relationship customers in Sweden increased by 43%. So we had a very good trend in terms of inflow of new customers, which we're very pleased with. So you can say that you saw the negative impact now on the margins in this quarter, but you also saw a good increase in the volumes, which will then of course benefit us going forward.
Can you quantify that benefit in any way or specify it? Is that on the fee commission line that you expect that benefit? Or and also what would be the time frame of realizing that benefit?
Yes. But I think in general, you can say that the percentage increase in the relationship cost would translate more or less into the same percentage increase in total income in retail banking. So that is quite a strong correlation.
Over a few quarters?
Yes, yes. Not I mean, of course, it takes some time to materialize fully in the numbers, but that's a good rule of thumb I would say.
Okay. Thank you.
Next question comes from Nick Davey from UBS.
Yes. Good afternoon, everyone. Three questions please from my side. A couple of follow ups really. First of all, on the RWA mitigation.
In your slides, mitigation. I was just interested in your answer. You referenced that a few other approvals are reliant on getting the IRB advanced approval first of all. So I guess my question is how much of this $18,000,000,000 to $20,000,000,000 RWA mitigation plan can you actually control yourselves irrespective of regulatory approval elsewhere? Second question please on costs.
On constant FX basis, you're running flat year on year, so to plan. But obviously, in your commentary, you're talking about being positively surprised by the progress on initiatives. So if you could just give us maybe just expand on that again just come back with a little bit more detail where are you positively surprised? How much more positive surprise would you need to see to revisit your cost target please? And 3rd and final question on total capital.
We've talked a bit about core equity from a leverage perspective and from a core Tier 1 ratio perspective. But just interested to revisit the slide where you're talking about total capital being north of 17%. It seems to me that the regulatory discussion in Sweden is heading towards banks running with 20% total capital plus. And I just wondered your view there whether you think clearly you'll get some benefit from diversification on the core Tier 1 ratio that you'll run with relative to the pure play suites, but whether or not you maybe have to give some of that advantage back by running with more total capital? Thank you.
Yes. First on the RVA mitigation and the SEK 30,000,000,000 I think that there are other approvals advanced approvals for example on international units that are kind of that probably we will not get before we get the big corporate advance approval. But what I also meant was that a number of the activities you can and initiatives you can build regarding working with your AGD, your PD, your maturity not least and so on is dependent on having an advanced approval. So in that context, you can say a number of the initiatives depending on getting the approval. Now we are not really concerned about getting the approval.
I think what we are mainly discussing is this initial impact of the approval. So we do of course control quite a lot of initiatives ourselves and we have a long list of more housekeeping type of initiatives the way we structure deals, the way we work with collateral etcetera that is of course in our control and constitutes a long list of initiatives adding to quite a big share of the total amount of €30,000,000,000
So if I could ask a quick follow-up. The SEK1 billion of mitigation that you've achieved this quarter, is that a satisfactory level all else equal? So if we exclude any regulatory approvals from the outside? Are you quite happy running at the €1,000,000,000 per quarter run rate ex approvals? Or is that a bit low relative to what you're aiming
for? It's a good question. You can say that in all honesty, I think you remember also we did actually anticipate to get this approval earlier. And as I was referring to a number of the a number of the longest or smaller initiatives we're working with are kind of dependent on having a approval. So we have you can say we have some delays in being able to execute on some of the initiatives or get the full benefit of them.
Now they are still there. So that's why we are have guided slightly differently this time that we maintain the €30,000,000,000 So it's more a timing matter you can say. So in that context, you can say the number could have been higher this quarter if we have got the approval back in June. Then on cost, I think what we are indicating is that we have also a long list of different type of initiatives and many of them look to deliver quite well. And I think that what is really amplified by initiatives delivering better.
And remembering also that behind the flat cost is very big gross movements and what is of course a discussion ongoing is that we potentially can see the gross savings developing very well. And then we have listed also and indicating capital markets there that we have a number of we think very important reinvestment opportunities somewhat into more mandatory type of things, but also in improving our customer proposition and improving our infrastructure etcetera, etcetera. So you can say it's a 2 step decision. First of all, we believe we should of course continue to deliver good gross savings and then there is the discussion of how much of this do we invest. So I think the first thing is of course that we can free up savings and that is what we're seeing that looks as we are really developing in a good way there.
Then finally on total capital, I'm not quite sure I fully understood your question, but you're right that minimum 17% that there are indications of higher capital levels. And I think also Gretchen you already often use the phrase of 20% total capital. Now we don't have the full resolution frameworks and the full measure of how to think about being in terms of debt and so on. So we cannot rule out that we will have to hold more total capital than the secure that we optimize the total capital
so that
we know slightly secure that we optimize the total purpose of software when we know slightly more.
But this is back to the resolution and bail in which is absolutely not clear. We are working on it as a TCV together with authorities, but it's still not clear exactly how this will come out and how we need to hold as bailing capital and then what kind of bailing capital and in what type of form and what the legal structure and so on is in that. But of course, when we know that then it's an optimization discipline in terms of how much capital, how much Tier 2 and how much Berlin is the optimal mix to minimize the total cost. I think the visibility in the core capital is quite good. As I said several times, that's not really the issue.
Our cost of attracting Tier 2 is not material. So it's not a material issue we are talking about here in my opinion. The only caveat would be the bail in discussion, which we don't The only caveat would be the bail in discussion which we don't really yet have our grips around. Nobody had that because we simply have not got it quantified yet.
Okay. That's very, very clear. I wonder if I could just ask one follow-up sorry going back on to the risk weighted assets point because I understand exactly your message here which is that a lot of your mitigation working with PD and LGD then is reliant on the AIRB coming through. I wonder if I could just ask the question in a different way then. If at Q4, we speak again the Advanced RB hasn't come through for whatever reason is what can be delivered without that approval?
What's the underlying run rate of things that you can achieve just working with the models as they stand? Or really is the bulk of this €18,000,000,000 to €28,000,000,000 can only really materialize once the advanced IRB has come in?
That we cannot answer. We can just say that as Thorsten said, it's a timing issue. Will it be Q4, Q1, Q2? We are guiding for 2015 then we have delivered to 30. That we still feel very strongly about.
But whether it's one of the other I'll as we have it. And we already have a lot of things ongoing as we said. So I don't think we can clarify more right now.
Okay. Very clear. Thank you.
The next question comes from Jacob Kruse from Autonomous Research.
Hi. It's Jacob from Autonomous. Just a couple of quick questions. Firstly, you talk about the local countercyclical buffers. And I just wanted to ask how clear have regulators in Sweden been that you're allowed to view this as local?
Because I guess ultimately it leads you to have a lower capital hurdle rate than smaller domestic Swedish banks. So are they fully comfortable with that way of looking at things? And then my other question was just on Denmark. Handelsbanken said earlier today that they are seeing re pricing on the corporate portfolio, which is very positive. And I just wanted to see if you are experiencing the same thing or if that's being offset by higher funding costs for you?
Thank you.
Yes. But I mean, it's stated clearly in CRD IV how the countercyclical buffer should be set and who is mandated to do it. And this was the main 40 hour 8 hour discussion in Ecofin when they decided it. And they all remember it. When I talk to different finance ministers, they remember this as it was yesterday.
Of course, they don't want the finance minister in another country to decide the capital level on exposures in the country. So I take it for granted and I haven't heard anything differently than the countercyclical has said per country exposure. So that I think is pretty straightforward. Anything else would also be deeply illogical because then a country with a cycle I. E.
Sweden would decide the capital buffer for a country without a cycle I. E. Denmark that sounds a bit strange.
Okay. But they haven't the Swedish regulators have not agreed or I don't know if they need to agree, but they haven't said so far that this is how they would look at it.
No. But they are very clear that they will do everything they can to follow the European level playing field thing. They are actually stating even more clearly these days that they are eager to do the regulation on the whole capital structure and everything. So it gets us close as possible to the European standard, which will also be monitored by ECB, SSN going forward. So they're very clear that the deviation from that standard and that manual would be something they would not appreciate and like.
So I think they will be pretty clear on this or are clear on this. So I haven't heard anything to the contrary.
Okay. Thank you.
And very shortly on your question on repricing in Denmark. We have seen repricing in Denmark however to a quite limited extent in Q3.
And the outlook there is getting better or is it just no real change?
I don't think we should expect significant more repricing in Denmark. But some might not be ruled out of course.
But this is Denmark is
not seen as the main country for further repricing.
Okay. Thank you.
As there are no further questions, I'd like to hand the call back over to your hosts for any additional or closing remarks.
Okay. Thank you very much for joining this telephone conference. We are now traveling over to London. Hope to see some of you there. Otherwise, please feel free to contact me anytime at your convenience.
Thank you.
Thank you. That will conclude today's conference call. Thank you for participation. Ladies and gentlemen, you may now