Good day. Welcome to the third quarter report 2013 international telephone conference call. Today's conference is being recorded. At this time, I'd like to hand the conference over Rodney Alfvén. Please go ahead.
Thank you very much. Welcome to this result presentation. In the room today we have our President and Group CEO, Mr. Christian Clausen, Chief Risk Officer, Ari Kaperi, and Chief Financial Officer, Torsten Hagen Jørgensen. We will start with a brief presentation, which will then be followed by a Q&A. Please, Mr. Clausen.
Thank you very much. Welcome to this call. I will do it briefly because by now you have all seen the numbers. I will tell a little about our plan going forward. The key message today is in reality that we are delivering according to our plan. Income is up, costs are down, RWAs are down, and we build the Core Tier 1 to 14.4%. All in all, we are delivering according to the plan. 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. This starts on page 20, where we just reiterate our target and the initiatives, the capital initiatives, the 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 will put in a counter-cyclical buffer from the beginning. Our blending minimum margin with the systemic risk buffer and capital conservation buffer still adds up to something like 11.3% in that area. Counter-cyclical is uncertain. Some countries have said they will, and some will not. An average around 1%-1.5% is plausible here. Then a Pillar 2 add-on, which we don't know the full effect of, now we know some of it, but not all. Still we believe that 13%, maybe 13.5% is not all wrong, and that will probably be our planning assumptions. We have built 14.4% capital, as you see, 220 basis points in a year.
When we then adjust this for the Norwegian risk weight and the CRD IV effects when they come, 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. We still have a pro forma guidance now around 15%-16%, including these initiatives, excluding profit and everything. That's the capital part of it. We also repeat the slide on page 23, now updated of course, that we built significant capital. As you can see, we have during recent years built quite a lot of capital and also paid out dividends. Now the room for dividend is of course increasing as we approach the capital level we need.
Dividends is very likely to go up 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 the same all over. We 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 goal customers consist a underlying base growth in income, which we expect to see of some few % at this point. The salary income has 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 digits there. We also see our capital markets investment banking initiatives delivering. Even though volume is slightly down on the large corporates, we actually do quite a lot of business, and activity has picked up. We expect going forward, we will see some auxiliary income growth along 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 recession, now we see positive growth in our countries, by the way, also in Europe next year. Low growth. Efficiency initiatives and capital discipline will still be the core themes going forward. The cost reduction and the unchanged cost is in reality cost reduction program.
We manage in the way that we keep costs unchanged and working on all processes, products and distribution processes in the way that we drive out efficiency all the time. We take out close to 4% in cost per year, add in the cost inflation and our investments and mandatory stuff, and we come to the more or less flat cost, actually slightly down. That's the way we've done it for three years, and we expect to continue here. The cost initiatives are delivering. We also highlight the regulation as a key cost driver. We have a lot of talk around Basel III and CRD IV. That's of course super important, but there are a very large number of other regulations. They all have the same thing in common. They all want to do something knowing our customer, our transactions, or our accounts.
If we do that, it's actually 48 regulations. It's similar things which they want to know more about the customer, the risk profile, the transactions, whatever. 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, we are saying that shipping is very low, we see a clear improvement in shipping. We also see good underlying development in Denmark, but still some credit losses in these quarters. The underlying development is positive for consumer confidence and house prices. On the ROE side, we restate that we have our plans intact, we are delivering on the plans, we think we'll deliver on the ROE target. We can also see it from what happened in the recent year. We actually drove our initiatives business ROE quite much higher. We have the low interest rates and the extra capital and stuff, which actually have taken it down again. We will still drive these ROE numbers up, we still expect to reach our target by 2015. That was a very short version.
Delivering on our plans. Q3, seasonally weak, but much stronger than the year before, 15% up on operating profit and a large number of initiatives delivering on income cost of capital. That was my introduction.
Thank you, Christian. Operator, we are now opening up the floor for questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask your question. We'll take the first question from Matti Ahokas 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 Q1 ratios. What is the actual figure that you are looking at 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'd 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. When I look at the Baltic Dry, for example, that has increased quite dramatically.
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 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 is around this 11.3%. We have a number of uncertainties. We have uncertainties on systemic risk buffer calculation, we have countercyclical buffer, we have on Pillar 2 treatment, and then we have some pending approvals, which is quite important, of course, for our capital efficiency initiatives. 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 Q1 level somewhat above 13%. It might be around 50 to 100 basis points higher than the 13%, which we can then scale up and down as we get more clarity on these outstanding issues.
Where do you believe you are, and what's the real quarter one ratio we should look at, the kind of 14 target?
That's what I'm saying. 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%.
I can take the shipping question. You are right that we have still continued to build up these collective provisions. You're also right that definitely the need of building those further is coming down as it looks like. 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. Our biggest problem market is tanker market. Yes, there is some recovery, especially in the product tankers, but not in this kind of large front as such. One reason for these collective provisions is that we have a few bigger workout cases, workout cases. We have made individual provisions for those cases. We want to be sure that whatever the outcome of these cases are in the future, then we are fully covered.
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 Grönborg from Danske. Please go ahead.
Yes, good afternoon. It's Per Grönborg from Danske. three questions a bit aligned with Matti's question. The first one being on the IRB advanced approval on core, which still is pending. Can you give us any indication where the bottleneck is? Is a specific FSA that is blocking it, or 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 got on risk rates in Denmark back in March. Are there any progress on getting those models finally approved. And finally on shipping, you state that it looks better. Does this imply that the cash burn, especially in the bulk segment, has stopped, or does it just imply that the cash burn has been reduced among the shipowners? Just give us a feeling of how much it has improved.
Thank you.
If I could start on the IRB approval process. I don't think we can shed very much light on it. What I think we can say is that we, of course, are in frequent dialogue. No doubt that the process ongoing is a Nordic calibration process of risk weights. 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, in general, 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 RWA 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? Wouldn't it be an idea just to go forward without the Norwegian part if that is what really is blocking this approval?
No, I think you're right in the way that we have three big approvals pending, one in Norway and two in Sweden. There have been a number of discussions in Denmark, of course, also. I think these three countries are the three actual ones discussing these risk weights. As I said, there are many different alternatives and routes to this, and we are, of course, in discussion with that. I don't think we cannot be very much more transparent at this point in time.
Okay. Fair enough.
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.
Exactly
Earlier we defined all of those customers as defaulted customers. 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. We made this application to FSA to get their approval for this. We have not yet got the approval, meanwhile, we have to have Pillar 2 capital to cover this change. The approval is not there yet. I'm sorry, can you repeat the third question?
Can I just add on this one? Do you expect to have that one as well before New Year?
It's very difficult to say. We don't know when we get the approval. As I said, now we have covered that in Pillar 2 requirement. I think it looks like to be the current market price. Sorry.
Only in the Danish company or also on the group Pillar 2?
Danish.
Only in Denmark. No impact on group Pillar 2.
No.
Okay. My final question was related to your shipping exposure. You say that things are moving better. My question is, you have seen some rate improvement. Does this mean that your clients are now facing a situation where they don't burn cash any longer, but are starting to become [cash flow net negative], or is this too early?
Yeah. Still in the tanker market, parts of the tanker market, some customers are still burning cash. The rates are not declining anymore, so that there has been bottom reached according to our understanding and observations. Not all the shipping companies are performing well in that segment. That is one reason that we have been prudent in this collective provision. Just to cater for potential, let's say, new problem cases. The likelihood is very low, in my opinion, that we would have major new workout cases coming.
What about bulk?
The bulk side has recovered somewhat more, so that then there we have a little bit better situation. Now we don't have different pipeline, many customers who could be in problem in that segment.
Okay. Thank you.
Thank you.
Next question comes from Jan Wolter 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.
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 sustainable level. I don't think that will need any constraints politically. I think we are ready to increase dividends at the end of this year. We don't know how much, of course, yet.
That's our expectation. There's clearly a dividend capacity in our figures.
Okay, thank you. 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? If yes, is that still ongoing? 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 repricing in general as a driver, not least coming from Finland, but of course, to a somewhat lesser degree than we have seen in the last 12 months.
Thank you. 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? Has something changed in the market for you to step back from that?
No, I still think that's a fair assumption, knowing that we do still believe we can do some repricing on the lending side. 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. 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 for that.
Next question comes from Ronit Ghose from Citi. Please go ahead.
Hi. Yeah, I had a couple questions. The first question is about your balance sheet, specifically on the sort of GAAP accounting for derivatives that came down about EUR 50 billion odd last year. You're on a kind of similar run rate this year. 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, they were like EUR 172 billion end of 2011, EUR 119 billion end 2012, and now it's about EUR 75 billion. A sort of general question related to that, and obviously we've been all watching your Core Tier 1 ratios rise, not just you, Nordea, but across the industry.
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.
Yeah, 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, we have done a lot of compression. I think the levels we are at now are probably where we can go, from here we have more natural, you can say, development in the derivative portfolio.
Just to be clear, you're saying you're kind of done there in terms of optimization, in terms of how you account for derivatives, or is there more to go?
Well, of course, that is how we see it now. Of course, we might have a whole new framework, of course, depending on things like leverage ratio.
Sure. Yeah.
regulatory changes that we cannot completely foresee now. As of now, I think we have seen the effect of the measures we have taken, like CCP and compression has been taking more or less, let's just put it that way.
Right
the level it's taking for now.
Yeah.
Sorry, the second question was.
Well, 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. I know 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. 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?
I think that we have been extremely strict on what we call on the volume discipline. We have been extremely strict on using the capital and using the balance sheet, because as we have been repricing significantly. I think it's fair to say that we have more now of a normalized balance sheet. 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. Therefore, you can also say that the balance sheet will probably more or less grow in check with that from here.
Right.
Ronit, I think there are questions also. Because, of course, we have two limitations. We have worked on the RWAs to get them down to get our capital ratios up. Then we worked on the derivative side, and we worked on everything related to the framework we know. We also worked on our long-term funding and these things, but we have not worked on leverage ratio at all.
Right.
We have a lot of things. There are so many things we can do there, but we haven't started because we don't really know where it will come.
I'm still skeptical to getting a leverage ratio in as a backstop , because if you start to do that, there's several things we need to do. 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 we start to take out the liquid low-risk part of the balance sheet, which we can of course do. There is quite a lot of maneuvering in the leverage ratio. As long as that has not been decided, we're not really doing it. We have very cheap access to funding, 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.
That we have to come back to, but there's more to be done, that's obvious. Let's see where the leverage ratio takes us, because if it becomes a real backstop, it's another thing. If it becomes something which upfront gives limitations, we will initiate that. So far, we have worked very focused on the RWAs, there are much more to be done. We still have a number of initiatives, we have guided for quite a lot of RWA efficiencies still to come.
Sure. I can see that obviously that's the primary metric, but I'm just curious on the leverage ratio, sort of 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 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. 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?
I think 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, there are also other more specific areas and segments in other countries.
We're 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. We will see volume taking up slightly more as a positive driver of income in 2014 than in 2013. Yes, there are more to do. There are more to do in Finland. There are also more to do in certain other subsegments on repricing, volume will start hopefully supporting the income driver.
Right. The volume you're hoping to see, is this a sort of broad macro pickup, or there are specific areas you can identify you're gaining market share?
Well, first of all, as you allude 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. This is something we expect to be more or less balanced across household and corporate, and more or less across countries also.
Great. Thank you.
It's a quite modest volume expectation 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 movement, what the impacts are and what you're seeing in the market and what the NII might do over the next few quarters? The second question is on Denmark, what the earnings progression has been. It seems like the macro is getting better, but the P&L development is a bit slower. In particular, I'm thinking about what could margins do over the next few quarters and where your expectations are for reduction in provisions, which seem pretty stable overall. Thank you.
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 on savings deposits. What we have seen is this decline in margins. However, if you look into the development since then, we are starting to see a pickup. The net effect has not been 20, and margins are somewhat picking up again. Of course, from a slightly lower level than we saw on average in Q2. 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. We had had a decline in volumes, and that has now turned around.
I think from a business case perspective, I think the changes we did on savings deposits and on mortgage primary margins, and the effects we have seen on volumes and the pickup again slightly in mitigating the full effect of the 20 basis point deduction is all coming out in a good way. This we see as a success, actually. Now of course, we hope to see the fuller effect in the quarters to come of this particular action. On Denmark, I should 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 2014. Then you had a question on?
Yes, the provisioning, 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 sort of levels?
I can comment on that. We expect these loan loss provisions coming down, that they are coming down in Denmark in 2014. It's very difficult to forecast what is the quarter it start to be visible. We believe that in the coming quarters, however, we still are seeing these elevated levels. 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. All in all the fundamentals in Denmark that you have seen from the macro figures, they have been stable for a long time. Now they have started to show positive development trends. Then we also see the reduction of flow to defaulted customers. Our risk leading indicators have been stable for many quarters. That impact loans, rating migration, past due loans.
Everything's pointing out that quality is improving, 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. We expect that 2014 it will be lower than 2013, the coming quarters still elevated.
Thank you very much.
Next question comes from Riccardo Rovere from Mediobanca.
Good afternoon to everybody. I have two, three 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, due to the balance sheet reduction, I would like to have an idea what is right now. As a follow-up question on the same topic, how long would it take for Nordea to take, let's say, the 4% in the second quarter to 5%, working just on the denominators, without touching the equity. Would it take, I don't know, 12 months, 24 months or five years or something, if you can give us an idea. The second question I have is on the statement you made before about the political risk you stated.
If I understand correctly that political risk is low. 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, mindful of real estate prices, the level of indebtedness and so on. They want also to establish a Financial Stability Council , where the members of this council actually, the head of FSA, the head of the Riksbank, 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. 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, the statement in Sweden has been the same all along. I don't think there's any new statements. It has been 12% capital plus several types of buffers. The only real uncertainty now is whether countercyclical will be 1.5, 2, or 2.5 in Sweden. That's not a major issue for us because Sweden is only 10%, 20% around of our exposure. Of course it will have an impact. It will have maybe 30 basis points or whatever on our capital ratio. There's some uncertainty in Pillar 2, but that is not straightforward how that is going to be handled. Again, if they increase the risk rates and stuff like that, again, we only have 7% of our balance sheet in Swedish mortgages.
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. That's what we are talking about in our opinion, unless new things comes out. I met with the ministers, I met with everyone, of course. I do that frequently. After these meetings, I ask the same question, is there any new messages? The answer has always been no. It is the same. It's becoming more granular. 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 the 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 may go to 20% or whatever. You can say maybe that's not the tools to control housing, but there might be other tools that are much more efficient. 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 I, 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 or we don't have any new messages there as I see it.
Yeah. On your question on leverage ratio, it's also for Q3, it's still 4% or 4.3%, depending on exactly how you calculate. On the question on going higher and so on, I think as also Christian Clausen related to earlier
If a leverage ratio is enforced or become a restrictive ratio, then of course it would have fundamental impact on the whole industry, on the liquidity market, et cetera. I think that it's premature to speculate too far into this. We still expect this to be potentially a softer type of ratio to be monitored. Of course, the actions will be dependent on exactly how this will be implemented.
Okay.
The number now is 4.3%, yes. In Q3 also.
Okay, thank you.
The next question comes from Sofie Peterzens from JP Morgan.
It's Sofie Peterzens from JP Morgan. I have three quick questions. My first question is that on your capital markets day, you guided for EUR 35 billion 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 EUR 30 billion? Also, if you get the advanced IRB approvals, how much should that help or reduce your risk-weighted assets in the fourth quarter? My second question is around IAS 19. Two of your competitors who have reported today and yesterday, they saw quite big capital improvements from IAS 19. Did that help your positive equity tier one in the third quarter? 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 third quarter. Should I view this more as a one-off or is that the new run rate? Thank you.
Yes. On your first question, the EUR 35 billion of RWA efficiency, that is the number we still stick to. You are right that we have delivered efficiency of around five, so there are 30 left, and that's exactly why we maintain the guidance of the pro forma number of 15%-16% core tier one when we have done all of these efficiency initiatives. 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. We stick to the numbers we communicated on the capital market day. The exact timing, of course, of some of the initiatives can vary a little. On the IAS 19 effect, this is relative to some of our Swedish peer.
This is smaller for Nordea. We also had a positive number. It was EUR 76 million in capital gain that goes directly into the quarter one capital. Relatively smaller than some of our peers. On the net fair value adjustments in Q3, I don't think we have really any extraordinary items or non-recurring items hitting the fair value positions. We have certain issues related to DVA structured products, et cetera. I can't recall any material or extraordinary impacts in Q3.
What you can add is that I think you're referring to the minus six in the group functions. That is EUR 28 million is the structured bonds, which is mark to market. Given that the spreads improved in this quarter, the debt, so to say, increased. They are minus 28. It's not a one-off, also not a real loss. Also within the 60, you have some eliminations in the business done between treasury and markets, which is then eliminated there. We have not received any extraordinary items. It's just been a very calm summer, especially in July and August.
Okay. This is not your new run rate going forward. We should expect something more similar to first and second quarter as a normal run rate for fair value?
No, what we said today was on the general level of the fair value, we said that July and August was very slow, low volatility, September picked up. I think that's indirectly a guidance that Q3 was lower than we expect to see going forward. This development in group corporate center is mentioned by Rodney. I wouldn't call it one-off, it could go both ways going forward. It's sort of a mark to market, it can also in the next quarter be the other way around.
Yeah.
It's not a new run rate.
Okay, great. That's very clear. Thank you.
As a reminder, to ask a question, please press star one. We'll now take the next question from Christopher Mossquist 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 reduced prices in May, that was with an ambition to increase your market share. 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. 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 lower funding costs. If you could just comment on market share and the margin outlook for Swedish mortgages, please.
Yeah. I think actually the market shares of new sales went up somewhat more significantly. It's also very important for us to state that we are basically not really tracking development in market share. The reason why we did this was that we had simply too low momentum, remembering that the mortgage product is a key hook product, getting new relationship customers. This was more an action to secure that we got a new and stronger momentum in the growth of relationship customers. We don't track, we don't have targets for market share as an end concept, but we had the objective to gain more relationship customers in Sweden. Our market share of new sales might go somewhat up and down. That's not something we kind of move towards.
If you look in the numbers, you'll actually see that the inflow of relationship customers in Sweden increased by 43%. We had a very good trend in terms of inflow new customers, which we're very pleased with. 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 also, what would be the timeframe of realizing that benefit?
Yeah, I think in general, you can say that the percentage increase in relationship costs will translate more or less into the same percentage increase in total income in retail banking. That is quite a strong correlation.
Over a few quarters.
Yeah. Of course, it takes some time to materialize fully in the numbers. 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, talking about the pro forma capital, it looks like you're guiding them as you've already worked through to somewhere just south of EUR 30 billion of RWA 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. I guess my question is, how much of this EUR 18 billion-EUR 20 billion 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-over-year, to plan. Obviously in your commentary, you're talking about being positively surprised by the progress on initiatives.
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? Third 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, 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.
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 Swedes, whether or not you maybe have to give some of that advantage back by running with more total capital. Thank you.
Yeah. First on the RWA mitigation and the EUR 30 billion, I think that there are other approvals, advanced approvals, for example on international units that probably will not get before we get the big corporate advanced approval. What I also meant was that a number of the activities and initiatives you can build regarding working with your LGD, your PD, your maturity, not least, and so on, is dependent on having an advanced approval. In that context, you can say a number of the initiatives are 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. 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 these, the way we work with collateral, et cetera. 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 EUR 30 billion.
If I could ask a quick follow-up then. The EUR 1 billion of mitigation that you've achieved this quarter, is that a satisfactory level all else equal? If we exclude any regulatory approvals from the outside, are you quite happy running at the EUR 1 billion per quarter run rate X 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. As I was referring to a number of the long list of smaller initiatives we're working with are kind of dependent on having an approval. 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 have guided slightly differently this time, that we maintain the EUR 30 billion. It's more a timing matter, you can say. In that context, you can say the number could have been higher this quarter if we had got the approval back in June.
On cost, I think what we are indicating is that we have also there a long list of different type of initiatives, and many of them look to deliver quite well. I think that's what is meant by initiatives delivering better. 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. We have listed also and indicating capital management 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, et cetera. You can say it's a two-step decision.
First of all, we believe we should, of course, continue to deliver good growth savings. Then there is the discussion of how much of this do we reinvest. I think the first thing is, of course, that we can free up savings, and that is what we're saying. That looks as if we are really developing in a good way there. Finally, on total capital. I'm not quite sure I fully understood your question, but you are right that minimum 17%, that there are indications of higher capital levels. I think also, Christian, you at least often use the phrase of 20% total capital. We don't have the full resolution frameworks and the full measure of how to think about bail-in and so on.
We cannot rule out that we will have to hold more total capital than the 17% that is stated in our current capital policy.
Okay.
We will monitor carefully and ensure that we optimize the total capital result when we know slightly more.
This is back to the resolution and bail-in, which is absolutely not clear. We are working on it as a GCC together with authorities, but it's still not clear exactly how this will come out and how much we need to hold as bail-in capital, and what kind of bail-in capital, and in what type of form and what the legal structure and so on is in that. Of course, when we know that, it's an optimization discipline in terms of how much capital, how much Tier 2, and how much bail-in 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, 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 really yet have our grips around. Nobody have 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 onto 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 is reliant on the IRB coming through. I wonder if I just ask the question a different way. If at Q4, when we speak again, the advanced IRB hasn't come through for whatever reason, 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 as the bulk of this EUR 18 billion-EUR 20 billion can only really materialize once the advanced IRB has come in.
That we cannot answer. We can just say that as Torsten said, it's a timing issue. Will it be Q4, Q1, Q2? We are guiding for 2015, then we have delivered the EUR 30 billion. That we still feel very strongly about. Whether it's one of the other quarters, a bit difficult to say. The FSA have said to us we'll get the approval in Q4, and if we do that, then we will proceed with the plan as we have it. We already have a lot of things ongoing, as you said. 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, 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. Are they fully comfortable with that way of looking at things? My other question was just on Denmark. Handelsbanken said earlier today that they are seeing repricing on the corporate portfolio, which is very positive. 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.
Yeah. 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 48-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 and exposures in the country. I take it for granted, and I haven't heard anything different that the countercyclical is set per country exposure. 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. 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.
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 to get as close as possible to the European standard, which will also be monitored by ECB, SSM going forward. They are very clear that the deviation from that standard and that manual would be something they would not appreciate and like. I think they will be pretty clear on this, or are clear on this. I haven't heard anything to the contrary.
Okay. Thank you.
Very shortly on your question on repricing in Denmark. We have seen repricing in Denmark, however, to a quite limited extent in Q3.
The outlook there, is it getting better or is it just no real change?
I don't think we should expect significantly more repricing in Denmark, some might not be ruled out, of course. 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. I 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 your participation, ladies and gentlemen. You may now disconnect.