Good day, and welcome to the 2nd Quarter Record 2013 International Telephone Conference. Today's call is being recorded. At this time, I would like to turn the conference over to Rodney Asian. Please go ahead.
Yes. Good day and very welcome to this telephone conference. We will start with a short introduction by Group's CEO, Mr. Christian Clausen, And then we are ready to take all kinds of questions and together with Christian also Group CFO, Torsten Hagen and Group Chief Risk Officer, Adi Kapre will also be here. So please Christian start.
Yes. Thank you and welcome to this meeting. I will flip through the presentation which is available on the International Telephone Conference. And I will not go through it detail. You have seen the numbers and some of you may even have seen on the first meeting.
But I will give some comments as in order to answer some of the questions we have received during the day. So if we start on page 5, the numbers I have nothing more to add there. But on net interest income on the next slide, I think it's worth mentioning that actually the pickup in net interest income is very interesting. And if we compare to 1 year ago, it's worth mentioning that we have a considerable compression of the deposit margin in that period. So actually we are following the plan on net interest income here.
The serious compression is not least in the Swedish krona of course interest rate level has dropped 65 basis points in that period. So even though we thought 1 year ago that interest rates were level level that is not the case. Now we probably think they're at very low level. So repricing, of course, on lending had a good impact, which means that also our blended margin is up slightly. And as we can see on that slide, the lending margin has indeed gone up somewhat.
The volumes are in reality more or less unchanged in local currencies. There's a lot of FX effects and then a few very large deals, which makes the underlying volume effect more or less neutral. Net commission is following the plan and very important line for us. That's where we a number of our income initiatives and it's following track very well both in savings and investment banking area and others. So if we look apart from the seasonally strong Q4 then we are actually delivering.
Assets under management is down slightly because of the markets, but net inflow is back on a very good level and actually at the highest inflow level not being a Q4 we have seen for a very, very long time. Risk management products are delivering also in terms of net fair value for customers. It has been a period with high volatility. So in total, the number is roughly unchanged. But all in all, more activity.
Also underlying activity in the corporate area, not so much lending demand, but general corporate activity, which is coming into Q2, which is very good to see after Q1 that we all know was very down. Costs flat. We can even argue it's slightly down. It's at least the lowest cost quarter we have had for 11 quarters measured in the way we do it excluding FX and variable salary. Credit quality improving.
The impaired loan is slightly down and a lot of indications that we see a better credit quality and it's very solid in countries Finland, Norway, Sweden and Baltics, whereas Denmark and shipping still have elevated levels, but we see clearly improvement here. Denmark is improving. Actually the consumer confidence is coming up and fairly big improvement in consumer confidence as we have seen. House price is up, so loan loss is down and we will see probably a trend here in the coming quarters, maybe not that fast of a decrease, but at least some improvement. And shipping exactly the same story.
Here we also see some interest for professional shipping investors in the assets. So also an early indication of turnaround. And here we see impaired individual assessed losses coming down. We have put on top some collectively assessed, but in general an improvement we have also expected. Funding is as always very strong and fully compliant.
And risk weighted assets is following the plan. We have some FX effects, but very importantly our efficiency gains keep knocking in also on the derivatives. So all in all a nice decrease, which means that our core Tier 1 is now 14%, which is moving up very nicely according to our plan. Again, we see the efficiency effects and a number of other issues coming in. On Poland, I just want to say that this was a strategic move.
We found that out of our many business units when I look at my monthly chart, I have 23 business units. So this was the one which didn't deliver the 10% or not and certainly not the 15 percent rate we need in return and with a weak outlook to do so. So the options for us to invest heavily to get scale or to divest. And when we top that up with the Polish authorities' attention to international banks, not least the demand to flow part of the stock then this was not difficult to do when we at the same time had an interested party to buy these wonderful and smaller branches in big cities with young highly educated staff then we can actually say what we've done in Poland was now sold at a good price which will impact our core capital ratio positively, but also improve our allocated capital. A few comments on the plan.
We have launched as you all know the pro form a Core Tier 1 ratio we're now put in and this is defined as the present ratio including the CADE4, our expected efficiency including Norwegian risk weights and there we have a range because we don't know exactly what these risk weights will be in there. That uncertainty is some of the efficiencies as well. But we say at least 14 percent. That is of course excluding income and volume growth in second half of the year. So the actual figure will of course end up either higher or lower probably higher.
And then going forward from there, we will then also have some additional RVA efficiency. All, I think the capital story still holds and we are delivering on what was seen as an ambitious plan only a few months ago. Regulation now is in with €900,000,000 We know what it is slightly lower than we previously expected. We've been very active on the CVA charge and other things. And then the Norwegian risk rates between €1,000,000,000 €7,000,000,000 There are several proceeds on the table.
It will probably not be neither €1,000,000,000 nor €7,000,000 It will probably be somewhere in between, but it's too early to call it. And the RBA efficiency is very much around the rollout of reviews and the sourcing and processes. All in all, the most important part in the longer run is of course to solve the customer demand with as little capital as possible and that is certainly the advice tools we have and the way we think about being capital light. Total income is holding up because we have our initiatives delivering. Again, I'd like to highlight that compared to Q2 last year, we have considerably lower deposit margins, which is of course the reason why the figure is not higher.
But repricing is coming in as expected in a good way, new customers and more activity and not leave the private banking areas positive. And then all this crossing is very structured way taking place. And we still think that we will deliver on especially the commission line, but also the net interest line. Cost is in check. Nothing more to say.
We are executing another €45,000,000 of our cut program and we are delivering according to the plan in a large number of areas. Loan loss is approaching the 16 basis points, which is the average over the cycle, probably a trend to be a bit lower. And ROE bridge is interesting because it shows that we are actually building ROE on the income initiatives in the Accelerate business to the extent we actually expect it. But then especially at lower interest rates and the increasing capital ratios is taking it more or less out again. So we are of course not delivering on ROE, but our initiatives are indeed delivering.
So in a normalized environment on interest rates, of course, this figure would have looked significantly higher. And then we can sum up and say that we are delivering according to the plans. And we are now ready to take questions.
Yes. So please moderator, we now open up the line for questions and answers.
Thank you.
Yes, good afternoon. It's Per from Danske. I have two questions. The first one related to your plant IRB advanced approval of your Danish corporate book. Overall, you currently have a risk rate on your corporate book of 50 2%.
What is it for the Danish part? And are you expecting to get the same 10 percentage point reduction as you basically implicit guiding for the overall corporate book if you get your IRB advanced models approved? The second question is related to the NII in Finland. Can you put some light on why it's growing that fast this quarter? What has happened?
I hear some stories about you have repriced some housing cooperatives loan meaning more loans to very large units. Can you put some light on what has happened in Finland this quarter? Thank you.
Okay. I can start to answer on these risk weights on our corporate portfolio in Denmark. Our current risk weight in Denmark for the corporate book is roughly 49%. And after this advanced IRB approval that will more or less remain the same. So that in Denmark the advanced model won't lead to decreased risk weight.
So and with these risk weights, we compare well with our local competitors.
Is this because the LTT in Denmark basically you can't model that down going on the advances I guess you can on the other markets?
It of course, it contains our own factors for LGD and CCF and it's those both factors, revised model in Denmark.
Okay. So okay. Interesting.
And On the net interest income in Finland, you're right that we have seen a quite strong repricing in Q2. It has been and the development has primarily been driven by repricing and it's both on corporate and household lending and volume more or less flat as you see. So it's true.
But then you asked also have we done something specific actions or taken some specific action in Finland. Yes, we have increased the credit margins for the part of the existing housing company loans, which for traditional reasons have been very low margin credits in Finland and there we made this type of increase due to part of our existing portfolio. But then moreover, the big driver for the margin increase is that both in the household as well as in the corporate portfolios the front book margins are still higher than the back book margins.
I guess still the problem in Finland is that the traditional residential war zone you cannot refinance that basically before people are moving to another property.
That's right. So that we can't increase the current or existing market portfolio. But all the time when people are, of course, when they are refinancing their mortgages, making change fees in their prepayment schedules or taking new loans then of course we are able to reprice and that is what we do.
Well the uptick we got this quarter, is this the full uptick? Or should we expect more in the Q3? I know you normally don't guide, but can you give us some hints?
In Finland, this repricing period is longer than in other countries. So that in Finland, this whole process takes more time and we have started this more or less 1 year ago and it will still continue. And as I said that even today that the front book margins are higher than the back book margins, so that we expect a gradual increase in average margins in
Finland. Okay. Thank you.
We'll take our next question from Alvaro Serrano of Morgan Stanley.
Hi. I've got two questions. 1 on a flop on the IRB. If you can you mentioned obviously the next few months, but it was expected I thought at the beginning of early Q2. Any more color you can give us if it's if you think it's going to be sooner rather than later or any additional comments you might want to make on top of what you've written?
And then on provisions, on the outlook of provisions going forward for the group, obviously, you've seen an improvement in shipping in Denmark. But in this quarter, there were also I think there were some write backs in Norway. How should we think about the provisions over the next few quarters? Also taking into account that CIB in Sweden were up. I don't know if you can maybe run us through how you think provisions are going to play out?
Thank you.
I don't think we can put that much more color on the advanced IRB approval process. As we have been informed earlier, we had we expected it by the end of Q2. And now we have been told to expect it within a few months and most readily there will be some summer holiday, so somewhere a few months into the other side on summer holiday. And as we have also indicated, we have no reason to believe that it will not be a positive outcome. But further than that, I don't think we can we are waiting eagerly, but cannot give that much more color to that.
Would decisions on improving capital return depends solely on that? Or do you think capital accumulation could also bring the decision forward?
I think what we are
trying to indicate on also on the pro form a Co Tier 1 ratio slide is that the end of year pro form a core Tier 1, Basel III ratio will be at least 14%. And that is in combination with the advanced IP and the Norwegian risk weights. And that is in combination is expected to and further efficiency expected to be able to further improve the way to above 14%. So I think we can we have signaled that we think that 14% end of year excluding these two major effects are still a positive number, which would potentially leave room for additional capital appreciation.
And regarding this outlook for the loan losses, I think that I can repeat what we said in the Capital Markets Day and what Christian also indicated in his presentation. So that in this period ending to 2015, we expect that we are reaching these low to an average levels of 16 basis points. Now we are at 22. But then of course it depends very much that how far the loan loss season in shipping and in Denmark start to come down. And then as we have said in previous quarters and what we saw also in this quarter is that we expect this type of gradual decrease in those two areas.
How fast the decrease is remain to be seen. Still both areas There are problems in both areas and we expect that in the coming quarters that the losses in those areas will remain elevated, but gradually they will start to come down. Then in other portfolios, we don't see big issues so that there also we can repeat what we have been saying so that the loan losses are low in other areas and will remain low in other areas. Saying that, of course, there is always this kind of quarterly volatility. Our loss levels are so low, so that even one individual figure case can influence on the quarterly actual loss figure.
But the big picture is unchanged so that we don't see this double signal, so weakening quality in other portfolios.
Great. Thank you very much.
We'll now take our next question from Riccardo Rovere of Medias Donker. Please go ahead.
Yes. Good morning to everybody. I would like to have an idea if you can provide us the Basel III leverage ratio at the end of June? And I just wanted to better understand what is driving the kind of margin expansion in some areas within the group given that as far as I understand your repricing was not so aggressive. I just wanted to understand better understand what is driving the spike in NII this quarter despite the consolidation of Poland?
On the Basel III leverage ratio, we expect based on the uncertainties on calculating this, we are estimating something around 4%.
Sorry, around 4%?
Around 4%, which according to our calculations are sufficiently well within our securing also that we can execute our plan including the capital repatriation and say possibilities embedded in our 2015 plan.
And this includes the off balance sheet exposure and all these things? Well, there's a number
of definition issues that are you can say not that clear. But the way we calculate which is I would say to the base of our own thing relatively conservative the country number of 4%.
Okay, okay. If I just may add, I mean that's according to the Basel proposal. And as you might know, that's a harsher definition than the old from COD 4. And according to COD 4, we're at 4.31%. So the 4.0% is our understanding of the Basel Committee then Basel proposal.
And then there are still some uncertainties relating to SFT assets and derivatives. That's our best understanding.
Thanks. Thanks, Odi.
We now take our next question from Sophie Petterson of JPMorgan. Please go ahead.
Thank you. Hi. Here is Sophie Petacenas from JPMorgan. I was wondering if you could talk a little bit about your volume growth. I saw that volumes were down 4% quarter on quarter.
How should we look at the impact on NII going forward from this decline in loan volumes? And second of all, I was just going to ask if you could clarify in one of your slides on capital, you have you see a 20 basis point improvement from growth. Could you just clarify what this growth is? And my third final question, Poland should we expect any further costs for Poland going forward? Thanks.
Maybe I should say a little about volume. We are in a situation where we have very little demand. And at the same time, we are selecting and deselecting business with only one parameter that's profitability. And at the same time, we have a number of large corporates that uses capital markets furthermore. We encourage them to use the capital market.
So in reality, we are managing the volumes below what we could easily have achieved. So you can see that there might be an underlying growth let's say actually in Q1 it was probably close to 0. Q2 it was maybe a small positive number. But I think going forward it's reasonable to expect also with our economic outlook with some slight improvement sentiment in the autumn in some of our markets that we really come back to a volume growth of what our guidance was previously maybe 2% or something like that maybe 3%. It's very difficult to say.
But I like to say we are not volume driven at all. So we have no target. So the volume is unchanged a little down. It's because we have repriced and because we have deselected business with lower hour costs. So it is a very important management decision we are taking all the time.
And it's day
by day that these decisions are
taken because it is important that we keep our pricing discipline. But the underlying growth is of course not of course, but we expect that the underlying growth will be there
at some few percentage points and that is
probably what we expect to get also going forward.
But just to summarize, so we should expect a little bit better volume growth going forward and the current volume growth is not really impacting your NII or given that you had the FX adjusted loan volume growth was down 4% quarter on quarter, we should not think about that as a negative drag into the second half?
The FX adjusted is more or less unchanged. That's more or less unchanged. It's because of very big FX effects in Q2. So we have it more or less flat. If we take out 1 or 2 big transactions then we have a flat volume.
So and as we wrote we have increased margins by 20 basis points in the past year. So, of course, we expect this to give a higher NII going forward. But of course, these desolation periods are some one which you might expect them to be of lower magnitude going forward to say it that way. And as I said, we also see some uptick in sentiment and we see some uptick in business activity in general not loan demand but business activity which will gradually lead to some loan demand. So I think we should think about a few percentage points.
But that's of course, with all the uncertainties we all know about, it's not easy to forecast. But the important statement is that it's not a volume target. We are not worried about this as long as our repricing is going on, as long as our deselection is going on in the right way I. E. That we deselect business with 2 lower autocrats, then we actually find then our top line will do well.
Yes, next question was?
Yes. And then you referred to the 20 basis point growth effect on the Core Tier 1 slide. And I understand it's true that due to somewhat lower RBA, we have a positive effect on Core Tier 1. Now this 20 basis point is somewhat of a mix effect. A lot of this is driven by lower derivatives and of course also that volumes in corporate are slightly down and household is slightly up.
So of course there's also a mix effect. So you have a RBA effect here that is adding 20 basis points to the Q1 due to these volume changes. And then I think your final question was on FOLEN where we have some where we have costs going forward and until closing, we will have the biggest uncertainty of cost relating the profit in the Polish bank. But otherwise from a cost perspective, we don't expect any further changes.
Great. Thank you very much.
We'll now take our next question from Jeff Doers of SocGen.
Hi, good afternoon. Jeff Doers here from SocGen. I wanted to ask a couple of questions about the Swedish mortgage market. First of all, you've had quite mixed signals from some of your peers in the market about the degree of margin pressure that we're seeing. I wonder if you could comment on that particularly as you have been quite active on your pricing.
And second of all, when you look at current customer demand, is there any, I guess preference for 2 year products over variable rate products? Is there a degree of customer switching to longer term fixes? And can you give us an idea of the difference in margins between those two products? Thank you very much.
Well, on the first question, yes, a number of discussions around this. And you're right, we changed our list price on Swedish mortgages for 20 basis points. And the week after, we actually also changed the margin on the savings products in Sweden. And yet again, these measures are not driven by ambitions on product market shares. They are driven by the fact that we want to expand the number of what we define as the relationship customers also in the household segment in Sweden, which we have been successful
in doing.
And this price is a good way to attract more relationship customers and that's not necessarily the same as negotiated price, which is a much lower number. So from a business case perspective, the changes we did on pricing in Sweden should be seen in combination and it was to our belief an attractive proposition, the changes we did. And as we have also stated earlier, we don't participate in price competition or in market share competition. It's already driven by number of the relationship customers and the amount of business to do with each of our relationship customers. So we still find the Swedish mortgage market an attractive market with the current margins.
On the mix? No major changes. No major changes to the custom demand to the custom demand mix you were asking about.
Okay. And any major change in the margin difference given that long rates have been ticking up slightly?
If you're talking Swedish mortgage margins specifically, yes, you can say that we have we did the list price change in late May. And in June, we saw a few basis point reduction of the mortgage margin. But it was we saw we started to see a slightly declining trend on margins already in March, but we're talking very few basis points. But the peak in the margins we saw was in March. And this change of the lift price has not really changed the picture.
That's very clear. Thank you.
We from Matti Alokas of Handelsbanken. Please go ahead.
Yes, good afternoon. Matti Alokas, Handelsbanken here. Two questions, if I may. Firstly, now we've got 2 positive outcomes, the CVA or the CRD IV approval was more roughly 30 basis points better than expected in our guided in your Capital Markets Day earlier on. And plus, of course, the Polish divestment means that the capital ratios actually look better.
So I was wondering is when you have 13% core Tier 1 ratio target, should we interpret that the bar has gone up because of these kind of structural changes or to roughly 13.5% obviously? Or is it still the 13, the level we should be looking at? And then on page number 22 on your slide presentation, you say that the impact of the Norwegian mortgage risk weight flow would be between €1,000,000,000 and €7,000,000,000 on the risk weighted assets. Is the €7,000,000,000 based on this 35 percent minimum risk weight for? Or what is the upper lever based on?
Thanks.
Yes. You're right. We have adjusted down the expectation of the CIB-four impact and we have the effect of the Polish provisioning. But the capital policy is stating that we want to have a quarter run rate of about 13%. There's no real reason for Nordea to change that policy also taking into account that we have all the time expected to have the 15% mortgage risk rate in Sweden, which will not impact the ratio correctly, but will have to be secured by the capital policy level.
So that was already included in our capital management announcement of the 13%. So for now that we see no reason to change the capital policy level. And then to your question on the weak and risk rates, it is correct that the high level of impact is related to
the
35% risk weight the risk weight for total is when you will then see an additional RVE impact of the SEK 7,000,000,000. But however, we again based on what we currently know, I mean, we don't expect it as Quentin also referred to, we don't expect necessarily to have the 35% proposal materializing, but probably somewhat lower.
Great. Thanks.
We'll now take our next question from Omar Kinan of Nomura. Please go ahead.
Good afternoon. Thanks very much for taking the questions. Just wanted to clarify a few things on Slide 21. If I look at the 50 to 100 basis points guidance for RWA efficiency, including Norwegian risk weights, If I back out the impact of Norwegian risk weights, it seems to be implying a mitigplication program of €16,000,000,000 for the full year, if I include the €4,000,000,000 from the first half. Is that the right way of thinking about it?
And could you discuss 15? What will get it to the upper end of that range and what will get it to the lower end of
that range? Thank you. Yes.
It's true that we have some ranges here. And it's of course as we also stated earlier today, it's we have now the advanced IP approval pending and we have to apply certain range of for that approval. We expected a positive effect, but we had to apply a range for prudency on not knowing exactly what level will materialize. And then we also have quite a big range on the Norwegian mortgage risk rate effect. Then we have the many measures we have taken aside from rollouts, but we have smaller rollouts both we have handed in and pending.
And then you have a quite long list of other mitigating activities. And as such, we see no reason to change the view that what we guided on capital money that many of these efficiency initiatives they will materialize. Now you can say that the exact timing, for example, of the long list of smaller rollouts we have handed into now where we get the approval exactly within 2013 or where we get it in 2014. And the very long list different efficiency initiatives there also now we are starting second half year of the year. There is also some both some uncertainty but also some flexibility on exactly where these initiatives will up.
So on the so dividing it between 13% and 14% of course carries some uncertainty, but the
list of initiatives we
presented in the Capital Market Day, the effect has not changed. So that is why we operate with these ranges. And as you can say, when we're talking about 2013, we also indicated that we have some kind of minimum expected level of efficiency due to the many different initiatives running. And that's why we guide that we do expect a minimum of 50 basis point positive effect I. E.
That the pro form a culture 1 will be 14% at least. And then the number of uncertainty, which is, as you say, it's not only AIB and we think risk, risk with our major ones of course, but also somewhat smaller uncertainty on one of the other efficiency initiatives as well. And so you're like exactly in 2013 or what people's point in 2015.
That's great. Thank you very much. And I just had a follow-up question if I may on net interest income. Just looking at Finland, NII was up by 13% sequentially.
Was that the impact of
moving parts there? Thank you.
Okay. I can answer here. So that we saw first of all on the lending side, we see that we saw increase in the corporate lending margins in SME segment as well as in the large corporate segment. So that in the corporate side, lending margins were up. But then on the household side, also the lending margins were up quite nicely.
And then when talking about deposits, there we saw on the corporate side, somewhat improved not much, but a little bit improved deposit margin with a few basis points. And that was also the case in the household deposit side. So all in all, all these margin drivers in Finland, both in lending book and deposit book were now positive in Q2. On the deposit side, the changes or improvements were marginal, but then again, they were not any more down. Okay.
Thank you very much. It was just my impression that the repricing on the household side comes through extremely slowly, so you shouldn't really see any noticeable effect from quarter to quarter. So is it fair to say that most of that came from corporate repricing? And if that's the case, then is most of the repricing done? Or is there flow through effects into the Q3?
Can you just give a little bit of color as to what the duration is of the lending on average, so we know how quickly repricing comes through and what the front versus back book remaining could be? Thanks.
In the mortgage book, the average is kind of true or behavior on maturity is roughly 7 years 6 to 7 years in Finland. So that it means that the repricing period is quite long. But we started to see impact already also in the mortgage book during the second half of first half. So it happened already in the Q1 and continued in the second quarter. So there was already a visible pickup in the household lending side.
And same levels in both segments. And then of course, if and when this repricing period is quite long in Finland, of course, logically, we expect that we will see this type of impact to be continuing in the coming quarters. It not be very fast and we are not talking about very many basis points. But nevertheless, the trend is there because currently the front book prices are better than the back book prices.
Okay. Thank you very much.
We will take our next question from Claire Kane of RBC. Please go ahead.
Hi, there. Two questions, please. The first is given the good progress you're making on the RWA efficiencies, would there be any change to your growth aspirations in terms of lending going forward? Could we expect more pickup going forward? Or do you see this as more demand driven?
And my second question then is on costs. You're showing, as you say, on underlying basis costs flat for around 11 quarters. Your cost income is 50%. It's higher than peers. And at what stage can we actually start to see the nominal cost base start to come down?
And have you got any cost income target in mind? Or which bank would you say is a good reference base for your where you'd like to end up? Thank you.
I'll do the costincome side now. You probably compare us with Swedish banks since we only have 20% of our business in Sweden. That is not really fair. We have the same costincome ratio in Sweden as the other Swedish banks, but we are also operating for 80% in other countries and there it's slightly different. So I would expect the cost income ratio to come down gradually.
Obviously, with income growth of a few percentage points as we are guided for a flat cost, it will obviously come down. Nominal cost will not come down. We will be at this level. And as we have elaborated on extensively on the Capital Market Day, we are making huge investments in a number of efficiency projects in IIT, in regulation, in mobile and whatever. So we are investing at the same time as we are taking out this 3% annual growth in wage inflation and other costs.
So already now we have probably taken out more than 10% costs in these 11 quarters and we'll continue to take out maybe another 6% to 7%. And visualizing that, we actually did on one slide. We actually say specifically how much cost we have taken out, euros 85,000,000 in the first half year. We reduced staff by 2%. Actually, we have since the start reduced start from 35,000 to 29,200.
So that's more than 5,000 people including the divestment in Poland. So it's more than 3,000 people. So we keep doing that and at the same time we invest in all the new regulation, new IT in mobile solutions and of course in all the new processes which will make cost lower going forward. So it is sort of we didn't make any upfront reservations or anything. So we don't have we are taking the costs as we go for taking down costs.
Yes. And you had a question on growth aspirations. And I
think actually you can say that
we have growth aspirations in the way that we want to grow the number of relation customers and we want to grow the profitable business with each of these customers I. E. Share of wallet. We also actually have said that we want to grow market share of non credit income and net fee and commission income, the total pool. We want to grow our market share.
So we want to grow and we want to invest what is needed to execute on that strategy. You can also say that we have had the view that repricing had to go first. And just within the last 6 to 12 months, we have seen a significant repricing on the especially in front book margins is now on a very different level. And of course, we have guided also in our Capital Market Day for some volume growth as we discussed earlier in this call around 2% to 3% over the period. And you can argue that as margin levels now looking much, much fractured as we have aspirations to grow as I just mentioned, We probably will see eventually some pickup in volume from the levels we are at now.
But only as I said very well aligned with the strategy we have laid out.
Thank you.
We will now take our next question from Christopher Roskreuis of Barclays. Please go ahead.
Yes. Hello. Thank you for taking the question. Just one question really for me regarding your fee income from corporates. So we've heard for some quarters how Nordic corporates have been quite cautious, but sort of solid.
And now we've seen an uptick in both SEB and your own income. So just wanted to, in your case, because you have a little bit of a different composition than some of your peers, as it seems, in terms of what type of income has been growing. So the question is, how sustainable this is, if this is a catch up from the previous quarter or if you think that this is something we should assume going forward as well? Thank you.
No. But I think that it's at least very clearly embedded in the strategy that we want to continue to grow and preferably also more than the market within this type of income. And we probably have the broadest range of products that is relevant within this category. So we do expect this combined to continue to grow and preferably as we have said more than the market.
Yes. Thank you.
Our next question comes from Nick Davis of UBS.
Yes. Good afternoon, everyone. Three questions please from my side. The first please on repatriation, which you've talked about or referenced a few times. I just wanted to see if I could press you a little bit about the shape in which you think that might take place.
You've talked a bit about loan growth or the lack of credit demand and maybe even in a normal environment maybe only seeing 2% 3% loan growth on the balance sheet which you hope can deliver 13% to 15% ROE. So I just wondered if you could talk the ordinary dividend is a Board decision. We know that much. But if you could just give us a flavor for whether you think really your current payout ratio is right for this sort of near term balance sheet growth and credit demand or whether you think you have other tools in the toolbox for capital repatriation? 2nd question please following up on Jeff's question around the list price on mortgages in Sweden.
We take your point clearly about how you're targeting relationship customers, but clearly there must be an element of the Swedish consumer base that's fluid and price sensitive and not necessarily the kind of gold customer that you're particularly targeting. So please just a flavor as to how long you think you might persist with these list rates 25, 30 bps below the peer group? What would you need to see as far as sort of marginal market share being taken before you might reconsider this strategy? And then the third and final question please just a word on shipping and NPL coverage. If I look at your statement of gross impaired loans, it's been a few quarters now where NPLs are on the decline, reserves or cumulative impairments are on the rise, NPL coverage clearly building.
Please just talk us through how sensitive you are at the collateral values. Really now do you think you've identified all of your problem customers? And for how many more quarters should we assume you have to build up NPL coverage to buffer against existing problem lines? Thank you.
Yes. Maybe I should talk about capital and dividends and stuff. First of all, repatriation will be dividends most likely. Now the Swedish government overhang is not fully gone, but somewhat gone. And if there are no other things about the stock pointing to a buyback then it wouldn't be a dividend.
And of course, all the numbers suggest that we by the end of the year can take a decision to pay higher dividends. And it's not only the Board decision, it's actually the AGM decision to pay a dividend. So we are proud about God here. So it's very difficult to say. But you can make your own calculations.
I think it's reasonable to expect that a dividend level be a higher dividend level will be decided. And into that, we will take into effect the expected growth and a number of other things. So I think what is worth listening to is the very clear statement from the Chairman saying that it's obviously so that in excess capital should be repatriated to shareholders. I think that's a very clear statement being repeated several times and I think it's the right thing to do. So you can make your own calculations.
Since we haven't taken the decision, it's really difficult to think to be more precise in guidance. In Sweden, I'd like to stress that we are only going for relationship customers. So if somebody goes into a branch and want a mortgage loan, the answer would be no at any price unless it's changed bank to there with all 5 products or whatever it is and then becomes a core customer. That's the rule and there are no exceptions. So we are not taking mortgage margins sorry mortgage market shares in Sweden in that sense.
But if we in this way get more relationship customers, it's not only saying more. We are of course taking some mortgage share margin, but this is sort of more importantly a customer share increase. And that we have done. The list price Thorsten said it more or less directly. But at the same time as we lowered the list price, we actually lowered our deposit margin, which was a net positive to the That was very clear.
So this was also to sort of give a message to the market, which was balanced that we may lower the deposit margin, but we're missing down lowering the other margin. Now this is a list price. It's not the actual negotiated price, which could be lower. So I don't think you should put too much into this. This is not a price war.
It's not even an attempt to move in market shares, but maybe we're moving a bit more relationship customers this way. And Ari, shipping coverage?
Yes. You are right in saying that we have built up these collective reserves and that means that our NPL coverage ratio, provision ratio is currently in shipping at the level of 43%. But the point is not to, I'd say, target some specific provision ratio as such. The reason or background for us building up this collective provision is the fact that still we see that few of these markets we are exposed to specific tanker and drybulk. The fact is that they are still weak.
Yes, we see signs of stabilization, but we have not yet seen this kind of signs of real recovery. And we wanted just to be prudent in our provisioning, so that if and when there would be some kind of new broadband clients in coming from those segments, if this weak market would continue for year or year and a half then we are provisioned for that type of scenario also. But according to the market expectations and our own view, we should start to see some kind of a slight improvement from next year if the indicators are showing the right picture. Then of course, if and when we start to see this kind of real evidence then of course that's the time to more or less stop this type of buildup over of collective provisions also in that segment.
Okay. 3 very clear answers. Thank you.
We will now take our next question from Per Granberg of Danske Markets.
Yes. Hello again. One more question that I just would like to get some clarification on. In Q4, you had some issues with the Danish FSA, seemingly also with the Swedish FSA. These model approvals that were requested by the FSA, any news on those?
Are we approaching an approval? Or is those models also still pending?
You must refer to this the way we classify these customers with objective evidence of impairment. Yes, that is still pending, so that we don't have decision from the FSAs, but we are waiting that in any month or week. There are no new issues in relation to that. So that so far we that until we have this approval, we have to hold this kind of Pillar 2 capital buffer to compensate that impact. But no news yet.
No news. Thank you.
We'll take our next question from Roni Wren of KBW. Please go ahead.
Good afternoon. Sorry if the question had been asked already. I joined a little late. On the model approvals, I just wanted to get a feeling overall what happened that they were not approved already in the Q2? And more generally, is there any conceivable scenario that the models will not get approved at all?
That would be my first kind of questions and apologies if you answered it already. And the second question is on the Treasury NII. It was again fairly strong. What is the outlook here in the face of lower interest rates probably some hedging coming off? Can you give us any guidance here?
Thank you.
Maybe on the model program, I think we have answered it. But I'd like to say there's no chance that we'll not get the approval. If that happens then I think all bank models in Northern Oil space will have to review obviously. We are coming with a high risk weight and we are still even after the approval high risk weight. So if we don't get the approval then all the other banks will need to be revised as well.
Very clear.
That is unthinkable at least for now. Now the effect why it's late? It's obviously late because we have at least 4 main countries with different views and different good or bad reasons different views on this and they are trying to consolidate. And we think it's a good thing that it takes time to do it well rather than fast. And we are helping them out all the time with the numbers and figures and calculations and discussions and so on.
So I think it's actually in pretty good progress. And as we say, we expect to get the approval in coming months with a positive result. And that's where we are. And we cannot say more because we haven't got the approval yet.
Okay. Thank you.
Yes. And I think on the treasury NII and I guess we had a fairly good quarter, but I think that on the outlook, I think it's very difficult to give any meaningful outlook. What we have said in Capital Markets Day and which we can repeat is that if you look on in operation on the funding cost side, we do expect still to see total funding cost peaking during 2013. But I think that that's the only type of outlook we think is feasible to give at this point in time.
Okay. Thank you so much.
Moderator, we have time for one more question.
Our last question comes from Andreas Hakansson of Exane. Please go ahead.
Yes. Hi. It's Andreas. Just had a follow-up from the meeting in Stockholm before. Just on NII in Finland, we talked about it earlier on the conference call.
And it goes up by €19,000,000 And if you take out the €5,000,000, let's say, it's €14,000,000 is that mainly driven by the extra day? Because you talk about an extra day being one of the key drivers of NII over the group. And if I look in the corporate center, the €10,000,000 growth is the buybacks of the issued debt. In Norway, it's a repricing. So the only real driver left is the extra day.
And is that mainly then coming from Finland, which I think you have told us in past years that Finland has the main sensitivity there, because that would explain the very rapid growth of course?
No, I think that the NNI in Finland is as explained earlier is the primary driver in Q1 and that is the quite strong improvement in lending margins both on corporate and household. That is the main reason. The one day effect that you are right is a modest the same amount for the group, but that's an effect spread over many, many different items. So Finland is particularly lending margin.
But I mean, out of the half the NII growth, I guess, is coming from one extra day. And in Sweden, we normally don't see it in the Swedish banks. And it feels more to be non Sweden. And I'm not quite sure, do we then see a bigger than decline in some of the other divisions or so it's not even half in Finland, it's evenly spread you say?
Yes.
Yes. It is not even you can say. We do have not the same NII growth in all the countries as we have in Finland because the key lending margin improvement is in Finland.
Okay. With that, we want to thank you all for showing interest in the results. And those of you based in London, you're most welcome to the lunch presentation tomorrow. Otherwise, I wish you all a very good and relaxing summer and hope to meet you shortly. Thank you very much.
Thank you. Bye bye.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now