Good day, and welcome to the second 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 Alfvén. Please go ahead.
Yes. Good day, very welcome to this telephone conference. We will start with a short introduction by Group CEO, Mr. Christian Clausen. Then we are ready to take all kinds of questions. Together with Christian, also Group CFO, Torsten Hagen Jørgensen, and Group Chief Risk Officer, Ari Kaperi, will also be here. 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. I will not go through it in detail. You have seen the numbers. Some of you may even have seen on the first meeting. I will give some comments in order to answer some of the questions we have received during the day. If we start on page five, the numbers, I have nothing more to add there. On net interest income on the next slide, I think it is worth mentioning that actually, the pickup in net interest income is very interesting. If we compare to one year ago, it is worth mentioning that we have a considerable compression of the deposit margin in that period. Actually, we are following the plan on net interest income here.
The serious compression is not least in the Swedish krona, of course, where interest rate level has dropped 65 basis points in that period. Even though we thought one year ago that interest rates were a low level, that is not the case. Now we probably think they are at a very high level. Repricing, of course, on lending had a good impact, which means that also our blended margin is up slightly. 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, a lot of FX effects, 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 have a number of our income initiatives, and it's following track very well, both in savings and investment banking area and others. If you 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 the highest inflow level not seen in Q4 we have seen for a 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 dull.
Cost flat. You 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, impaired loans 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 a clear improvement here. Denmark is improving. Actually, consumer confidence is coming up and a fairly big improvement in consumer confidence as we have seen. House prices up, so loan losses down, and we will see probably a trend here in the coming quarters. Maybe not that fast a decrease, but at least some improvement. Shipping is exactly the same story. Here we also see some interest for professional shipping investors in the assets.
Also an early indication of a turnaround, and here we see impaired individually 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. All in all, a nice decrease, which means that our quarter one is now 14%, which is moving up very nicely also 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.
This was the one which didn't deliver the 10%, or certainly not the 15% rate we need in return. With a bleak outlook to do so, the options was to invest heavily to get scale or to divest. When we top that up with the Polish authorities' attention to international banks, not least the demand to float 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 modern branches in the big cities with a young, highly educated staff. We can actually say what we built in Poland was now sold at a good price, which will impact our core capital ratio positively, but also improve our ROAC considerably, the return on allocated capital. A few comments on the plan.
We have launched, as you all know, the pro forma Core Tier 1 ratio we now put in. This is defined as the present ratio, including the CRD IV, our expected efficiency, including Norwegian risk weights. There we have a range because we don't know exactly what these risk weights will be, and they're a bit uncertain, some of the efficiencies as well. We say at least 14%. That is of course including 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. Going forward from there, we will then also have some additional RWA efficiency. All in 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 sort of EUR 9 billion. We know what it is, slightly lower than we previously expected. We've been very active on the CVA charge and other things. The Norwegian risk weights between EUR 1 billion and EUR 7 billion. There are several processes on the table. It will probably not be neither one nor seven. It will probably be somewhere in between, but it's too early to call. The RWA efficiency is very much around the rollouts 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 right 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. Repricing is coming in as expected in a good way. New customers and more activity, and not least the private banking area is positive. All this cross-selling is a 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 EUR 45 million on 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.
Our ROE bridge is interesting because it shows that we are actually building our ROE on the income initiatives and ancillary business to the extent we actually expected. Especially lower interest rates and the increasing capital ratios is taking it more or less out again. We are, of course, not delivering on our ROE, but our initiatives are indeed delivering. In a more normalized environment on interest rates, of course, this figure would have looked significantly higher. We can sum up and say that we are delivering according to the plans, and we are now ready to take questions.
Yes. Please, moderator, we now open up the line for questions and answers.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause for a moment to assemble the queue. We'll take our first question from Per Grönborg of Danske Markets.
Yes, good afternoon. It's Per from Danske. I have two questions. The first one related to your planned IRB advanced approval of your Danish corporate book. Overall, you currently have a risk rate on your corporate book of 52%. What is it for the Danish part? Are you expecting to get the same 10 percentage point reduction as you are 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 exposure 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%. 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. With this risk weight, we compare well with our local competitors.
Is this because the LGD in Denmark, basically you can't model that down going on the advances, I guess you can on the other markets?
It of course advanced contains our own factors for LGD and CCF. It's not so much a difference between the foundation and advanced modeling in Denmark.
Okay. Interesting.
On the net interest income in Finland, you're right that we have seen quite strong repricing in Q2. The development has primarily been driven by repricing, and it's both on corporate and on household lending, and volume more or less flat as received. It's true.
You ask 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, let's say credits in Finland. There we made this type of increase due to part of our existing portfolio. 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 loan, you cannot reprice that basically before people are moving to another property.
That's right. That we can't increase the current or existing mortgage portfolio. All the time when people are, of course, when they are refinancing their mortgages, making changes in their repayment schedules or taking new loans, 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 third quarter? I know you normally don't guide, can you give us some hints?
In Finland this repricing period is longer than in other countries. In Finland this whole process takes more time and we have started this more or less one year ago, and it will still continue. As I said that even today that the front book margins are higher than the back book margins, we expect 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. One on a follow-up on the IRB. You've mentioned obviously over the next few months, but it was expected, I thought at the beginning of early Q2. Any more color you can give us 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? On provisions, on the outlook of provisions going forward for the group. Obviously you've seen an improvement in shipping in Denmark. In this quarter there also, I think there was some write backs in Norway. How should we think about the provisions over the next few quarters? Also taking into account that CIB and 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 expected it by end of Q2, now we have been told to expect it within a few months and most realistically there will be some summer holidays. Somewhere a few months into the other side on summer holiday. As we have also indicated we have no reason to believe that it will not be a positive outcome. 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 depend solely on that or do you think capital accumulation could also bring the decision forward?
I think what we are trying to indicate also on the pro forma Core Tier 1 ratio slide is that the end of year pro forma Core Tier 1 plus 3 ratio will be at least 14%. That basically is excluding the effect of the Advanced IRB and the Norwegian risk weights. Further efficiency expected to be able to further improve the rate to above 14%. I think we have signaled that we think that 14% end of year, including these two major effects are still a positive number, which would potentially leave room for additional capital repatriation.
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. That in this period ending 2015, we expect that we are reaching these long-term average levels of 16 basis points. Now we are at 22. Then of course it depends very much that how fast that the loan loss rates in shipping and in Denmark start to come down. 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 remains to be seen.
There are problems in both areas, we expect that in the coming quarters that the losses in those areas will remain elevated, but gradually they will start to come down. 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 bigger case can influence on the quarterly actual loss figure. The big picture is unchanged so that we don't see these type of signals of weakening quality in other portfolios.
Great. Thank you very much.
Take our next question from Riccardo Rovere of Mediobanca. 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. 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 better understand what is driving the spike in NII this quarter. Thank you. Despite the consolidation of Poland.
On the Basel III leverage ratio, based on the uncertainties on calculating this, we are estimating something around 4%.
Sorry, around 4%?
Around 4%,
Okay
according to our calculations are sufficiently well within our securing also that we can execute our plan, including the capital repatriation possibilities embedded in our 2015 plan.
This includes the off-balance sheet exposure and all these things?
There's a number of definition issues that are not that clear. The way we calculate, which is, I would say, to the best of our understanding, relatively conservative, it comes to a number of 4%.
Okay.
If I just may add, that's according to the Basel proposal. As you might know, that's a harsher definition than the old from CRD IV. According to CRD IV, we are at 4.31%.
Okay.
The 4.0 is our understanding of the Basel proposal. Then there are still some uncertainties relating to OTC assets and derivatives. That's our best understanding.
Thanks.
We'll now take our next question from Sophie Pettersson of JP Morgan. Please go ahead.
Yeah. Thank you. Hi, here is Sophie Pettersson from JP Morgan. I was wondering if you could talk a little bit about your volume growth. I saw that volume is very down 4% quarter-on-quarter. How should we look at the impact on NII going forward from this decline in loan volumes? Second of all, I was just going to ask if you could clarify, in one of your slides on capital, you see a 20 basis point improvement from growth. Could you just clarify what this growth is? 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, at the same time, we are selecting and deselecting business with only one parameter, that's profitability. At the same time, we have a number of large corporates that uses the capital markets no more. We encourage them to use the capital market. In reality, we are managing the volumes below what we could easily have achieved. You can see that there might be an underlying growth of say, actually in Q1 it was probably close to zero. Q2 it was maybe a small positive number.
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 will come back to a volume growth of what our guidance was previously, maybe 2% or something like that, maybe three. It's very difficult to say. I like to say we are not volume driven at all, we have no target. If volume is unchanged or a little down, it's because we have repriced and/or because we have deselected business with lower ROACs. It is a very important management decision we're taking all the time, it's day by day that these decisions are taken, because it is important that we keep our pricing discipline. The underlying growth is, we expect that the underlying growth will be there.
There's some few percentage points, that is probably what we expect to get also going forward.
Just to summarize, 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?
Well, the FX-adjusted is more or less unchanged. That's more or less unchanged. It's because there are very big FX effects in Q2. We have it more or less flat at that. If we take out one or two big transactions, we have a flat volume.
As we wrote, we have increased margins by 20 basis points in the past year. Of course, we expect this to give a higher NII going forward. Of course, these deselection periods are some one which you might expect them to be of lower magnitude going forward, to say it that way. As I said, we also see some uptick in sentiment, we see some uptick in business activity in general, not loan demand, but business activity, which will gradually lead to some loan demand. I think we should think about a few percentage points. That, of course, with all the uncertainties we all know about, it's not easy to forecast. 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 too low ROACs, then we actually find then our top line will do well. Yes, next question was?
You referred to the 20 basis points growth effect on the quarter one slide. It's true that due to somewhat lower RWA, we have a positive effect on quarter one. These 20 basis points is somewhat of a mixed effect. A lot of this is driven by lower derivatives, of course, also that the volumes in corporate are slightly down, and household is slightly up. Of course, there's also a mixed effect. You have a RWA effect here that is adding 20 basis points to the quarter one due to these volume changes. I think your final question was on Poland, where of course, going forward and until closing, we will have the biggest uncertainty, of course, relating to the profit in the Polish bank. Otherwise, from a cost perspective, we don't expect any further changes.
Great. Thank you very much.
We now take our next question from Geoff Dawes of Societe Generale.
Hi, good afternoon. Geoff Dawes here from Societe Generale. I wanted to ask a couple of questions about the Swedish mortgage market. First of all, we've had quite mixed signals from some of your peers in the market about the degree of margin pressure that we're seeing. I wondered if you could comment on that, particularly as you have been quite active on your pricing. Second of all, when you look at current customer demand, is there any, I guess, preference for two-year products over variable rate products? Is there a degree of customer switching to longer-term fixes? 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. You are 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 product in Sweden. 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 relationship customers, also in the household segment in Sweden, which we have been successfully doing. List price is a good way to attract more relationship customers. That's not necessarily the same as negotiated price, which is a much lower number. 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.
As we have also stated earlier, we don't participate in price competition or in market share competition. It's only driven by number of the relationship customers and the amount of business we do with each of our relationship customers. We still find the Swedish mortgage market an attractive market with the current margins. On the mix-
No major change.
No major changes to the customer demand mix you were asking about.
Okay. Any major change in the margin difference, given that long rates have been ticking up slightly?
If you're talking Swedish mortgage margins specifically.
Yeah.
You can say that we did the list price change in late May, and in June we saw a few basis points reduction of the mortgage margin. We started to see a slightly declining trend on margins already in March, but we're talking very few basis points. The peak in the margins we saw was in March. This change of the list price has not really changed the picture.
That's very clear. Thank you.
We may take our next question from Matti Ahokas of Handelsbanken. Please go ahead.
Yes. Good afternoon. Matti Ahokas, Handelsbanken here. two questions, if I may. Firstly, now we've got two positive outcomes. The CVA or the CRD IV approval was roughly 30 basis points better than expected or guided in your Capital Markets Day earlier on. Plus, of course, the Polish divestment means that the capital ratios actually look better. So I was wondering if when you have the 13% quarter one 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? Then on page number 22 on your slide presentation, you say that the impact of the Norwegian mortgage risk weight floor would be between EUR 1 billion and EUR 7 billion on the risk-weighted assets.
Is the EUR 7 billion based on this 35% minimum risk weight floor, or what is the upper level based on? Thanks.
You're right. We have adjusted down the expectation of the CRD IV impact, and we have the effect of the Polish provisioning. The capital policy is stating that we want to have a Core Tier 1 ratio of above 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 weight in Sweden, which will not impact the ratio directly but will have to be secured by the capital policy level. That was already included in our Capital Markets Day announcement of the 13%. For now, we see no reason to change the capital policy level.
To your question on Norwegian risk weights, it is correct that the high level of impact is related to the 35% risk weight proposal is when you will then see an additional RWA impact of EUR 7 billion. Again, based on what we currently know, as Christian 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 question from Omar Keenan 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 point guidance for RWA efficiency, including Norwegian risk weights, if I back out the impact of Norwegian risk weights, it seems to be implying a mitigation program of EUR 16 billion for the full year if I include the EUR 4 billion from the first half. Is that the right way of thinking about it? Could you discuss the sensitivities around the 1%-2% additional RWA efficiency to 2015? 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.
It's true that we have some ranges here, it's of course as we also stated earlier today, we have now the Advanced IRB approval pending, and we have to apply a certain range for that approval. We expect it's a positive effect, but we have to apply a range for prudency on not knowing exactly what level will materialize. We also have quite a big range on the Norwegian mortgage risk weight effect. We have the many measures we have taken aside from roll-outs, but we have smaller roll-outs, both we have handed in and pending. We have quite a long list of other mitigating activities. As such, we see no reason to change the view that what we guided on Capital Markets Day, that many of these efficiency initiatives, they will materialize.
You can say that the exact timing, for example, of the long list of smaller roll-outs we have handed in to now, will we get the approval exactly within 2013, or will we get it in 2014? The very long list of different efficiency initiatives are also now we are starting second half year of 2013. There is also both some uncertainty but also some flexibility on exactly where these initiatives will end up. Dividing it between 2013 and 2014, of course, carries some uncertainty, but the list of initiatives we presented on the Capital Markets Day and the high-level estimates of the effect has not changed. That is why we operate with these ranges.
As you can say, when we are talking about 2013, we also indicated that we have some kind of minimum expected level of efficiency due to the many different initiatives running. That's why we guide that we do expect a minimum of 50 basis point positive effect, i.e., that the pro forma Core Tier 1 will be 14% at least. There are the number of uncertainty, which is, as you say, it's not only IRB and Norwegian risk weight, which are the major ones, of course, but also somewhat smaller uncertainty on whether or not the other efficiency initiatives will materialize exactly in 2013 or will be postponed into 2014 and 2015.
That's great. Thank you very much. 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 deposit repricing, or what exactly was the moving parts there? Thank you.
Rune, do you want to take that question?
Okay. I can answer here. We saw, first of all, on the lending side, we saw increase in the corporate lending margins in SME segment as well as in the large corporate segment, in the corporate side, lending margins were up, on the household side also the lending margins were up quite nicely. 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. That was also the case in the household deposit side. All in 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 again they were not any more down.
Great. Thank you very much. It was just my impression that the repricing on the household side comes through extremely slowly, you shouldn't really see any noticeable effect from quarter to quarter. Is it fair to say that most of that came from corporate repricing? If that's the case, is most of the repricing done or is there flow through effects into the third quarter? 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 through our behavior and maturities roughly seven years, six to seven years in Finland. It means that their repricing period is quite long. We started to see impact already also in the mortgage book during the first half. It happened already in the first quarter and continued in the second quarter. There was already a visible pickup in the household lending side. The magnitude of the corporate margin increases was more or less the same. Now in Q2 it was more or less the same levels in both segments. 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 continued in the coming quarters.
It will 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. 2 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 a pickup going forward, or do you see this as more demand driven? My second question 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. At what stage can we actually start to see the nominal cost base start to come down? Have you got any cost income target in mind, or which bank would you say is a good reference base for where you would like to end up? Thank you.
I'll do the cost income side. 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 cost-income ratio in Sweden as the other Swedish banks, but we're also operating for 80% in other countries, and there it's slightly different. I would expect the cost-income ratio to come down gradually. Obviously with an income growth of a few percentage points as we have guided for on flat cost, it will obviously come down. Nominal cost will not come down. We will be at this level. As we have elaborated on extensively on the Capital Markets Day, we are making huge investments in a number of efficiency projects in IT, in regulation, in mobile and whatever.
We are investing at the same time as we're taking out this 3% annual growth in wage inflation and other costs. Already now we have probably taken out more than 10% costs in these 11 quarters, and we continue to take out maybe another 6%-7%. Visualizing that we actually did on one slide. We actually say specifically how much cost we have taken out, EUR 85 million the first half year. We reduced staff by 2%. Actually, we have since the start reduced staff from 35,000 to 29,200. That's more than 5,000 people, including the divestment in Poland. It's more than 3,000 people. We keep doing that and at the same time we invest in all the new regulation, in new IT, in mobile solutions and, of course, in all the new processes which will make cost lower going forward.
We didn't make any upfront reservations or anything. We are taking the costs as we go for taking down costs.
Yeah. 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 relationship 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 fee and commission income, the total pool, we want to grow our market share. 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 6-12 months, we have seen a significant repricing, especially on front book margins is now on a very different level.
Of course, we have guided also in our Capital Markets Day for some volume growth, as we discussed earlier in this call, around 2%-3% over the period. You can argue that as margin levels now are looking much more attractive as we have aspirations to grow, as I just mentioned, we probably will see eventually some kickoff in volume from the levels we are at now. Only, as I said, very well aligned with the strategy we have laid out.
Great. Thank you. We will now take our next question from Christoffer Rosquist of Barclays. Please go ahead.
Yes, hello. Thank you for taking the question. Just one question really from me regarding your fee income from corporates. 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. I 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. 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. We probably have the broadest range of products that is relevant within this category. We do expect this income line to continue to grow and preferably, as we have said, more than the market.
Yeah, 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 capital 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 of 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 a balance sheet, which you hope can deliver 13%-15% ROE.
I just wondered if you could talk clearly, 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. Second question, please, following up on Geoff'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 pretty fluid and price sensitive and not necessarily the kind of gold customer that you're particularly targeting. Please, just to flavor us for how long you think you might persist with these list rates, 25, 30 basis points 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? 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 to 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 loans? Thank you.
Yes. Maybe I should talk about capital and dividends and stuff. First of all, repatriation will be dividends, most likely. 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 will be a dividend. All the numbers suggest that we, by the end of the year, can take a decision to pay higher dividends. It's not only the board decision, it's actually the AGM decision to pay a dividend. We are god above god here, so it's very difficult to say. You can make your own calculations. I think it's reasonable to expect that a higher dividend level will be decided, and into that, we will take into effect the expected growth and a number of other things.
I think what is worth listening to is the very clear statement
From the chairman saying that it's obviously so that any 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. You can make your own calculations since we haven't taken the decision, it's very difficult to be more precise in guidance. In Sweden, I'd like to stress that we are only going for relationship customers. If somebody goes into a branch and wants a mortgage loan, the answer would be no at any price. Unless it changed bank to there with all five products or whatever it is, and then becomes a core customer. That's the rule and there are no exceptions. We are not taking mortgage market shares in Sweden in that sense. If we in this way get more relationship customers, it's not only taking more.
We are of course taking some mortgage share margin, more importantly, we're taking a customer share increase. That we have done the list price, Torsten said it more or less directly. At the same time as we lower the list price, we actually lowered our deposit margin, which was a net positive to the bank. That was very clear. This was also to give a message to the market, which was balanced, that we may lower the deposit margin, we are saying that we are lowering the other margin. Now this is a list price. It's not the actual negotiated price, which could be lower. I don't think you should put too much into this. This is not a price war. It's not even a cent of moving market shares, maybe we're moving a bit more relationship customers this way. Ari shipping coverage.
Yes. You are right in saying that we have built up these collective reserves, that means that our NPL coverage ratio, provisioning ratio is currently sitting at the level of 43%. The point is not to let's say target some specific provisioning 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, specifically tanker and dry bulk. The fact is that they are still weak. Yes, we see signs of stabilization, we have not yet seen these signs of real recovery.
We wanted just to be prudent in our provisioning so that if and when there would be some kind of new problem clients coming from those segments, if this weak market would continue for a year or year and a half, we are provisioned for that type of scenario also. 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 real evidence, of course that's the time to more or less stop this type of build-up of collective provisions also in that segment.
Okay. Three very clear answers. Thank you.
We will now take our next question from Per Grönborg 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 are 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 a decision from the FSAs, but we are waiting that, let's say, in any month or week. There are no new issues in relation to that. Far until we have this approval, we have to hold this kind of Pillar 2 capital buffer to compensate that impact. No news yet.
No news. Thank you.
We'll take our next question from Ronnie Ren of KBW. Please go ahead.
Good afternoon. Sorry if the question has been asked already. I joined a little late. On the model approvals, I just want to get a feeling overall what happened that they were not approved already in the second quarter. More generally, is there any conceivable scenario that the models will not get approved at all? That would be my first question. Apologies if you answered it already. 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 approval, I think we have answered it, but I'd just 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 Europe space will be up for review, obviously. We are coming with a higher risk weight and we are still even after the approval higher risk weight. If we don't get the approval, then all the other banks will need to be revised as well.
Okay.
That is unthinkable, at least for now. The effect, why it's late, it's obviously late because we have at least four main countries with different views and good or bad reasons, different views on this. They're trying to consolidate, and we think it's a good thing that it takes time to do it well rather than fast.
We are helping them out all the time with the numbers and figures and calculations and the discussions and so on. I think it's actually in pretty good progress. As we say, we expect to get the approval in coming months with a positive result. That's where we are. We cannot say more because we haven't got the approval yet.
Okay, thank you.
Yeah. I think on the treasury and NII, 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, which we can repeat, is that if you look in isolation on the funding cost side, we do expect still to see total funding cost peaking during 2013. I think 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 Håkansson of IGZ. Please go ahead.
Yes. Hi, it's Andreas. I just had a follow-up from the meeting in Stockholm before. Just on NII in Finland, we talked about it earlier in the conference call, it goes up by EUR 19 million, and if you take out the EUR 5 million, let's say it's EUR 14 million. Is that mainly driven by the extra day? Because you talk about an extra day being one of the key drivers of NII of the group. If you look in the corporate center, the EUR 10 million growth is the buybacks of the issued debt. In Norway, it's a repricing. So the only real driver left is the extra day. Is that mainly then coming from Finland? Which I think you've told us in past years that Finland has the main sensitivity there. That would explain the very rapid growth, of course.
I think that the NII in Finland is as explained earlier, is the primary driver into one on 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 more or less the same amount for the group. That's spread over many different items. Finland is particularly lending margin driven.
Out of the half the NII growth, I guess, is coming from one extra day. In Sweden, we normally don't see it in the Swedish banks, and it seems 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 it's not even half in Finland, it's evenly spread, you say?
Yes.
Okay.
Yes, it is not even if 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.
Okay. With that, we want to thank you all for showing interest in the result. 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 disconnect.