Good day. Welcome to the first quarter report 2013 international telephone conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rodney Alfvén. Please go ahead, sir.
Yes. Thank you very much. Welcome all of you to this first quarter of 2013 result presentation. We will start with a presentation by our President and Group CEO, Mr. Christian Clausen. It will be followed by a Q&A session. With us in the room here, we have also our Chief Risk Officer, Mr. Ari Kaperi, and our Chief Financial Officer, Mr. Torsten Hagen Jørgensen. Christian, please.
Thank you. Welcome everyone. I will do a sort of a 10-minute presentation of the slides, which is available. I'll start with the key messages. We deliver on the plan, which we presented at our Capital Markets Day. We have an underlying profit that seems a little flat, but it's actually underlying up when we correct for one-off items. We see low activity, low loan demand in the corporate sector. We deliver flat cost again. We see a robust credit quality with improvement in impairments. Flat RWA with quite a lot of activity going on in efficiency gains. The quarter one increase to 13.2%. Another award this quarter to Best Bank. It's not the same as last quarter, a new one. The numbers you've already seen.
Let's highlight the net loan losses, which are down. The operating profits, which is actually slightly up. When we move to the net interest income, it may look a little soft, but actually, we have two days less lower return on liquidity buffer. There are also a few other items which actually suggest that the net interest income is at least flat. The movement in net interest income is reflected in the blended margin, which is unchanged at 107 basis points, slightly up. Deposit margins down. Lending margins up. Corporate loan demand is low, slightly down. We see household lending still growing around 2.5% on the year. Funding gap well under control. Fee and commission income is nicely up, a good trend.
We see that a lot of our income activities is actually reflected here because that's where we see the activity due in the savings area and the risk management area. Apart from the seasonal strong Q4, we actually have a good development here. Very much also coming from the savings area. While demand for loans are low, demand for advice on savings is very high. Low interest environment and strong savings rates, of course, suggest an issue for many customers on how to place their savings. Our savings plan service is actually one that is gaining a lot of momentum. We see assets under management up, performance strong, and strong inflow in the key areas. Some outflow in institution sales from actually two accounts which have changed investment strategies, so no concern from that point.
Fair value is also up on the customer side when we adjust for that one-off, again, showing that this activity area is performing well. Costs are flat. I'll come back to the cost a bit later in more detail. Credit quality is very robust, impaired loans stable, slightly down. Loan losses down, Denmark and shipping down. Rest is flat at a very, very low level. If we move to Denmark and shipping, it's more or less a copy of the slide from last time, except for the fact that loan losses are lower. The house prices are stabilizing. We still see more signs as we go that stabilization is happening. Of course, this means that eventually we will see even more improvement. Exactly how, when, and how much, that is very difficult to say. The same argument goes for shipping.
We see lower loan losses also here. We have some collective put on, but freight rates stable and new tonnage also coming down. Also here we have a sentiment also from the main stronger ship owners that they expect improvements towards the end of the year, maybe into next year. Underlying performance is actually up somewhat when we adjust for this fee recognition in Q4 and a few one-off items adjusted, then we actually have some increase in the underlying profitability. Funding access still very strong. We have actually one of the lowest, if not the lowest funding costs of any bank and strong liquidity buffers. We keep generating the capital. We have a slightly negative effect of the new revised IAS rules, where we have to take the negative net liabilities directly to the equity. We still build quarter one equity.
I'll come back to that later. The same thing with risk-weighted assets stabilizing, a lot of roll-outs and stuff happening. I'll come back to that a bit later. Quarter one up to 13.2. I will not go into each business area. If you have questions, I will be delighted to do so. In general, retail is moving ahead very strongly. Also, wholesale is following the plan. Business deselection is still on. We deselect business with high risk and low returns, and where auxiliary business is not likely to get. We are very precise on this, exactly how to do this. Loan demand a bit lower than we have been very active on the capital market on behalf of our customers. All in all, I would say that they are following the plan in a good way.
Wealth is, of course, delivering savings is very much in favor right now where we have high savings rate and low rates. When we move on to the final paragraph, we are delivering on the plan. That's actually where we follow up on the initiatives presented at the capital market, the capital initiatives, the income initiatives, the flat cost initiatives, and risk profile and low-risk activity. First of all, the IBAs, you see the bridge on page 25. IBA efficiency of EUR 2 billion, mainly the IMM rollout of counterparty risk, a few more. Then we have some negatives, which are the FX effects, which, of course, depending on the state of the Swedish and Norwegian krona versus EUR. Then these intermittent regulatory changes, which is higher loss-given default for some real estate in two of our countries which have expired.
That effect will disappear when we get our AIRB approval, hopefully during Q2. Quarter one ratio up 10 basis points. Again, you see we underlying deliver sort of 40 basis points in efficiency and profit. Then we have the IAS negative, and we have this regulatory changes in FX. All in all, exactly according to our plan. Income is also according to the plan. We have all the activities going on, and the areas we invest in and develop quite a lot right now is very visible in the non-interest income, which is up 5%. Still we keep on getting the new customers, sort of 4% per year annualized, and then we cross-sell better. It's very much the savings area, as I mentioned several times. All in all, the strategy on the income side is also delivering well.
Cost is flat, and if we move to the execution of our big cost program of EUR 450 million over the next three years, we've delivered EUR 40 this quarter according to plan. We're trying to line up a bit more precise exactly what we are doing. These are the deliveries in this quarter. We've still more advisory branches and less cash handling in the branches. We've rolled out more mobile apps and other stuff, which is also adding to the effect that we get the transaction on the mobile, now also advice. Then a lot of processes have been implemented, automated reporting processes. We've transferred more staff to our offshore center in Poland, manual processes. Life and pension have delivered well on the cost efficiency and the Finance Value Program, which is very much to get global standardized reporting has been delivered.
New digitalization of statements, and the service entity, which is one entity where we do centralized IT contract management. All in all, according to plan. Loan losses also according to our expectations, I would say. Impairments are down, and indicators are good. We see loan losses coming down. Exactly how that will develop in the coming quarters is difficult to say, but it looks like we see some improvement in general. The ROE bridge is very clear. That's actually also according to the plan, except from the external factors, of course. The business-driven ROE development is +2.1% repricing, net commission income, net fee very slightly down and lower business volumes, lower loan losses. Then the external factors are of course knocking in, and still the lower interest rates are having significant effect on our income line. Guarantee fees for state guarantees.
Of course, increasing capital, which we have in the calculation. As we say on the final slide, we are delivering on the plan on all elements. Despite a quarter with low economic activity and some macro uncertainties out there making both households and corporates holding back visible and lower loan demand, despite that, I actually think we have delivered a quarter exactly as we had planned for. This concludes my presentation. I will hand over to the Q&A session.
Yes, please, operator. We can now open up the line for Q&A.
Thank you. If you wish to ask a question at this time, please press the star or asterisk key on your telephone keypad, followed by the digit 1. We'll take our first question from Omar Keenan of Nomura. Please go ahead, sir.
Good afternoon. Thanks very much for taking the questions. I just had two quick questions on capital. The first one is on the timeline for the approval of the advanced corporate models. Do you believe that you're still on track for a full rollout by the end of the second quarter? Just linked to that, how much toing and froing with the regulators is there? Do you think everything's proceeding with their own schedule? Just secondly, a few peers have guided on the reduced impact of Basel III from CRD IV changes. Do you expect to make any change to your guidance on the impact of Basel III? Thank you.
Yes. Thank you. With regards to the advanced IRB rollout for Nordic Corporates, we stick to the guidance we gave on the Capital Markets Day that we do expect to get this approval during Q2. We think that the process is progressing as we could envisage, no big changes on that. You are right, we are updating the guidance we gave on the Capital Markets Day. We guided the market on Basel III and IAS 19 impacts of around 150 basis points.
Now IAS 19 have materialized, the new guidance for Basel III impact is 110 basis points.
By?
Around 110 basis point impact.
Okay. I thought it was 100 bips before. Is that Basel III and IAS 19 together or just Basel III, 110 bips?
We guided on capital models around 150 basis points for Basel III and IAS 19 in totality. Now we have taken in the effect of IAS 19 in the level of 10-15 basis points. Now we have taken into account also the SME effect and CVA effect, and the new guidance is 110 for Basel III, CRD IV impact.
Okay, great. Thank you.
Our next question comes from Andreas Håkansson of Exane. Please go ahead.
Yes. Hi. A few questions. First one is on your cost guidance. It's clear, of course, you're targeting flat cost, but with a few items excluded. Could you give us a feeling where costs are going to end up, including your FX and variable pay and so on? Second question is just an update on the negative impact from a rate cut, as ECB might cut rates next week. Can you tell us what is the impact of a 25 basis points rate cut? Last point, following up on a previous question there on the approvals. There's been discussion in Swedish media today about the potential placing for the government. Without speculating on that, just wondering, do you feel that you could start a buyback program before you get your models approved, i.e., with a capital ratio below where you need to be in the future? Thank you.
If I could start trying on the cost guidance. It's of course very difficult to say how FX rates will develop going forward from here. The same goes for the other correction we make, which is the variable salary pay, i.e., the exact income mix and how it will develop going forward. We have shown in our accounts the effect year to date of these two effects. I think we don't have any more detailed guidance on that other than, as we have said, that we will keep it flat adjusted for this, but we don't have any particular views on how this will develop.
Is the 1.8 that you did in the first quarter, is that a guidance on basically where you could end up for the full year?
You're asking us to project the FX movements, which we of course cannot do. Costs are flat. Variable salary is a small effect this quarter, not very big. Therefore it's actually FX. To guide you on FX rates, I would be happy to try to do that.
No, that's fine.
I think Rodney has another.
You can say in the Capital Markets Day on slide 49, we gave you actually an indication of where we expect the variable salaries to be between now and 2014. As you can see there, it is actually a very small amount. When it comes to the FX, we assume that we have approximately 50% of our cost in Sweden and Norway. Of that 50, the absolute majority is in Sweden. You can do your own calculation based on that. 50%, we'll say 2% depreciation of the euro versus these two currencies translates into 1% cost impact. Of course, it's very important to remember that this also impacts our revenue line. If you look at the bottom line, we have a quite good hedge towards currency.
It will be gross movements in the P&L, but the bottom line is rather unaffected.
On the rate cut, you can say we gave you also guidance at the Capital Markets Day that 100 basis points change in the interest rates affect our deposit accounts by approximately EUR 580. We have some positions in the treasury that will offset that partly. That's EUR 500 million net for 100 basis points annualized. Of the deposit accounts, we have the biggest exposure towards Finland. That is approximately 40% of our transaction accounts. We have 25% in Denmark and Sweden, and the remaining in Norway. That gives you also an indication of the impact. Please remember that this is 100% increase on rates. If you look at the reduction of rates, we're now approaching zero, the effect is slightly higher on the downside than on the upside.
Buyback, I don't think we have any comments on buyback. We have a mandate to start buyback, it requires a board decision. We have no intention to do that right now. We guided that we would do it if the government started to announce that they will sell in the market or there were any other logical reason for doing that. Otherwise, this decision is most likely to be taken in the autumn. Of course, the focus is on dividend more than anything. Buyback is an option we have if the board believes that the stock price is for any reason
Subdued or impacted by anything where we could help out by buyback shares. That's really the thinking we have done. Whether the government will sell or not is not anything I can comment.
Yeah. Okay. Thank you.
Our next question comes from Per Granberg of Danske Markets. Please go ahead.
Yes, good afternoon. Also, a couple of questions from my side. You are addressing the Danish remortgaging as a key driver of your net financial items line. My question is, the fee you have introduced rolling over on the 1st of January, or is this new remortgaging that have taken place this quarter? We don't really see the same activity in the other Danish banks. That was my first question. My second question is a bit nitty-gritty. You sold a Swedish debt, a bad debt portfolio, got a gain on the net interest income line, but this also impact other lines, reversals on the loan loss side, or is it this item that is driving up other revenues? My final question is related to the Nordic FSAs.
You got an order on your IRB models from the Danish FSA just before Easter, that you should seek approval before making larger changes. Has this just been accepted by the other FSAs or do you have similar issues pending with the other FSAs? In that context, can you share with us what is the size of the Pillar 2 add-on currently for the full Nordea Group? As far as I see, I can only find it for the Danish part of the Nordea Group. Thank you.
Well, on the first one, I think we can say that we do see the effect of what we have done in Denmark on the margins. Now, we don't disclose that on product level, of course, but we do have positive development in Q1 from that.
That was the new year rollover of the existing floating rate loans. Is it actually clients that during Q1 have changed their products?
No, you can say that it's mainly an effect from. You see this effect in the fair value item under the Danish banking unit. The activity was high in the fourth quarter, but we accounted for this in the first quarter, and it was very much related to the bond auction that took place in December.
Okay.
As you know, we are moving customers and incentivize them to move from a one-year funding to 30-year lending to them to match the funding. That's what you see in Denmark.
Okay.
I think it's dangerous to extrapolate this activity level going forward. This was a high activity level related to the bond auction in December.
Okay, perfect.
I could take your question about these bad debt sales. What were the impacts? There is no impact on loan losses, so that it's only the way it was communicated in context of the reporting.
You have sold a portfolio of bad debt and put the total gain on net interest income?
Yes.
Okay, sure. Why not?
Relating to your last question on this Danish FSA's request to seek for approval for the change we made in the way we have classified these OIV customers in the capital calculation. Yes, it was just simply a change we have made, and today's [inaudible] , together with the Swedish FSA, they agreed that we have to seek approval for that then, and we have done it, and now it's in progress. It's nothing more strange than that. These Pillar 2 add-ons, it's only in Denmark we have this type of add-on for the books so that then that's the same for the whole group.
Does this mean that it's only in Denmark it's public, or don't you have any add-on at all in the three other Nordic countries?
Not this type of add-ons, no. We don't.
Okay. Interesting. Thank you.
Our next question comes from Matti Ahokas of Handelsbanken. Please go ahead.
Yes, good afternoon. A couple of questions on the capital as well, please. Could you confirm that you don't have any positive impacts from the recent changes or revisions to the CVA and SME rebate rules? At least most of your peers have reported that they have got positive gains. I was just thinking that the 100 basis or 110 basis point negative charge should be smaller now when we have the details about CRD IV. Also regarding the same theme that some of your peers, most of your peers have actually reported the Basel III Core Tier 1 ratio already or their expected level that you haven't. Is this just a reflection of that you haven't got the advanced IRB approval and the figure would change so much? What's the reason behind you not disclosing that? Where would the figure be at the moment?
Is it close to the 13% level, or would you potentially have to revise upwards your 13% Core Tier 1 ratio target as well? Thanks.
I think we can reiterate that the guidance we have given on the Basel III effect is around 140 basis points
That is now the new guidance, including the effect of the rebate on SMEs and other changes, is leading to a new guidance of a 110 basis point. That is the guidance we are giving on the Basel III impact. The further guidance we have given is, of course, that we have said that we believe our quarter one ratio, including Basel III impact, will be about 13% by the end of 2013. We have reduced the guidance from around 140 to around 110.
The impact of the CVA and SME was roughly 30 basis points. You haven't come up with the kind of real figure, what you expect that to be unlike your peers. Is there some reason behind that?
We have given the guidance I mentioned, and the reason we have, as we also stated on the Capital Markets Day, is that we have these approvals and we have had the fact that we are going to also earn a lot of money during 2013. By the end of the year, we will have much more clarity on what is the effect of net profit, what's the effect of our approvals, and what's the effect of all our many other RWA efficiency initiatives running during this year.
Great. Thanks.
We have, of course, all the numbers by now, but especially when it comes to the CVA, we got this IMM approval in this quarter. Then please remember that when we have the AIRB and other approvals, that could affect the CVA, and that's why we don't want to give an exact number, because that is still a little moving material based on the approval we are expecting.
Great. Thanks. Very clear.
Our next question comes from Geoff Dawes of Societe Generale. Please go ahead.
Hi, good afternoon, everyone. Geoff Dawes here from Société Générale. Just one question from myself this time. It's on the shipping operations. You give obviously a slightly more confident view for the rest of 2013. Could you possibly go into a bit more detail about that? You said the freight rates have stabilized at a low level, and some of your customers were feeling more confident. It's pretty tough to see that from earnings estimates or market data, that things are really improving. Can you go through maybe a little bit more detail and sector by sector where that improvement is coming from? Thank you.
Of course. Our problem portfolios or these high-risk portfolios and the most difficult shipping subsegments are tanker market, it's containers, and it's dry bulk. We don't have exposure to container more or less at all, so that's not the big issue for us. How do we see the tanker and dry bulk? We are not expecting actually a recovery more or less during 2013. What we have seen that the market forecast, which we tend to agree, is that the recovery would start from 2014 mainly. Little by little, not very quick, but nevertheless, some kind of recovery. Our estimations, the way we have guided the loan losses are not based on a quick recovery of rates during this year. Again, we don't expect any kind of further drops either, so that we expect a relatively stable rates in these two sectors.
That is more or less what is our base estimation. Then again, of course, now when we have seen what is happening in our trade portfolio also in those segments, is that these current risk customers which has been in distressed situation for one year, one and a half years, they are still in that type of situation, but there has been hardly any new risk customers coming in those segments either. The flow of new risk customers also in this segment that's now reduced or is more or less non-existent. We are dealing with existing risk customers, and of course, we have seen some drops in collateral values, in the asset values. Not major ones, but some drops, and of course, that's the source of our increased [great] losses in this quarter on top of this collective provision we have made.
Okay. The credit losses we're seeing relate more to increased coverage on existing NPLs, and we should expect that to continue, but we shouldn't expect a huge inflow into the NPL stock. Is that the correct interpretation?
Yeah, that is what I'm saying. That is roughly also the way we see the outlook.
Got it. Thank you very much. That's very clear.
Our next question comes from Nick Davey of UBS. Please go ahead.
Yes, good afternoon, everyone. Nick Davey from UBS. Couple of questions from my side, please. Just to follow up, please, on the interest rate sensitivity to a rate cut. Can you just clarify a little bit, please, around certainly then the Finnish book, how much of your deposits are linked to your IBOR rates and how much to actual base rates? Maybe just an observation across your deposit base, if you can't do it by region, just so that we get a flavor that if your IBOR or reference rates, interbank rates generally are already down at 20 basis points, really what a base rate cut really does economically to your business. A second question, please, on Poland.
Since the announcements around the restructuring of that business, we haven't really seen much in the way of absolute cost levels coming out or economic capital or risk-weighted assets consumed by the geography coming down at all. Other than a bit of revenue weakness, can you just talk us through really what the strategy is there to turn that around and bring up the RAROCA, and generally improve the shape of the business? Thank you.
If I comment on this euro interest rate sensitivity, which is mainly coming from Finland, of course, when the rates are so low as they are, the downside risk we have, but it's not anymore so high. Now, based on our latest calculations, our structural interest rate risk in EUR is roughly EUR 25 million with 100% rate drop. Of course, 100% rate drop is not very feasible, so that we start to have a quite low sensitivity towards lower euro rate. Of course, DKK is related, and there our downside risk scenario or risk sensitivity is somewhat larger. It's roughly DKK 70 million in 100 basis points down.
On Poland, I can say that we are taking the measures which we also mentioned at the Capital Markets Day. We're broadening the offering. We're moving up in the segment on the household, which is moving well in a good way. We're also taking more initiatives on IBAs. In general, we are also looking at other options, and as we said very clearly that business units that do not meet our return target and where we see that could be difficult to reach, then we will also be willing to take structural measures. That we are doing. We're looking at that in several areas. You can say the first attempt is, of course, to see if we, through organic changes, can make things look better. I will not exclude anything. I'll just say that the return in Poland is, of course, not satisfactory.
Okay. Very clear. Thank you.
Our next question comes from Sophie Petersen of JP Morgan. Please go ahead.
Here is Sophie Petersen from JP Morgan. I had also a couple of questions. First of all, some of your Swedish peers have been kind of guiding that repricing is history in Sweden, and revenue or NII outlook looks a little bit more challenging going forward. Could you just discuss or give an update from the Capital Markets Day how you view NII opportunities, or how do you see NII developing in the four different Nordic countries? Also, could you discuss a little bit Denmark, how you see the asset quality developing there? Your losses were still relatively high, although down quarter-over-quarter, but I think your NPLs were down over 2% quarter-over-quarter. Thank you.
I think we can say on repricing and follow up on the Capital Markets Day messages, I think we can say both. If we look on both household, on retail, corporate, and on CIB customers, and we look in all the markets, then in all of these areas, margins are up in Q1. That of course is a very positive message that the repricing continues, and it's in all markets and in all segments. Of course, as we also guided in Capital Markets Day, not least in Finland and partly in Norway, we do see a stronger repricing than in the other markets on the corporate side, not least.
At least as we guided, we will see this repricing continue, and of course we will, as we have also expected it might be with a somewhat less speed, you can say, and less impact than we have seen during 2012. Directionally, it's very much in line what we said at the Capital Markets Day.
You can say that we agree that in Sweden, we have the best reprice achieved so far. We said at the Capital Markets, the two most potential countries would be Denmark and Finland, I think, going forward. Sweden's better repriced than the other countries.
We should assume that NII is going to be up year-on-year, even if the first quarter NII was down 1% year-on-year?
That depends on the deposit margin.
You can say this, of course, we are talking about now is lending margins, which we control. Then of course, we have seen a continued decrease of deposit margins. As we have also said on Capital Markets Day, on the combination, it is difficult what exactly would happen on the deposit margin side, of course, is a good question. What we can control, the lending margin increases. As I said, we are increasing in all segments, in all markets in Q1. We think we can continue to do that maybe with a slightly less speed, as I said.
Then you had a question related to the asset quality in Denmark. As you heard and as you have seen, the situation has been stable now in Denmark. The quality of our portfolio as well as the macroeconomic situation in Denmark now for relatively many quarters. Then what does it mean to our loan losses and risks? It means that little by little we start to come down because if the situation is stable and not anymore going down, then of course, we have made loans provisions when we have identified these riskier customers early in the previous quarters, and then the flow of new problem customers in this type of stable environment is, of course, decreasing. As you can see from our figures, so that the loan losses, they have been stable, slightly down. So are the impaired loans. They have been stable, slightly down.
In this quarter, what was specific was that the losses from the household customers were very low. That now the losses came mainly, or let us say, majority of the losses in Denmark, it was from the corporate sector. That is also, in a way, good signal that we don't see big issues now in the household side.
What about you're not concerned with [first stock] of interest-only mortgages that start to amortize over the next couple of years?
They will not be a big problem because we are doing this in a controlled way and incentivizing. We have been incentivizing customers already for some time to change their interest-only loans to do loans with repayment schedules, and it will not happen in one go. Our analysis is that it will not be a big issue for us. We all the time incentivizing customers to change their interest-only loans.
Great. Thank you very much.
As a reminder, if you wish to ask a question, please press star one on your telephone keypad. We will now take our next question from Fridtjof Bernt of Arctic Securities. Please go ahead.
Yes. Thank you. Three questions, if I may. First, if you could just explain how and what changes were made to the Norwegian risk model when risk weights fell on mortgages from 16% to 9% through 2012. Second, if you could say something more regarding the Pillar 2 requirement in Denmark, because I would actually expect it to be more in line with Danske. If I may see from the table, I would expect it to be around 2.5%, which is a slightly half percentage point above Danske. What do you think is reflected in that Pillar 2 requirement? Third, regarding IRB models which you hope for approvals in Q2.
If there were any delays in countries or even if there were strictures, safety margins and so on between the countries, is there something preventing you from shuffling portfolios around between the countries? If you have any comments regarding that. Thank you.
Yeah. Maybe we should start from the back, Ari, on approval of AIRB.
Yeah, of course, what we will get and what we have seen is this kind of, let's say, full approval for the advanced in all the countries. Yes, of course, there will be different parameters in different countries. There may be different this type of safety margins in different countries. In theory, you are right. Of course, we could start to reshuffle portfolios and arbitrage in this, but that's not definitely what we will start to do. That would be stopped sooner or later if you would like to do that by the regulators, I'm sure. That would be this type of no-brainer to start to use that type of regulatory arbitrage. I'm not sure that I got your question about this risk weights in Norway. Can you repeat it?
Yeah. I think if I see from your Pillar 2 report in Norway, I see that the risk-weighted mortgages fell from 16% end 2011 to 9% end 2012. What has been driving those changes? Is it model changes, or if you could say some add on any comments there, that would be helpful.
Okay. What we do every year is that, of course, we are validating our all parameters and models, and that is this type of normal yearly parameter validation. This is what our model shows and our experience shows that actually our risk weights were too high in that part of portfolio in Norway, in the retail Norway. That is actually what has happened in our portfolio. This is our internal model. Of course, we are faced with these risk floors, whatever regulation in Norway will be set. This is our actual risk and how that has developed in Norway.
Could I just follow? Would you say that is a big shift for a model from one year to another, or is it normal in portfolios in general that you could see more or less a halving of risk weights through validation?
This is bigger than normal, but the background for this is that now we have been able to increase the quality of our information in Norway from the sourcing information from them, let's say collateral systems. This has been this kind of cleanup of this model which has been underway, that we have not been able to do it for some years, so this is bigger than normal annual impact.
Okay.
You can say what happens with these approvals is always that if you don't have sufficient data quality or you lack experience for sufficient long time, then the FSA have approved the model and said, "But if you can validate this parameter with more data, then you can change the parameter." That is exactly what we have done. This is quite a big move, I agree on that, but we have a number of areas where we have a bit too high parameters. You can argue that there's an add-on, or whatever you would call it, in reality, because we have not been able to sufficiently quantify the real risk. When we do it, then it's approved, and then we work with that. We all know that there will be risk floor in Norway.
Yeah.
The question reflects the real experience risk, and that is approved by the FSA.
Thank you. Just a third question related to Denmark, because like I said, I would expect the Pillar 2 requirement to be somewhat similar for Danske and Nordea, and it seems to be higher for Nordea. What do you think this Pillar 2 requirements reflects in that respect? Do you have any comments here?
No, it's not possible to us to comment on what our peers are doing. I'm sorry. We can only answer for what we are doing.
What do you think the Pillar 2 requirement is reflecting for you then? Anything particular, or?
No, I think that we understand this requirement, and there's a page for it, and we just take it. I don't have.
additional comments on it. It is what it is, and then there is an argument for it, and we can live with it.
The 2.5% requirement, if it's something similar to that is what is reflected in the management or Pillar 2 buffer, when you look back at your Capital Markets Day slide stating there's 1.5% add-on for potential countercyclical buffers, Pillar 2 buffers and other buffers. That 2.5% is reflected in that, isn't it?
Actually, now I only understand what you are asking for this additional buffer required from the local CECL rules in Denmark, this CECL recommendation. That doesn't have impact on the Nordea's group figures and Nordea's group capital buffers and these different capital buffers we have at the group level. The answer to your question is no, that this is not changing our.
No
because what we disclose in the Capital Markets Day.
Okay. Thank you very much.
Understand within the beginning.
Thank you.
Our next question comes from Matthias Falkiewicz of BRE Bank. Please go ahead. Please go ahead, sir. Your line is now open. Our next question comes from Riccardo Rovere of Mediobanca. Please go ahead, sir.
Good afternoon to everybody. Three questions from my side. Sorry to get back again to a question that has already been asked, but still I struggle to understand. In rates in the Euro Area, short-term rates, EURIBOR three months, it is 0.20, completely disconnected from current policy rates, 0.20, 0.75. It is like saying that your operations in Euro Area countries are actually working with policy rates at 0.25, 50 basis points below the current one. I really struggle to understand why you should suffer from any technically formal rate cut. Sorry to get back to that. Second question I have is, rates will not go down probably more in at least EURIBOR three months in Euro Area, in Denmark. This could be the case in Sweden and eventually in Norway.
What is the threshold below which there is no mitigation action that could eventually compensate for further drop in short-term rates in Sweden and Norway? 25 basis points from the current levels, 50 basis points from the current levels, 100 basis points? Finally, my third question is on capital. If I take your Capital Markets Day indication, which is risk-weighted assets remain more or less anchored at kind of EUR 170 billion risk assets and use your 13% Core capital, I end up with more or less EUR 22 billion of Core capital in your mind. If I take the asset of the bank, which is almost EUR 700 billion, and add more than EUR 100 billion of off-balance sheet commitments, I know it is a bit brutal calculation, but I end up with a kind of leverage ratio below 3%.
I know I should adjust assets here and there, I know, is it something that you're looking at? Is it something that you're worried? Is it something that you are discussing with the regulators? Thank you very much.
If I start from the last question, you are talking about the leverage ratio. Our leverage ratio is 4%, we are not worried about this, is what we are saying.
Sorry to interrupt. This 4% under Basel III? Okay, fine. Good.
That is not the big issue for us, for the time being, at least. These rate cuts, of course, these figures we gave, it is simply a calculation that if the interest rate would be down, whether it is kind of administrative rate or not, but this answer was based on if the discount actual rates are coming down in the marketplace, the way we fund, then this should be this kind of interest rate sensitivity. Everybody can assess themselves that whether this type of administrative rate cuts that will lead to also decrease in the market rates. That was not the point of our answer before.
Sorry to interrupt. It is like saying there is no mitigation you can do, no hedging, no nothing.
On the deposit side, there is hardly anything we can do. If the rates are down, they are down. That's the fact, of course, the way to compensate that is that we are always trying to go up in the lending margins. So far we have been relatively successful, as you can see from our blended margin development. It's difficult to mitigate this total market rate decrease.
Very clear. Thank you very much.
Our next question comes from Alvaro Serrano of Morgan Stanley. Please go ahead.
Hi. Yeah, very final question, just on the core capital calculation. I see there's a deduction in this quarter from insurance companies of EUR 617 million that I haven't seen before. It's deducted in Tier 1 instead of core capital. I just want to get the view of how the core capital accumulation has gone. In the quarter, it's been 10 basis points, obviously, as you've pointed out. Has the core capital calculation changed in the quarter, or what's that EUR 617 million?
No, the 617 is in the life insurance. You could say previously our entire investment in life was deducted from the total capital base, and now from this quarter, 50% is from the total capital, 50% from the Tier 1 capital ratio, not the Core Tier 1. If you look at the Core Tier 1, it's a fairly straightforward calculation. We increased it by approximately EUR 260 million, our profit was EUR 796, and then we deduct 40% as anticipated dividend. That brings it down to around EUR 480 level. You take out EUR 248 from the IAS 19, and then you're down to the increase in the Core Tier 1. It's a fairly straightforward calculation.
Okay. Just wanted to clarify that. Thank you.
As a reminder, if you wish to ask a question, please press star one on your telephone keypad. As we have no further questions at this time, I would like to hand back to our speaker for any closing or additional remarks.
Okay. Thank you very much for attending this telephone conference. We are happy to take any questions, please don't hesitate to give me a call. Now, good luck. Thank you.
Thank you. That will conclude today's conference call, ladies and gentlemen. You may now disconnect.