Good day, and welcome to the First Quarter Report 2013 International Telephone Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Rodney Elwin. Please go ahead, sir.
Yes. Thank you very much and welcome all of you to this Q1 2013 result presentation. We will start with a presentation by our President and Group CEO, Mr. Christian Clausen and then it will be followed by a Q and A session. And with us in the room here, we have also our Chief Risk Officer, Mr.
Ari Katholie and our Chief Financial Officer, Mr. Torsten Hagen Jorgensen.
Christian, please? Thank you and welcome everyone. I will do a sort of a 10 minute presentation of the slides, which is available and I'll start with the key messages. We deliver on the plan which we presented at our Capital Market Day. We have an underlying profit that seems a little flat, but it's actually underlying up when we correct for 1 off items.
We see lower activity, low loan demand in the corporate sector. We deliver flat cost again and we see a robust credit quality with improvement in impairments, flat RVA with quite a lot of activity going on in efficiency gains and then the Core Tier 1 increased to 13.2 percent and then an award another award this quarter, it's the 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 and the operating profits which is actually slightly up.
And when we move to the net interest income, it may look a little soft. But actually we have 2 days less lower return on liquidity buffer. There are also a few other items which actually suggest that the net interest rate income is at least flat. And the movement in net interest income is reflected in the blended margin, which is unchanged at 107 basis points slightly up and deposit margins down and lending margins up. Corporate loan demand is low, slightly down and we see household spending still growing around 2.5% on the year.
Funding gap were under control. Fee and commission income is nicely off a good trend. And we see that a lot of our income activities is actually reflected here because that's where we see the activity during the savings area and the risk management area. And apart from the seasonally 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 and savings is very, very high.
And low interest environment and strong savings rates of course suggests an issue for many customers on how to place their savings. So our savings plan service is actually one that is gaining a lot of momentum. And we see assets under management up, performance strong and strong inflow in the key areas, some outflow in institutional sales from 2 actually 2 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.
And then 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. And 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, but 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.
And the same argument goes with shipping. We see lower loan losses. Also here we have some collective put on, but freight rate stable and new tonnage also coming down. So also here we have a sentiment also from the main stronger ship 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. And we keep generating capital. We have a slightly negative effect of the new revised IAS rules where we have to take the negative net result not net result, the negative net liabilities directly to the IAS to the equity. But we still build a core Tier 1 equity. I'll come back to that later.
And the same thing with risk weighted assets stabilizing a lot of rollouts and stuff happening. I'll come back to that a bit later. So core Tier 1 up to 13.2. Percent. 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 ancillary business is not likely to get.
So 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. So all in all, I would say that they are following the plan in a good way. And where 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 is 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 no risk activity. So first of all, the IVAs, you see the bridge on page 25. RVA efficiency of €2,000,000,000 mainly the IMM rollout counterparty risk a few more. And then we have some negatives, which are the FX effects which of course depending on the state of the Swedish and the weakened corona versus the euro.
And then these interimistic regulatory changes which is higher loss given default for some real estate in 2 of our countries, which have expired. But that effect will disappear when we get our EIB approval hopefully during Q2. Quarter one ratio up 10 basis points again. You see we underlying deliver sort of 40 points basis points in efficiency and profit. So then we have the IAS negative and have this regulatory changes in FX.
So all in all exactly according to our plan. And the 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%. And still we keep on getting the new customers sort of 4% per year annualized and then we crush them better. It's very much the savings area as I mentioned several times.
So 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 €450,000,000 over the next 3 years. We have $11.40 this quarter according to plan. And we are trying to line up a bit more precise exactly what we are doing.
These are the deliveries in this quarter. So we've built more advice alternatives 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 advised. And then a lot of processes have been implemented automated reporting processes. We have conferred more staff to our offshore center and Poland manual processes.
Life and Pigeon have delivered well on the cost efficiency and the finance value program, which is where we have 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. So all in all according to plan. And 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.
And the ROE bridge is very clear. That's actually also according to the plan except from the external factors of course. So the business driven ROE development plus 2.5 percent 2.1 percent repricing net commission income, net fab value slightly down and lower business volumes, higher loan losses lower loan losses. But then the external factors of course knocking in and still the low interest rates are having significant effect on our income line and guarantee fees for state guarantees and then of course increasing capital which we have in the calculation. So as we say on the final slide, we are delivering on the plan on all elements and despite a quarter with low economic activity and some macro uncertainties up there making both household and corporate holding back visible in lower load demand.
Despite that, I actually think we have delivered quarter exactly as we have planned for. So this concludes my presentation. I will hand over to the Q and A session.
Yes, please operator. We can now open up the line for Q and A.
Thank We will take our first question from Omar Keenean of Nomura. Please go ahead, sir.
Good afternoon. Thanks very much for taking the 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? And just linked to that, how much toing and froing with the regulators is there?
Do you think everything is proceeding with them on schedule? And then 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 regard to the advanced IRB rollout for Nordic corporates, we stick to the guidance we gave on the Capital Market Day that we do expect to get this approval during Q2. And we think the process is progressing as we could envisage and so no big changes on that. And then you're right, we are updating the guidance we gave on the Capital Markets Day.
We guided the market on 5th parcel 3 and IAS 19 impacts of around 150 basis points. And now IAS nineteen have materialized and the new guidance for Basel III impact is 110 basis points, around 110 basis points impact.
Okay. I thought it was 100 bps before. So is that Basel III and IFRS 19 together or just Basel III 110 bps?
We guided on capitalized around 150 basis points in for Basel III and ISS19 in totality. And now we have taken in the effect of ISS19 in the level of 10, 15 basis points. And now we have taken into account also the SME effect and CBA effect and the new guidance is 110 for Basel III, CRD4 impact.
Okay, great. Thank you.
Our next question comes from Andreas Hakansson of Agzan. Please go ahead.
Yes. Hi. A few questions. First one is on your cost guidance. It's clear, of course, you're targeting flat costs, 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 on the an update on the negative impact from a rate cut as ECB might cut rates next week. So can you tell us what is the impact of a 25 bps rate cut? And last point following up on the previous question there on the approvals. There's been discussion in Swedish media today about a potential placement for the government.
And 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 what is how FX rates will develop going forward from here. And 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.
And I think we don't have any more detailed guidance on that other than as we have said that we will keep it adjusted for this. But we don't have any particular views on how this will develop.
But is the 1.8 that you did in the Q1 is that a guidance on basically where you could end up for the full year?
But you're asking us to project the FX movements, which of course cannot do. So costs are flat. Variable salary is a small effect this quarter not very big. Therefore, it's actually FX. So to guide you on FX rates, I would be happy to try to do that.
No, that's fine.
I think Reiten Halsimel. Yes.
You can take into Capital Markets Day on there on slide 49. We gave you actually an indication of where we expect the variable salaries to be between now 2014. And as you can see though it's actually a very small amount. Then when it comes to the FX, I mean, we assume that we have approximately 50% 50% of our costs in Sweden and Norway. So and of that 50, the absolute majority is in Sweden.
So then you can do your own calculation based on that. So 50% but say 2% depreciation of the euro versus these two currencies translates into 1% cost of impact. But then of course it's very important to remember that it also impacts our revenue line. So if you look at the bottom line, we have a quite good hedge towards currencies. So it will be gross movements in the P and L, but the bottom line is rather unaffected.
And 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 rate affect our deposit accounts by approximately €580,000,000 And then we have some positions in the treasury that will offset that part. So that's €500,000,000 net 4 100 basis points annualized. Then you can say 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. So that gives you also an indication of the impact.
But please remember that this is 100% increase in rate. If we look at the reduction of rates, we're now approaching 0. So the effect is slightly higher on the downside than on the upside.
Buyback, I don't think we have any comments on buyback. We can we have a mandate to start buyback and we have 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 resell in the market or there were any other logic reason to do it that otherwise this decision is most likely to be taken in the autumn. And of course, the focus is of course on dividend more than anything.
Buyback is the option we have if the Board believes that the stock price is for any reason subdued or impacted by anything that where we could help out buy back 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're addressing the Danish re mortgaging as a key driver of your net financial items line. My question is this the fee you have introduced rolling over on the 1st January or is this new reemorging 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. Your Solar's really stepped our bad debt portfolio got a gain on the net interest income line. But this also impacts our lines reversals on the loan loss side?
Or is it this type that is driving up other revenues? And 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 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.
But that was the New Year or the New Year rollover of the existing floating rate loans? Or is it actually clients that during Q1 have changed their products?
No. I mean you can say that
it's mainly an effect from and you see this effect in the fair value item under the Danish Banking unit. And this is mainly actually coming from the 4th the activity was higher in the 4th quarter that we accounted for this in the Q1. And it was very much related to the bond auction that we took place in December. And as you know, we are moving customers and incentivize them to move from a 1 year fund into 30 year lending to them to match the funding. So that's what you see in Denmark.
Then I think it's dangerous to extrapolate this activity level going forward. So this was in high activity level related to the bond option in December.
Okay. Perfect.
Then I could take your question about these bad debt sales. What were the impacts? There is no impact on loan losses. So it's only that's why it was communicated in context of the reporting.
So you have sold a portfolio of bad debt and put the total gain on net interest income? Yes. Okay. Sure. Why not?
Then related to your last question on this Danish FSA's request to seek for approval for the change we made in why we have classified these Huayvi customers in the capital calculation. Yes, it was just simply a change we have made and today's FSA together with the Swedish FSA, they agreed that we have to seek approval for that and we have done it. And now it's in progress. It's nothing more strange than that. And then 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 3 or the Nordic countries?
No, 3 add ons. No, we don't.
Okay.
Our next question comes from Matti Ahokas of Handelsbanken.
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? Because at least most of your peers have reported that these they have got positive gains. So I was just kind of thinking that the 100 basis or 110 basis point negative charge should be smaller now when we have the details about CRD IV?
Then also regarding the same theme that most of your peers most of your peers have actually reported the kind of Basel III core Tier 1 ratio already or their expected level of 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? And or what's the reason behind you're not disclosing that? And where kind of 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.
No, but I think we can reiterate that the guidance we have given on the Basel III effect is around 140 basis points. And that is now the new guidance including the effect of the rebate on SMEs and other changes is leading to a new guidance of 110 basis points. So that and that is the guidance we are giving on the Basel III impact. And the further guidance we have given is of course that we have said that we believe our core Tier 1 ratio including Basel III impact will be about 13% by the end of
2016. So we have reduced
the guidance from 140 from around 140 to around 110.
So 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?
Well, 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 you can say we have these approvals and we have had the fact that we are going to also earn a lot of money during 2013. So by the end of the year, we will have much more clarity on what's the effect of net profit, what's the effect of our approvals and what's the effect of all our many other RBA efficiency initiatives running during this year.
Great. Thanks. We have of course all the numbers by now, but especially when it comes to the CDA. We got this IMM approval in this quarter. And 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 you an exact number because that is still a little moving material based on the approval we're expecting.
Great. Thanks. Very clear.
Our next question comes from Jeff Dawes of Societe Generale. Please go ahead.
Yeah. Hi. Good afternoon, everyone. Jeff Dawes here from SocGen. Just one question for myself this time.
It's on the shipping operations. You gave 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. But it's pretty tough to see that from earnings estimates or market data that things are really improving.
So can you go through maybe a little bit more detail in sector by sector where that improvement is coming from? Thank you.
Yes. Of course, our problem portfolios or these are high risk portfolios and the most difficult shipping subjects segments are tanker market, it's containers and it's drybulk. We don't have exposure to container more or less at all. So that's not a big issue for us. And how do we see that the tanker and dry bulk?
We are not expecting actually a recovery more or less during 20 13. 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. So that our estimations to the way we have guided the loan losses are not based on quick recovery of rates during this year. But then again, we don't expect any kind of further drops either, so that we expect relatively stable rates in these two sectors.
That is more or less what is our base estimation. And then again, of course, now when we have seen what is happening in our credit portfolio also in those segments is that these current risk customers, which has been in this let's say situation for 1 year, 1.5 years. They are still in that type of situation, but there has been hardly any new risk customers coming in those segment feeders. So, flow of new risk customers also in these segments that have now reduced or is more or less non existent. So we are dealing with the existing risk customers.
And of course, there's still 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 decreased credit losses in this quarter on top of this quality provision we have made.
Okay. So the credit losses we're seeing relate more to increased coverage on existing NPLs and we shouldn't expect that to continue, but we shouldn't expect a huge inflow into the NPL stock. Is that the correct interpretation?
Yes. That is what I'm saying. So 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 Davy of UBS. Please go ahead.
Yes. Good afternoon, Yvonne. Nick Davy from UBS. A couple of questions from my side please. Just a 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 arrival rates and how much to actual base rates? And 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 LIBOR or reference rates into bank rates generally are already down at 20 basis points really what a base rate cut really does economically to your business? Then the second question please on Poland. Since the announcements around the sort of restructuring of that business, we haven't really seen much the way of absolute cost levels coming out or economic capital or risk weighted assets consumed by the geography coming down at all.
So 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 RARAKA car 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. So that now based on our latest calculations, our structural interest rate risk in euros is roughly €25,000,000 with 100 percent rate drop. So and then of course, the 100 percent rate drop is not very feasible, so that we start to have a quite low sensitivity towards lower euro rates. Then of course, Danish krona is related and there our downside risk scenario is risk sensitivity is somewhat larger. It's roughly €70,000,000 in the 100 basis points down.
Yes. On Poland, I can say that we are taking the measures which we also mentioned at the Capital Market Day. We are broadening the offering. We're moving up in the segment on the household, which is moving well in a way. We're also taking more initiatives on IVAs.
But 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 that could be difficult to reach and then we will also be willing to take structural and that we are doing. We're looking at that in several areas. But you can say the first attempt is of course to see if we through organic changes can make things look better. So 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 Pettersen of JPMorgan. Please go ahead.
Here is Sophie Petterzen from JPMorgan. I had also a couple of questions. First of all, some of your Swedish peers have been kind of guiding that repricing its 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 different or the 4 Nordic countries?
And 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 on quarter. But I think your NPLs were down over 2% quarter on quarter? Thank you.
Yes. I think we can say on repricing and follow-up on the Capital Market Day messages, I think we can say both if we look on both household on retail corporate and on CRB customers and we look in all the markets then in all these in all of these areas margins are up in Q1. So that of course is a very positive message that the repricing continues and it's in all markets and in all segments. Now of course, as we also guided in Capital Markets Day, not least in Finland and partly Norway, we do see a stronger repricing than in the other markets on the corporate side, not least. So 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. But directionally, it's very much in line what we said the customer is doing.
But you can say that we agree that in Sweden, we have the best reprice achieved so far. So we set up a delta mine in 2 most potential countries would be Denmark and Finland, I think going forward. So Sweden is better repriced than the other countries.
So we should assume that NII is going to be off year on year even if the Q1 NII was down 1% year on year?
That depends on the deposit margins.
I mean, you can say this of course we are talking about now is lending margins which we control. And then of course we have seen the then of course we have seen a continued decrease of deposit margins. And as we have also said on capital markets, on the combination it's difficult. What exactly will happen on the deposit margin side, of course, is a good question. But what we can control the lending margin increases, as I said, it's we are increasing in all segments in all markets in Q1.
And we think we can continue to do that maybe with a slightly less speed as I said.
And 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. I mean the quality of our portfolio as well as the macroeconomic situation in Denmark now for relatively many quarters. And 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 launch provisions when we have identified these kind of riskier customers early in the previous quarters and then the flow of new problem customers in this stable environment is of course decreasing.
And 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. And in this quarter, what was specific was that the losses from the household customers were very low. So that now the losses came mainly or let's say, majority of the losses in Denmark, it was from the corporate sector. So that is also in a way a good signal that we don't see big issues now in the household side.
And what about you're not concerned with the first stock of interest only mortgages that start to amortize over the next couple of years?
It 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 the loans with repayment schedules. Finalize it is that it will not be a big issue for us. But we are all the time incentivizing customers to change their interest only loans.
Great. Thank you very much.
We will now take our next question from for Geoff Berenz 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 model of risk model when risk weights fell on mortgages from 16% to 9% through 2012? 2nd, 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 you have an explanation on why you think you are if I may see from the table, I would expect it to be around 2.5%, which is a slightly 0.5 percentage point above Danske.
What do you think is reflected in that Pillar 2 requirement? And third, regarding IRB models for which is which you hope for approvals in Q2, if there were any delays in countries or even if there were stricter 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 AIP.
Yeah. Of course, what we will get then what we have seen is kind of, let's say, full approval for the VAST 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. And 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. So that would be stopped sooner or later if we would like to do that by the regulators, I'm sure. So that would be the step of a no brainer to start to use that type of regulatory arbitrage. I'm not sure that I got this your question about this risk weight in Norway. Can you repeat it?
Yes. I think if I see from your Pillar 2 report in Norway, I see that the risk weight of mortgages fell from 16% end 2011 to 9% end 2012. There have been I think there 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 the normal yearly parameter validation. And 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. So that is actually what has happened in our portfolio. Then this is our internal model.
Of course, then we are faced with these risk floors whatever regulation in Norway will be set, but this is our actual risk and how that is how that has developed in Norway.
Could I just follow-up? Is that would you say that that is a big shift for a model from 1 year to another? Or is it normal in portfolios in general that you could see a more or less a halving of risk weights through validation?
This because they're 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. And then so that this has been this kind of cleanup of this model, which has been underway for us 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. And 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 reflects the real experience risk and that is approved by DSA.
Thank you. And just a third question related to Denmark because I would 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 for us to comment on what our peers are doing. So I'm sorry, we can only answer what we are doing.
What do
you think the period 2 requirement is reflecting for you then? Anything in particular or?
No. I think that this is we understand this requirement and there's a stage for it and we just take it so that I don't have any guide over. Let me give you more comments on it. It is what it is and there is an argument for it and we can live with it.
And the 2.5% requirement, if it's something similar to that, that is what is reflected in the management or Pillar 2 buffer when you look in your when you look back at your Capital Markets Day slide stating this one 0.5% 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 CV rules in Denmark, this CV recommendation. And that doesn't have impact on the Nordisk Group figures and Nordisk Group capital buffers and these different capital buffers we have in at the group level. So that the answer to your question is no, this is not changing our capital guidance. It's what we disclosed in the Capital Markets Day.
Okay. Okay. Okay. Thank you very much. Thank
you. Our next question comes from Matthijs Falkiewicz of B. RE Bank. Please go ahead. Our next question comes from Ricardo Rivera 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, you arrive at 3 months, it's a 0.20, completely disconnected from current policy rates, 0.20 75. So it's like saying that your operations in euro area countries are actually working with the policy rate at 0.25, 50 basis points below the current one.
So I really struggle to understand why you should suffer from any technically formal rate cut? Sorry to get back to that. 2nd question I have is rates will not go down probably more in at least Europe or 3 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?
And finally, my third question is on capital. If I take your Capital Market Day indication, which is risk weighted assets remain more or less anchored at 100 and kind of €170,000,000,000 risk assets and use your 13% core capital, I end up with more or less €22,000,000,000 of core capital in your mind. If I take the asset of the bank, which is almost €700,000,000,000 add more than €100,000,000,000 of balance sheet commitments. I know it's 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.
But 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're talking about the leverage ratio. Our leverage ratio is 4%, so that we are not worried about this is what you are saying.
Sorry to interrupt this 4% under Basel
III, the way okay, okay fine. Good. So that's not
a big issue for us for the time being at least. Then these rates cuts of course, these figures we gave, it's a simply a calculation that if the interest rate would be down, I'm not whether it's kind of administrative rate or not, but this answer was based on if these kind of actual rates are coming down in the marketplace that the way we fund then there should be this kind of interest rate So then everybody can assess themselves that whether this type of administrative rate cuts that will lead to also decreasing in the market rates. But that was not the point of our answer before.
Sorry to interrupt. It's like saying there is no mitigation you can do, no hedging, no nothing?
On the deposit side, it's there is hardly anything we can do. If the rates are down, they are down. And that's the fact, of course, the way to compensate that is that we are always trying to go up in the lending margins. And so far we have been relatively successful as you can see from our blended margin development. But it's difficult to mitigate these double market rate
decrease.
Very clear. Thank you very much.
Our next question comes from Alvaro Serrano of Morgan Stanley. Please go ahead.
Hi. You have very final question just on the core capital calculation. I see there's a deduction in this quarter from insurance companies of $617,000,000 that I haven't seen before. Is and 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 pointed out. But has the core capital calculation changed in the quarter? Or what's that 617,000,000
No. The EUR 617,000,000 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 a core Tier 1. But if you look at the core Tier 1, it's a fairly straightforward calculation.
I mean, we increased it by approximately €250,000,000 And then our profit was €796,000,000 And then we deduct 40% of anticipated dividend. So that brings it down to around 4.80% level. And then you take out 248% from the IAS 19 and then you're down to the increase in the quarter 1. So a fairly straightforward calculation.
Okay. So I just want to clarify that. Thank you.
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. So please don't hesitate to give me a call. And now good luck.
Thank you.
Thank you. That will conclude today's conference call. Ladies and gentlemen, you may