Good day, and welcome to the Nordea Bank AB 4th Quarter and Year End Report 2012 International Telephone Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rodney Alvin. Please go ahead.
Thank you, operator. Most welcome to this presentation. We will start with a very brief introduction of our group CEO, Mr. Christian Clausen. And then we will follow that by a Q and A.
We will have the opportunity to ask questions to Mr. Clausen to our CFO, Mr. Torsten Hagen Jorgensen and our Chief Risk Officer, Mr. Erik Capri. So Christian, please.
Yes. Hello everybody. It's a pleasure to be here and present just very briefly
a few things. I know you've probably all seen the news today. But on my first slide, I have the P and L. And you saw that we had a good income development and a very well controlled cost development, which means that actually our risk adjusted profit is up 20%, ending the year on a 12.1% return on equity in Q4 and building 13.1% for Q1. And based on that, we put forward our plan for the future.
We have delivered on the 2011 plan above what we set out to do in 2011, 1.5 years ago. And now we have planned for the coming years, which is shaping the future relationship bank as we call it. A lot to do with moving closer to customers, managing capital and cost and risk very carefully. And we actually have 3 areas where we intend to deliver and where we haven't today made disclosure on how we see these things going forward. 1 is our capital generation going forward and the fact that we return excess capital to shareholders.
The second one is our E target, which we have revised or confirmed, but revised in the way it's defined to 15% on a core Tier 1 above 13% in a normalized interest rate environment to make it more clear. And the core Tier 1 ratio above 13% is our new capital policy and that we intend to deliver continuously on a very well diversified and resilient business model, which should create very low volatility in our results. As it has done in previous years, it will also that in the future. And we will do that very much by increasing share of what is repricing, continued cost reduction, risk management and very much our accelerated risk weighted assets efficiency program, which I have delivered in Q4 and Q3 will deliver even more during next year and also going forward very much compensating the Basel III effect and the growth we have in our RVAs. And my final slide is the one that summarizes our capital generation in recent years, which demonstrates that we have built €20,000,000,000 of capital.
We have retained 12,000,000,000 for equity and paid out €7,600,000,000 Going forward, we will not need to build very much equity according to our plans. And therefore, our capital duration will be available to shareholders. And the way we will do that will be discussed later on dividends or we will get a mandate for share buybacks which is another possibility. So this will end my introductory remarks and I'm sure we will have questions now.
We can open up for questions now.
Thank We'll now take our first question from Matti Ahokas in Hamburg. Please go ahead.
Yes. Hi. Good afternoon. Two questions, if I may. Firstly, regarding Norway, what's your take on the mortgage risk weights?
What do you assume they will be now after March? And have you already increased the mortgage rates in Norway to add up for this? And if not, when will you do it? And how much of an impact do you expect that would have? The second question is regarding Denmark.
Hearing your comments earlier today that obviously it looks like it's stabilizing. But what are the key sensitivities for the reported loan loss in Denmark? House prices apparently are stable, but what is really the game changer? What could make that the loan losses could be a lot lower than what they have been? Thanks.
Yes. Georgios on the mortgage risk rates in Norway, we have included in our assumptions that there will be mortgage risk rates of somewhat about 20% in place.
What about the margins or the mortgage rates?
I think our margins have improved and I think we'll see potential for further increase in margins.
But have you increased the rates already? And or do you plan to do so in the coming future?
If I may Matti, as you might recall, we started last year with a fairly low profitability in Norway in 2011 beginning 2012 coming from 2 low margins. So what we have done in 2012 is actually to raise the margin to have a more sufficient profitability with the current situation. So we have not taken into account any further increase in risk weights and anything like that. So the main purpose of 2012 has been to restore margin to a more decent profitability with the current capital requirements.
Understood.
And then I could comment on this your question on sensitivities in Denmark. What could be the levers to take the bonus level down? You mentioned yourself one important lever is the house prices naturally. But then I would say that if an overall consumer confidence is the main issue in the Danish economy, so that then in a way when that is up then naturally that will influence on SME local SME corporate and on their performance as well as that will be the trigger also for the house prices. And all issues relate to that.
And of course, then all these kind of macro drivers are, of course, behind this consumer confidence that when the situation in Europe and in the export markets, it's improving and if we shoot like that, then of course, that will have an influence. That will be my answer.
All right. Great. Thanks.
We'll now take our next question from Jeff Dawes from Societe Generale.
Hi, good afternoon. Jeff Dawes here from SocGen. Two quick questions from myself. First of all, if we can look at the Finnish operations for a little bit, obviously, the pre provision and post provision profitability is quite depressed. Is there anything you can do around asset repricing?
Or is that absolutely impossible in the finished market particularly on the mortgage side? And costs haven't really added too much to that equation either. So how would you get the Finnish profitability up to adequate levels? Or is it purely about waiting for a rate increase? 2nd good question is around the shipping operations.
You guided at the start of last year that the shipping division would remain breakeven or profitable every quarter throughout 2012. That has obviously been the case. Can you us a similar outlook or guidance for 2013 I. E. Will the shipping book be profitable every quarter?
Thank you.
Okay. If I can start talking about Finland. Yes, we see that there is a potential for margin hikes actually both in the mortgage book as well as in the corporate book. The Finnish market has seen and still is very price sensitive, so that the banks who has started this type of increasing margins usually have seen that quite quickly in terms of volumes and number of customers and market share. So that's kept a little bit of this type of trend.
But now all the banks, they are actually now taking up their margins. And I'm relatively, let's say, confident that we can see some kind of increase, especially in the market, let's say, margins in Finland. Then again, of course, Finnish Business is the structure of Finnish business is very sensitive to the interest rate as you said yourself, so that we have a very high and big transaction account portfolio in Finland higher in relative terms than in any other markets. And of course, that is very sensitive to interest rate levels and that is of course one driver which is keeping this profitability a little bit lower in Finland compared to other countries. When it comes to the cost, let's say, savings and efficiencies, naturally, we are running the same type of, let's say, programs as in all other countries.
So that there is no Finland is no exception on that. So that definitely we will work on cost efficiency also in Finland.
Okay.
Then should I continue on shipping as well or? Yes.
Shipping will be profitable going forward as well. It's been profitable also the crisis and it will continue because we are saying that loan losses may stay at this level for some more quarters. We actually don't really know when it will start to go down, but it's unlikely it will go up And we see some improvements coming in towards the end of the year in shipping values and other things. So we are determined to keep ourselves profitable every single quarter during the crisis in our shipping business, which just shows what fantastic business line it is, what it is in the world. So and I just met shipping companies both in China and Singapore.
And I can tell you they really know who have supported them during the crisis. So this would be a fantastic business now when these loan losses start to be a bit lower.
Great. That's fantastically clear. Thank you.
We will now take our next question from Omar Khinan of Nomura. Please go ahead.
Hello. Thanks very much for taking the questions. Just two short questions, if I may. Firstly, just wondering on the one point 5% guidance of RWA efficiency. I was wondering if you could give us an update of the timetable we can expect that to come through, in particular, when will be by the time you have to start reporting on Basel III, which for the Swedish banks might be by the 1st July of this year?
And just a second quick question. Just on capital and you discussed that excess capital over your policy requirement to be returned to shareholders and now you're at 13% fully loaded core Tier 1. I was just wondering if you could perhaps just give us a bit more insight into how you're thinking about how projected growth, your current capitalization and payout policy and other options fit together? Thank you.
Maybe I could start on the last question just to clarify. We are now 13.1 percent, but in 2.5 percent as we say in the table for example in our Analyst presentation, table 20. Just to make it clear. So what we're saying there, we have 13.1% now, then we will have the Basel III effect, 1.5% we will grow and then we will have our efficiency programs. And this will knock in during the year, but we expect in every single quarter to be above 13% for the rules applying in that particular quarter.
So returning excess capital, yes, but that sometime I think we will need to see the Basel III reporting come in as expected. And then that stance will be taken. It's a clear commitment to return capital. We don't want to run the bank with more capital than necessary. With this very well diversified business model with low volatility, we can run the bank with somewhat lower capital than others because the volatility is so much less.
But we are not giving any precise timing of excess capital returning to shareholders,
extend on that
Sorry. Just I guess just to extend on that question. I guess if we think about the full Basel III deductions taking place from the 1st July, I guess how much of the 1.5% efficiency measures will be complete by the 1st July as well?
Okay. Then I can take that part. If you have these presentation slides on Page 21, we have this kind of waterfall chart showing a little bit on the flow chart showing a little bit on the elements. So that in this RVA efficiency targets, we are aiming at executing NOK 25,000,000,000 during this year. And then your question is that how that is, let's say, scheduled between the first half and second half.
Most of this is expected to come from this approval of advanced IRB model in Nordic Corporate Institutional Portfolios and that we expect to come in place during the first half. Then let's say from the rest that is split the EMEA between the first half and second half. So that let's say roughly 70% of this 70% to 75% of this €25,000,000,000 is scheduled to be executed during first half.
That's great. Thanks very much.
We will now take our next question from Sophie Petersen of JPMorgan. Please go ahead.
Yes. I was wondering you have your profitability slide where you kind of talked at 1% of your or 100 basis points of your ROE improvement will come from lower losses. When should we really start to see that your losses come down? Because if I back calculate that, it would mean that you would have around 15 basis points of credit losses. So should we already start to see an improving trend in 2013?
And yes, if you can talk a little bit about that. And then my second question relates to your buyback scheme. Are you if the Swedish government would reduce their 13.5 percent stake in Nordea, would you use potentially your buyback mandate to buy any of these shares? Thank you.
Around this loan loss guidance in a way it's we don't keep this in a very precise guidance so that okay what is the exact number in loan losses in various years. But this is clear that we expect that during this period we are outlining here in this material, we expect that this will happen. To be more precise when that remains to be seen, But during, let's say, next, let's say, 2, 3 years within the next 2 years, we expect that we reach more or less this type of levels.
But what about I think your shipping in Denmark accounted for roughly 3 quarters of your losses in 2012. Should we do you expect an improvement in these losses for 2013?
No. What we have said is that we may see that the current level of losses in those books they are continuing for the next quarters. Then it's very difficult to say that, okay, what happens in Q3, Q4, and Q2, let's say next year. So that this is too precise guidance you are now asking so that I'm not willing to give such an exact one. But the trend is here what we are painting and what we are believing so that we'll be materializing during this period.
Okay. Thank you.
We will now take our next question from Jacob Kruse of Autonomous Research. Please go ahead.
Hi. It's Jacob from Autonomous Research. I just had two questions on your cost program. Firstly, the €450,000,000 of savings that's about 3% per year. I don't quite understand why that doesn't lead to a reduction in cost given where inflation levels and the kind of union agreements that have been made with bank employees in the Nordic countries, which I guess to me look more like maybe 1.5% to 2% underlying cost inflation?
And then my second question is, if I look at your cost base your staff cost base in 2012 versus 2011 versus excluding the integration expense, that's up about 2.8%, while you've cut your staff on average by about 5%. So there seems to be an a migration of expenses somehow. So could you just talk about why you cannot be a little bit more aggressive in actually cutting costs, especially if we assume that we're not having a massive increase in either volumes or activity for the near future? Thank you.
Yes. If we start with the savings, I mean, this 3%, and you're right that inflation is somewhat lower. But then I mean, we are also in an investment phase. We still want to continue the business and improve and increase franchise. So that will also cover this flat cost target.
Then when it comes to the trends in 2012 versus 2011, if you adjust for foreign exchange or FX movements and if you adjust for variable salaries, the cost is actually down 0.5%.
Okay. And how much investment is there in that $450,000,000 less underlying cost growth?
We will be very happy to elaborate more on that on the Capital Markets Day. That's where we're going to give the full disclosure.
Okay. Thank you.
We will now take our next question from Friedjof Berens of Arctic Securities. Please go ahead.
Thank you. Most of my questions regarding RVA efficiency have been answered, but just follow-up there. Is it that the model approval on IRB Advance also has to be on the Norwegian part has to be done by the Norwegian FSA? And in that sense, have you got any signals there that they will also do this within the next 6 months or something?
You're right. This model has to be approved by all 4 FSAs including Norwegians. Still we expect that that will be the case. Of course, different when there are these kind of specific issues with specific FSAs, then we have to evaluate that what does it need to this approval. Of course, we may end up in the situation that then in a way we don't introduce the model in all geographies as we extreme case.
But nevertheless, we are working for the full rollout, the full approval and we believe that we will get it during the first half.
Okay. Thank you.
We will now take our question from Nick Davey of UBS. Please go ahead.
Yes. Good afternoon, everyone. Three quick questions if I can please. The first one on the target now of 13% Basel III core Tier 1. Could you please just elaborate a little bit on the driver of that number?
I know some of your peers have a range which goes slightly above that. Just with whom have you had the dialogue that gives you the comfort that 13 is the go to number? And are you making any assumptions in there on mortgage risk weights, countercyclical buffers and other still slightly unsolved regulatory inputs? The second question please, sorry back to the RWAs on slide 21. Your efficiency measures now target €35,000,000,000 of mitigation.
I think the previous target was around €19,000,000,000 So could you just give us some flavors to where the marginal €16,000,000,000 of RWA production is going to come from? Where you're having particular success? Really just give us a flavor of this gap and where it's coming from? And then the third question please on slide 22 this bridge of your ROE. I'm just getting a flavor please if I can for the 200 basis points of ROE improvement from income generation and cost efficiency.
Obviously, as you've discussed, you're aiming to keep costs broadly flat. So I suppose this is largely revenue based. I'm sure we'll get more of this in March, but any rough guidance please on areas where you feel particularly confident on revenue growth from here? Thank you.
Jeroen? Yes. I think on the first one on the 30% quarter 1 target, I think we have a quite developed view on most of the known impacts on capital requirements including most of what have been mentioned mortgage risk rates in Norway and Sweden, CLD4, IAS 19, etcetera. So I think we have covered most of the area we do so. And of course, we are then making assumptions of the actual outcome where there are ranges to be defined.
We have of course taken our stance on that. So there has been a quite elaborate approach to the 30% culture ones are.
I can take the next question to this RBA efficiency, which is now €33,000,000,000 as you said compared to the 2019 earlier communicated. The increase is coming from 3 components. Mostly it's new rollouts, which we are now let's say, 2015, 2016. Now we have simply speeded up in the planning of rolling those. Then we are talking about portfolios like Russia.
We are going to deploy internal models. We are doing going internal models in retail, Baltics. In Nordea, Finance. We are finally, when we get this approval for advanced models, then we extend that to international branches as well as in our markets and trading or treasury books and so forth. So there are lots of different smaller rollouts, which we need to think a little bit faster.
Then the next area is this type of even enhanced so called housecleaning exercises more and more, let's say, of information and from our collaterals and other issues which are influencing on the RVA calculation. And thirdly, then we are going refining and then making our models more and more granular, so that they are measuring better the various segments. Currently, we have quite these large parameters that they're common for many type of customers and we are going more granular in that approach. So that's improving and then being more precise in our models. That is more those are more or less the issues we are now adding up to this current plan.
And then of course, it takes more resources, more IT support and all that, but that is now what we are planning do.
Yes. And I think on the ROE bridge questions on income generation and cost efficiency, this is of course where we will come back to. But on the income generation side, it is as mentioned, it's mainly driven by repricing and share of wallet effects and this on what we regard as moderate volume assumptions. And on the cost efficiency side, it's a long range of initiatives including a type of new processes offshoring and over time of course also people reductions. But that I think is exactly what we will elaborate more on the Capital Market Day.
Okay. Look forward to more detail then. Thank you.
We will now take our next question from Per Groenberg of Danske Markets. Please go ahead. Yes.
Thank you. Good afternoon. I have two questions. The first one again related to slide 20 and the regulatory impact from Basel III. You're talking about €20,000,000,000 As far as I see it Swedish risk rates are they in that figure at all?
Norwegian risk rates if I look at 35% risk rates, those two items by themselves should be some €11,000,000,000 You have a quite sizable insurance base, which don't make any for at all today. Just wondering how the figure is that low? My second question is related to slide 22 and the effect on return on equity from lower loan losses.
On some of
the earlier questions you said that this is Denmark and it's shaping where loan losses will normalize which makes a lot of sense. What about the current very low loan loss level you have in the rest of the Nordics? Do we assume that will normalize in the other direction or will it just stay at the very low levels they are currently? Thank you.
Yes. On the first question, yes. The mortgage rates in Norway are fully included in the numbers and so are the expectation of the Swedish mortgage weight of 15% is also included in the estimated regulatory effects in 20 13.
We have a figure of
some €10,000,000,000 to €11,000,000,000 for those two items? We assume as we said before for the mortgage risk weight in Norway, we assume slightly above 20% risk weight with weaker somewhat
more than
€2,000,000,000 of risk weighted assets. And for the Swedish mortgage rates, it's around close to 30 basis points And in Sweden, it's part of the Pillar 2. And the effect that has uncovered Q1 requirement is
also included in the expected
regulatory plan. Now, the with the Tier 1 or Tier 2 capital, but it is included as including the Core Tier 1 requirements.
Then the next question related to these loan losses and how do we feel that the other markets beyond Denmark and shipping are developing. And here we believe that more or less the current status will prevail so that we don't foresee any kind of big increases in losses on average in other markets. Then again, there may be ups and downs so that some market may be up, some market may be down and that is of course our strength so that we have many markets and they are compensating more or less each other in normal circumstances and adjusting this kind of quarterly or even annual volatility. So that's our base estimation that on average the loan losses in other markets would be more or less at this level also.
Okay. Thank you.
We will now take our next question from Claire Keane of RBC. Please go ahead.
Good afternoon. I just have two questions, please. The first is related to slide 22 and your ROE progression. Just wondering if you could talk a bit about how the leverage moves as the ROE increases. So we have the RWA roughly flat, but what would RWA Basel III leverage ratio look like?
And is that something that you focus on in your planning? And then my second question relates to partly the income generation expectation you have. How much of this do you think could come from margin expansion from reduced liquidity requirements? Now you're well above the 100% LCR and potentially you could see a change in the calculation of the LCR going forward. Thank you.
I don't think as such we have operated with a leverage rate of expectations. But you are right that RVA is assumed to be flat and equity might be slightly higher and we are assuming somewhat of even moderate volume growth. So with that guidance, I think you can make the calculations on the leverage ratio.
Currently, our leverage ratio is roughly 4% or 4 100 basis points, so that at least we are at comfortable level already now. And of course, as far as the mitigated, this plan would increase the leverage or improve in terms of leverage ratio even a little bit further.
If I should say something about income on page 22, it seems to be a bit a lot of questions for that. Income will grow because we reprice and because we do more business with more customers. Real volume growth is very small in the assumption going forward. But more business without more customers will actually and then read some repricing in some markets and now we have indicated some of them already. That will give some income growth and then with flat cost, it's actually cost income ratio effect we are talking about obviously from these two lines cost and income.
And that combined will give some lower costincome ratio which will amount to these numbers. We will elaborate more in London around this and also per business area how it works. I also like to say on the loan losses lower. I mean, we have had an average now of 19 basis points loan losses and we are coming from the higher level now during the crisis in 2009, 2010, 2011 of yes, we were all the way up to 50 basis points or something. Now we're down to 30 level.
Of course, we will in the coming years with this our outlook we have come below our average. And that is likely and as Ari had said, we will see reduction in the pension loan loss areas in the coming quarters. Exactly when and how, we will not say. We don't give forecast on loan losses, but we have clearly indicated that we think some stabilization in credit quality is happening and therefore that will eventually happen. And therefore this bridge is one that should indicate the magnitude we expect.
We don't put exact timing on it, but we expect that to happen sort of clearly within this time horizon.
Thank you.
Claire, if I just may did I interpret you correctly that you were asking whether we can expand margin due to the softer LCR rules in Europe. Then the answer to that is that Sweden has already implemented the liquidity there short term.
Okay. Yes. Thank you. We will now take our next
a quick one. Your messaging on capital still seems to be that you need to make progress on capital build. But at the same time, you've asked for buyback permission. And I'm just trying to square that circle. What is what will be the use of buyback if you're still focused on increasing capital over the next year?
Thank you.
I think I don't understand the question, I think I don't understand
the question, because we
are not saying that we need to build significant amount of capital. On the contrary, we are clearly indicating that limited capital build is needed, very limited actually. If you look at the combination of these slides, they demonstrate very little capital build. And therefore, as we demonstrate, for example, on Page 27, we are building. If you take the capital in €12,000,000,000 it's up more than €3,000,000,000 euros Some of it is retained and some of it's paid out.
But if you don't have to repay retain anymore then obviously the figure is 3,000,000,000 available. And if you add that €13,000,000,000 and 14,000,000,000 and 15,000,000 then I think it's fairly easy to get to a number that is substantial. And whether we would buy back or we will give dividend has certainly not been decided. So we clearly state that the mandate for buybacks is only to get flexibility. So we are not saying that that will happen.
But then of course the dividend will happen. But this also goes very much hand in hand with how things develop and what the Board perceives is the right move forward, which of course will depend on the pricing of the stock and the number of other issues.
Okay. Sorry, I misunderstood some of your comments, but that clarifies it. Thank you.
We will now take a follow-up question from Sophie Petersen of JPMorgan. Please go ahead.
Yeah. Hi, here. It's Sophie again. I realized that you forgot to answer one of my questions and that was regarding the buybacks that in case the Swedish government would sell their 13.5% stake in Nordea, would you use potentially these buybacks to buy back some of those shares? And if so by how much?
Well nothing can be excluded. We don't have any plans for anything. So we will not speculate on how and when this will happen. And of course, we cannot control influence or any way guide how a shareholder sells or does not sell its shares. So that's completely out of our control.
We're just saying the Board wants full flexibility depending on the capital build and the performance. And then of course the stock price development and the valuation and all sort of things come into the big blender. Then they turn it out and out comes a decision, which of course is rather dividend of share buybacks. We just want to make sure we have a mandate, so we cannot exclude a buyback. Okay.
And how big is your buyback mandate going to be?
I think it's 10 percent.
Okay. Thank you very much.
As there are no further questions at this time, I would like to hand the call back to the speakers for any additional or closing remarks.
Yes. Thank you very much, operator. I'd like to thank you all for participating. This ends our telephone call and thank you for listening in. We will have some meetings tomorrow in London and maybe I'll see some of you there.
Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now