Good day, and welcome to the Nordea Bank Abp fourth 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 Alfvén. 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, then we will follow that by a Q&A, where you will have the opportunity to ask questions to Mr. Clausen, to our CFO, Mr. Torsten Jørgensen, and our Chief Risk Officer, Mr. Ari Kaperi. Christian, please.
Yes. Hello, everybody. It's a pleasure to be here and present just very briefly a few things. I know you probably all seen the news today, but on my first slide, I have the P&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 a 13.1% in quarter one. 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, one and a half years ago. 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.
We actually have three areas where we intend to deliver and where we have today made a disclosure on how we see things going forward. One is our capital generation going forward and the fact that we return excess capital to shareholders. The second one is our ROE target, which we have revised or confirmed but revised in the way it's defined to 15% on a quarter one above 13% in a normalized interest rate environment to make it more clear. The quarter one 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 do that in the future.
We will do that very much by increasing share wallets, 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 RWAs. My final slide is the one that summarizes our capital generation in recent years, which demonstrates that we have built EUR 20 billion of capital. We have retained EUR 12 for equity and paid out EUR 7.6. Going forward, we will not need to build very much equity according to our plans, and therefore our capital generation will be available for shareholders. 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.
This will end my introductory remarks, and I'm sure we will have questions now. We can open up for questions now.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key followed by digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question. We will pause for just a moment to allow everyone to signal. We will now take our first question from Matti Ahokas in Handelsbanken. 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? Have you already increased the mortgage rates in Norway to adapt for this? 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 losses 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. On the mortgage risk weights in Norway, we have included in our assumptions that there will be mortgage risk weights of somewhat about 20% in place.
What about the margins or the mortgage rates?
I think our margins have improved, and I think we see potential for a further increase in margins.
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 too low margins. What we have done in 2012 is actually to raise the margin to have a more sufficient profitability with the current
situation. We have not taken into account any further increase in risk weights and things like that. The main purpose of 2012 has been to restore margin to a more decent profitability with the current capital requirements.
Understood.
I could comment on this, your question on sensitivities in Denmark, what could be the levers to take the loan loss level down. You mentioned yourself one important lever is house prices, naturally. I would say that the overall consumer confidence is the main issue in the Danish economy. When that is up, then naturally that will influence on local SME, corporate and under performance, as well as that will be the trigger also for the house prices and all issues relate. Of course, for these kind of macro drivers are, of course, behind this consumer confidence that when the situation in Europe and in the export markets are improving and issues like that will have an influence. That would be my answer.
All right, great. Thanks.
We'll now take our next question from Geoff Dawes from Société Générale.
Hi, good afternoon, Geoff Dawes here from Soc Gen. 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 Finnish market, particularly on the mortgage side? Costs haven't really added too much to that equation either. How would you get the Finnish profitability up to adequate levels, or is it purely about waiting for a rate increase? Second question is around the shipping operations. You guided at the start of last year that the shipping division would remain break-even or profitable every quarter throughout 2012. That has obviously been the case. Can you give us similar outlook or guidance for 2013? 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 been and still is very price sensitive, so that the banks who have started this type of increasing margins usually have seen that quite quickly in terms of volumes and number of customers and market share. That has kept a little bit this type of trend. Now all the banks, they are actually now taking up their margins. I'm relatively, let's say, confident that we can see some type of increase, especially in the mortgage margins in Finland. Again, of course, the structure of Finnish business is very sensitive to the interest rate, as you said yourself.
That we have a very high and big transaction account portfolio in Finland, higher in relative terms than in any other markets. Of course, that is very sensitive to interest rate levels. 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 programs as in all other countries, Finland is no exception on that. That definitely we will work on cost efficiency also in Finland.
Okay.
Should I continue on shipping as well?
Yeah, shipping will be profitable going forward as well. It's been profitable through the crisis, and it will continue. 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. 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 in the world. 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. This will 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 Keenan in Nomura. Please go ahead.
Hello. Thanks very much for taking the questions. Just two short questions, if I may. Firstly, just wondering on the 1.5% 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 of July of this year. 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 at 13.1 Basel 2.5, as we say in the table, for example, in our analyst presentation table 20. Just to make it clear, what we're saying there, we are 13.1 now, then we will have the Basel III effect, 1.5 we will grow, and then we will have our efficiency programs. 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. Returning excess capital, yeah, but that's some time 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. We are not giving any precise timing of excess capital returning to shareholders, but the commitment to do so. Ari, on the timing.
Okay.
Please continue.
Sorry. I guess just to extend on that question. I guess if we think about the full Basel III deductions taking place from the 1st of July, I guess how much of the 1.5% efficiency measures will be complete by the 1st of July as well?
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 elements. In this RWA efficiency target, we are aiming at executing EUR 25 billion during this year. 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 modeling in Nordic corporate institutional portfolios, and that we expect to come in place during the first half. From the rest, that is split evenly between the first half and second half. Roughly 70%-75% of this EUR 25 billion is scheduled to be executed during the first half.
That's great. Thanks very much.
We will now take our next question from Sophie Petersen of JP Morgan. Please go ahead.
Yeah. I was wondering, you have your profitability slide where you kind of thought that 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? If I back calculate that, it would mean that you would have around 15 basis points of credit losses. Should we already start to see an improving trend in 2013? Yeah, if you can talk a little bit about that. My second question relates to your buyback scheme. If the Swedish government would reduce their 13.5% 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, we don't give this kind of very precise guidance so that, okay, what is the exact number in loan losses in various years. 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 two, three years. Within the next two years, we expect that we create more or less this type of levels.
What about, I think your shipping on Denmark accounted for roughly three-quarters of your losses in 2012. 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 groups, they are continuing for the next quarters. It's very difficult to say that, okay, what happens in Q3, Q4, Q1, and Q2, let's say, next year. This is too precise guidance you are now asking, so that I'm not willing to give such an exact one. The trend is here, what we are painting and what we are believing, so that will 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 EUR 450 million 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%-2% underlying cost inflation. My second question is if I look at 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%. There seems to be an 8% sort of negative wage inflation or a migration of expenses somehow.
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, this 3%, you're right that inflation is somewhat lower. We are also in an investment phase. We still want to continue the business and improve and increase our franchise. That will also cover this flat cost target. When it comes to the trends in 2012 versus 2011, if you adjust for foreign exchange or the FX, the movement, if you adjust for variable salaries, the cost is actually down 0.5%.
Okay. How much investment is there in that EUR 450 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 Fridtjof Berents of Arctic Securities. Please go ahead.
Thank you. Most of my question regarding RWA efficiency have been answered, just follow up there. Is it that the model approval on IRB Advanced also has to be on the Norwegian part, has to be done by the Norwegian FSA? In that sense, have you got any signals there that they will also do this within the next six months or something?
You're right. This model has to be approved by all four FSAs, including Norwegians, still we expect that that will be the case. Of course, if and when there are these kind of specific issues with specific FSAs, we have to evaluate that what does it mean to this approval. Of course, we may end up in the situation that in a way we don't introduce the model in all geographies as we'd dream case. 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 next 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 quarter one. Could you please just elaborate a little bit on the driver of, or the justification 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 EUR 35 billion of mitigation. I think the previous target was around EUR 19 billion.
Could you just give us some flavors to where the marginal EUR 16 billion of RWA reduction 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. The third question, please, on slide 22, this bridge of your ROE. 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. 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.
Yeah.
I think on the first one on the 13% quarter one 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 weights in Norway and Sweden, CRD IV, IAS 19, et cetera. I think we have covered most of the areas where these two, 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 stand on that. There has been a quite elaborate approach to this 30% quarter one target.
I can take the next question. This RWA efficiency, which is now EUR 33 billion, as you said, compared to the EUR 19 earlier communicated. The increase is coming from three components. Mostly it's new rollouts, which we are now implementing faster, so that we are going for smaller and smaller portfolios. Earlier, we planned to introduce them a little bit later, let's say 2015, 2016. We have just simply speeded up in the planning of rolling those. We are talking about portfolios like Russia. We are going there for internal models. We are doing internal models in retail Baltics, in Nordea Finance. Finally, when we get this approval for advanced models, we extend that to international branches as well as in our markets and trading or treasury books and so forth. There are lots of these kind of smaller rollouts which we just simply execute faster.
The next area is this type of even enhanced, so-called housecleaning exercises, more and more efficient sourcing in of information and from our collaterals and other issues which are influencing on the RWA calculation. Thirdly, we are refining and then making our models more and more granular so that they are measuring better the various segments. Currently, we have quite large parameters that they comment for on many type of customers, and we are going more granular in that approach, so that improving and then being more precise in our models. 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. That is now what we are planning to do.
Yeah. I think on the ROE bridge questions on the income generation and cost efficiency, this is of course where we will come back to. On the income generation side, it is, as mentioned, it's mainly driven by repricing and share of wallet effects and less on or what we regard as moderate volume assumptions. On the cost efficiency side, it's a long range of initiatives including, of course, type of lean processes, offshoring, and over time, of course, also people reduction. That, I think, is exactly what we will elaborate more on the Capital Markets Day.
Okay. Look forward to more detail then. Thank you.
As a reminder, if you wish to ask a question, please press star one. We will now take our next question from Per Grønborg 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 are talking about EUR 20 billion. As far as I see it, Swedish risk weights, are they in that figure at all? Norwegian risk weights, if I look at 35% risk weights, those two items by themselves should be some EUR 11 billion. You have a quite sizable insurance bit which do not make any deductions 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 is shipping 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 risk weights 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 2013.
Will you estimate the figures of some EUR 10 billion-EUR 11 billion for those two items?
We assume, as we said before, for the mortgage risk weight in Norway, we assume slightly above 20% risk weight.
Okay
which equals somewhat more than EUR two billion of risk-weighted assets. For the Swedish mortgage weights it's around close to 30, the previous point effect. In Sweden it's a part of the Pillar 2, and the effect that has on Core Tier 1 requirement is also included in the expected regulatory impact. We will try to be allowed to meet this with Tier 1 or Tier 2 capital, but it is included as including the Core Tier 1 requirements.
The next question relate to these loan losses and how do we feel that the other markets beyond Denmark and shipping are developing. There 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. 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 then they are compensating more or less each other in normal circumstances.
Adjusting this sort of quarterly or even annual volatility. That's our base estimation, that on average, the other market, 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 Kane 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. We have the RWA roughly flat, but what would RWA to assets or equity to assets or a Basel III leverage ratio look like? Is that something that you focus on in your planning? 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. You are right, the RWA is assumed to be flat and equity might be slightly higher. We are assuming somewhat of even moderate volume growth. With that guidance, I think you can make the calculations on leverage ratios.
Currently, our leverage ratio is roughly 4% or 400 basis points, that at least we are at comfortable level already now. Of course, as Torsten indicate, this plan could increase the leverage, well improve in terms of leverage ratio even a little bit further.
Yeah.
Maybe I should say something about income on page 22. It seems to be 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 with our more customers will actually, and then with some repricing in some markets, and Ari has indicated some of them already. That will give some income growth and then with flat cost, it's actually cost income ratio effect we're talking about obviously from these two lines, cost and income. That combined will give some lower cost income ratio, which will amount to these numbers. We will elaborate more in London around this and also per business area, how it works.
I would also like to say on the loan losses, Noah, we have had an average now of 19 basis points loan losses, and we're coming from the higher level now during the crisis in 2009, 2010 and 2011, 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 outlook, we have come below our average. That is likely, and as Ari has said, we will see reduction in the present 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. Therefore this bridge is one that should indicate the magnitudes 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? The answer to that is that Sweden has already implemented the liquidity regulation with the LCR measures. We don't expect any effect there short term.
Okay. Yes. Thank you.
We will now take our next question from Chintan Joshi of Nomura. Please go ahead.
Hi. Good afternoon. Just a quick one. Your messaging on capital still seems to be that you need to make progress on capital build. At the same time, you've asked for buyback permission, I'm just trying to square that circle. 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 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, we demonstrate very little capital build. Therefore, as we demonstrate, for example, on page 27, we are building. If you take the capital, it's up more than EUR 3 billion. Some of it is retained and some is paid out. If you don't have to retain anymore, then obviously the figure is EUR 3 billion available. If you add that to 2013 and 2014 and 2015, then I think it's fairly easy to get to a number that is substantial. Whether we will buy back or we will give dividend has certainly not been decided.
We clearly state that the mandate for buyback is only to give flexibility. We're not saying that will happen. Of course, a dividend will happen. This also goes very much hand in hand with how things develop and what the board perceives as the right move forward, which of course will depend on the pricing of the stock and a number of other issues.
Okay, sorry, I misunderstood some earlier comments. That clarifies it. Thank you.
We will now take a follow-up question from Sophie Petersen of J.P. Morgan. Please go ahead.
Yeah. Hi, here is Sophie again. I realized that you forgot to answer one of my questions. 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? If so, by how much?
Well, nothing can be excluded. We don't have any plans for anything. We will not speculate on how and when this will happen. Of course, we cannot control, influence or any way guide how a shareholder sells or does not sell its shares. That's completely out of our control. We're just saying the board wants full flexibility depending on the capital build and the performance. Of course, the stock price development and the valuation and all sort of things come into the big blender. They turn a lot out. Out comes a decision, which, of course, is either dividend or share buybacks. We just want to make sure we have a mandate. We cannot exclude a buyback.
Okay. How big is your buyback mandate going to be?
I think it's 10%.
Okay. Thank you very much.
As a reminder, if you wish to ask a question, please press star one. 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 disconnect.