Good morning, and welcome to Nordea Capital Markets Day 2013. My name is Rodney Alfvén, I'm heading up the investor relations department here at Nordea. There will be a comprehensive presentation today. We start up with Christian Clausen, then we will have a presentation of the financials of the business areas and of the credit risks. Then we will end up with a Q&A. We'll have all the questions and answer session after the capital markets presentation. I would like to welcome Group President and CEO, Christian Clausen.
Yes. Good morning and welcome. It's a pleasure for me to see so many faces here. We are nearly sold out, which is a good thing. For all good performances, you always want a full audience, I hope we will have a good day. We will go through Nordea and our plan and the future in quite a lot of detail. I will do the overview and where we are and why we are here, then we will get on with it as we go. I hope when we are done, when we have the Q&A session, that you have got a much clearer picture of where we're going and how we're going to get there. Shaping the future relationship bank. I will touch upon our platform, where we are.
You probably know most of this, also then go into what we have actually delivered before I actually turn into the plan. Let's start with the platform. Nordea is the leading bank in the Nordic area. We have the largest platform, the largest operating income. We are leader in market share. We are leading in distribution and network and all in all, a very strong platform. The Nordic area is macroeconomically a sound area. The public finances are in good shape. All four countries are below the European Fiscal Compact level of 60% public debt. Even on the public budgets, it looks fairly good. Denmark is the only one with somewhat of a deficit, looking better into 2013.
When you look at the big macro picture, if we look at the AAA-rated countries, even in that comparison, the four Nordic countries come out well with the low debt levels. A sound background. Sometimes we get too used to this when we are in the Nordic area. Last week I was visiting a number of banks further down south in Europe, I think this is an environment which a lot of banks would want to operate in. There are also some growth prospects. These are our economic forecasts for the coming year. After 2012, where we had negative growth in two of the countries, only Norway really sticking out, but also Sweden doing well. Then in 2013, we're moving into quite a nice picture with 1.5% growth rate, according to our projections. Pretty well spread.
In two, then it starts to look like 2011. We are not fully taking all this into our plan. We have a somewhat more conservative plan, where we expect lending growth of some 2% in the beginning of the period, growing towards 3% at the end of the period. Also, interest rates are moving up gradually. These are the three-month forward rates, and as you can see, they are indeed moving up. Also here we are conservative, taking in a lower expectation on the interest rate development, which, as you know, is pretty important to our P&L. The Nordic bank market is very well penetrated. Actually, the four Nordic markets are some of the most sophisticated bank markets in the world. The banking volume per customer is very high, only surpassed by the U.S.
The online banking penetration is at a very high level and the number of cards per customer. This reflects pretty sophisticated customers. This is really good news for us because this goes really hand-in-hand with the relationship strategy and our multi-channel distribution strategy. Of course, the customers in the Nordic area are very receptive to the way we are rolling out our strategy. It is possible to advise with customers and transact with customers on electronic means, which is, of course, a prerequisite for efficiency. Also a very sophisticated bank market. In this environment, we have indeed delivered. We have built a superior customer franchise on the retail banking side, 11 million customers, a clear number 1 ranking in all countries, number 1 or 2.
On the corporate institutions market, we are talking about 625,000 relationship customers and a clear number 1 position and also here, number 1 and number 2 position in all markets. On top of this retail franchise, we have also built a number of global capabilities, global businesses, very much the capital markets, the asset management, the life and pension, and the private banking area, which we're going to hear much more about during the day, where we are clear leader in the Nordic area, but also have capabilities to take on the international competition we meet in the area. The retail customers is a very strong part of our franchise, and we have grown the number of retail customers in the past five years, as you can see from the blue line, actually significantly. At the same time, our operating income has gone up.
A very simple business model in essence, more customers, more business with the customers and more operating income. This is close to sort of a straight line, so a very stable business model. This is building on our relationship banking model. You're going to hear this word many times today. After the Q4 call, an investor told me that he counted 21 times I mentioned relationship banking. Today, you will count 50 times, I'm sure. You will hear it over and over again, and we will do our best to get the message through why the relationship banking business model before the crisis, before 2007, was superior. Why it was instrumental in taking us through the financial crisis with these results, but also why it's going forward in the new normal, it will be a superior business model.
It will mean that we work very closely with our customers. We will manage the risk, as we have done, in a very good way. We will be early out in handling risks. We will see the risk clearly. We are monitoring all the customers. We know exactly their cash flows and everything. Also, we know the customer's need. We can actually service the customers with exactly the products and the services the customer needs, and thereby get this fantastic win-win situation where the customers are very loyal and very happy, and we do all the cross-selling possible. Where we have an opportunity on this sophisticated customer base to actually service them through electronic means and through telephone bank and through all the means that makes it possible to do a real efficient bank model. We are going to hear much more about that.
Michael is spending time on it. I'm sure that we will see that this is a superior model. We have worked with it for many years, of course, we are getting much more granular and much more precise in how we do it. We know exactly where the levers are to gain efficiency and exactly where the levers are to get profitability. Also on the corporate institutional franchise, we have a very superior position. This graph is a typical Greenwich survey where we have the number of relationship, core relationship customers up, and then on the X-axis, we have the quality, the perceived quality from the customers. You can see we are in a league of our own. 95% of all big customers in the Nordic area claim Nordea as a core bank. That's just way above the peers.
On quality, we are also there, close to the 80 mark. Also customers perceive the quality of the services they get from Nordea superior to our peers. That's not surprising because we are close. We are intimate with the customers, not only geographically, but also with our advisors. We have a large number of advisors on these big customers, service them on a daily basis with all sort of needs. That is, of course, only possible because we have developed the capabilities, especially the more advanced product capabilities, which are the value-added services to these customers. Any bank can do lending, maybe not in the size Nordea can do, but they can do lending, they can do transactions. To do the capital markets, the advisory, all the various products which are important going forward.
We have developed that capability over many years, the track record is impressive, I would say. A very strong growth in our income in this area. Very low volatility too, I would say. Today, we stand out as a clear number one in all the league tables which are mentioned here, which are more or less all the ones which the corporate customer would say, "These are my most important demands on quality." This is also very important because going forward, an increasing part of the financing of the corporate sector will be done on the capital markets and not on our balance sheet.
Going forward, it is, of course, key to be number one here, to still service the customer, provide financing, equity financing, debt financing, and get the mandates to actually arrange this, at the same time as we do the daily business, the customer financing, the transaction financing, and the trade financing, and whatever it is. Also on Wealth Management, we have built a globally competitive franchise, which is not maybe often lifted forward. We will do that today, and Gunn will explain a lot about this. We are clearly the leading Nordic asset manager by a margin with EUR 218 billion. We have over the last three years had a CAGR of 11% growth in this area, clearly above peers.
We are number one on life, number one in private banking, number one in international private banking, number one in real asset management, and we have built a global fund distribution which is actually very unique. We are distributing our funds in 16 countries. As you can see from the slides, we are distributing through 14 of the 20 biggest global wealth managers. We are now ranked number 7 in Europe in terms of cross-border fund promotion, which is a very strong thing, demonstrating that we are competitive in this area. This is of course key because without the product capabilities in this area, it is not very easy to run the business. This, of course, goes very strongly hand-in-hand with the retail relationship strategy because this product capability, these services are the ones which we filter in.
As you have noticed, we have a very large savings growth in the area. Going forward, we may see a period of time where lending growth may not be too big. The savings area is growing quite rapidly. We see growth rate in the savings area much higher than that. Because of all this, we are the most diversified bank in the Nordic area. Our largest country is 27%, 26%, 24%, and 18%, and so on. We are very well diversified, and this, of course, comes out in low volatility. We have the lowest income volatility of any bank in Europe the last five years. Not too bad. Demonstrating the diversification and, of course, our risk profile. This comes out in our ROE development, which is pretty interesting because back in 2007, we delivered 20% ROE on 6% capital, as you can see.
Now we deliver 12% ROE on 13% capital. Of course, I know very well which one I would like the better. Of course, the 12 or 13 is superior, and at the same time, we have absorbed all the cost of new regulation, all the new increased funding costs, and by the way, a significant drop in interest rates, leaving deposit margins close to zero. Delivering 12 and 13 now is actually showing that this business model has indeed delivered. On volatility, no quarter below 8% ROE, no year below 11% ROE. The risk profile has been maintained since 2002. It is stable. Of course, we are through the cycles with our loan losses, as you can see. The average is 16 basis points compares well with our peers, and we maintain that risk profile also as we go forward.
This low volatility has been recognized by debt investors. Our CDS spread is among the lowest in Europe. This means that we attract long-term funding at very attractive rates. This is, of course, a key competitive factor, especially vis-à-vis our international competitors, that we can fund and build the balance sheet with very low funding costs, and therefore we maintain this risk profile. We are indeed compliant on new regulation. We have now built a core capital ratio above 13%, clearly above the regulation and also above our new capital target, which I come back to. We are also compliant on the LCR, not only in general but also in the main currencies. Of course, more regulation is coming. Of course, still some uncertainty remains out there, I think we also see some visibility.
The main outstanding issues are recovery resolution coming through this year, both in Financial Stability Board and through the directive in Europe. We are well underway with our recovery plan, resolution plan is also being made for Nordea, I don't think it will be a major issue. Maybe some cost, I don't think it will be major because it will also create a lot of transparency towards a recovery resolution situation. Banking union is coming. We welcome that. One single supervisory manual will drive discipline in Europe, I think it will push convergence when all the big Euro countries start to converge into one manual. A lot of countries will sort of try to follow on on that is, of course, positive to Nordea being in several countries. Liikanen is outstanding. Later this year, the commission will decide.
Today, it's not likely we will see a Liikanen proposal like in the report. More likely we'll see something like the German or the French proposal. We are in general very well positioned. The way we have structured our trading operation means that we can actually do what needs to be done without very significant costs. The Nordic FSAs, they have this conservative stance. They've had it all the way through. It's pretty predictable, it's actually a stance in which we are in good constructive dialogue, we follow it continuously. I think actually they're driving a very sound financial system in the Nordic area. All in all, of course, some uncertainty about future regulation, we have seen most of it, I think the visibility is pretty good by now. We have indeed, during the whole journey, delivered on all our targets.
You can expect us to deliver on these targets as well. We have delivered on the relationship customer growth, 4.5% per year during the last seven years. Very significant retail growth. We're talking about premium customers with an annual growth over seven years of 4.5%. Very significant shift. We have driven up operating income by more, showing we have penetrated each customer better, we have increased risk-adjusted profits by nearly 9%. This is a very important measure, I can tell you that my first appearance was actually here in London as an announced CEO in December 2006. Not in this hotel, another one. My first target I announced was to double risk-adjusted profit over seven years. Now six years has gone, we are exactly tracking that target, which is quite interesting.
In those days, December 2006, we didn't know about a financial crisis coming out in 2007 and 2008. Obviously, this is a target I'm pretty fond of having because we are following it very closely, even that target. Of course, we have doubled our core capital, growing at more than 9%, which of course a big achievement at the same time as we have kept our dividend policy. We have indeed, during this period of time, delivered on our targets. This is a lot of confidence to have when we shape the future. The future relationship strategy and the plan we're presenting is a sustainable business model that will, on a sustainable level, deliver clearly above cost of capital in return. It has some strong commitments to our shareholders, and it also contains a lot of strong commitments to our customers.
We are only implicitly talking about the customers today. We are talking more about the shareholders and the capital generation, all these things. There are a lot of commitments to the customers and a lot of things which are very important to create a sustainable banking model in this new environment. The commitment to the shareholders is, of course, that we will generate a lot of capital, and we'll return it to the shareholders. We will deliver 15% ROE at a Core Tier 1 of 13% on normalized interest rates, and we will keep the very low volatility in our diversified business model also going forward. Let me elaborate on that. Far, we have actually delivered very significant capital generation, nearly EUR 20 billion. A lot of it, as you can see, have been retained earnings to build Core Tier 1.
The Core Tier 1 capital has doubled, as I already demonstrated. We have also paid out dividends according to our dividend policy. Going forward, we do not need to retain very much equity because we are already there, and efficiency measures will do the rest, which means that it will be possible to return to shareholders, in one or the other form, much more of the capital we generate every year. The Core Tier 1 has been built to more than 13%, and we expect in every single quarter going forward to stay above the 13%, because the new regulation which will come later this year or maybe early 2014, will be fully mitigated by more efficiency and the retained earnings. Every single quarter, we expect the 13% to be made, even maybe with some margin.
This is, of course, very much due to the fact that RWAs remain flat. We have taken down RWAs. A lot of measures have been executed, a lot of measures in all categories you can think of, not only modeling. It's a lot to do with the way we do the business. It's a lot to do with the way we construct every single transaction, and it's a lot to do with the way we source data. It is a lot to do with the way we handle every single element in the equation, calculate the risk weights and the potential losses. We expect that to continue going forward. We have plans on the table.
We are executing plans right now which will deliver this, and going forward, we have plans which make us say that we think we can keep this level of risk-weighted assets with the growth rates we anticipate in the years to come to 2015. Another strong driver is, of course, to manage cost and be more efficient. We have now nine quarters of flat cost behind us, and we will continue at least for another eight quarters. This is actually a cost-saving program of EUR 450 million. This will offset inflation, but it will also leave room for some investments in our franchise, which we'll come back to later. This leaves us with a return on equity target. We said in the spring of 2011, nearly two years ago, that we would deliver 15% ROE on 11% capital.
11% capital was a high number in those days, nearly two years ago. Today, we are repeating the target, but now on 13% capital, 15% return on 13% capital, and we will drive it up by a lot of income initiatives, which will drive up ROE by 1%, cost efficiency, flat cost, taking down cost income ratio another 1%, and lower loan losses, which will normalize gradually, which will deliver more than 13%. Then the normalized interest rates will deliver two percentage points. I'm sometimes asked why we put in this normalized interest rates, because isn't this a little outside your control? Yes, of course, interest rates is outside our control. The reason that interest rates can deliver 2% ROE is inside our control. It's core strategy. The relationship strategy builds transaction accounts. That's by definition the nature of a relationship.
You have a transaction account, whether you are a corporate or a household customer with Nordea. That transaction account you use to transact, that account we do not pay interest on, and obviously it's very sensitive to interest rates. This is an asset to our strategy, transaction accounts. This is clearly within our control that we build transaction accounts, and we keep doing that, and it's a huge asset to have because over a cycle, this strategy is going to deliver a return. That's the reason why we indicate it. This is actually a conservative interest rate forecast that delivers the 2%. It's not expecting any big increases, maybe some normalization, i.e. positive real interest rates, which I think most central bank governments are talking about already now as a normalized situation. This is the way we're going to do it.
Torsten is going to dive much deeper into this. I will leave it for here to loan losses, which also will normalize. In general, we have a very good credit quality in most of our markets, Norway, Finland, Sweden, Russia, Poland, Baltics, a number of other areas. We actually have positive rating migration in institutional and household portfolios. We have these two areas which have caused some loan losses, shipping and Denmark. They have stabilized at an elevated level, and they are stabilizing. We can see that because the impaired loans are not going up anymore. We clearly expect this situation to improve during 2013. It's difficult to say how much in which quarter, but 2013, as we see the Danish macro conditions stabilizing, as we are seeing it happening right now. We see ship values bottoming out. This is an important part.
Ari will, of course, come back to this in much more detail later on. We will continue on the core relationship strategy. As I already said, this relationship banking model are delivering a very stable and low-risk profile in our lending book and will continue to run our business this way. You can rest assured that the risk profile will not change. The business areas are ready to deliver on the plan, and we're going to hear more about that today. I will take the opportunity to introduce the business area heads who will actually present this. Torsten Hagen Jørgensen, our Group CFO, will right after me dive into the numbers and the logic of the strategy. Michael Rasmussen, Head of Retail Banking, will of course talk about retail banking. Casper von Koskull, Head of Wholesale Banking, will describe in more detail our Wholesale Banking strategy.
Peter Nyegaard, Chief Operating Officer in Wholesale Banking, will not present, but he will be on stage for Q&A later on. Gunn Wærsted is Head of Wealth Management and will dive into this very interesting business area, and we will hear more about the details, so you can really appreciate it. Ari, Mr. Risk, Chief Risk Officer, will take care of the risks and hopefully portray in more detail exactly how we look at the risk profile and the book. We have the business area well-positioned. We have plans. They are being executed. On retail, this large, well-diversified model with a relationship banking model, with a distribution model Michael will go into, which is very interesting. This was number eight time I mentioned relationship banking.
It's becoming still more efficient in terms of cost, and it's becoming still more efficient in terms of penetrating the customer base better. It has a lot of scale to it. Those scale benefits are getting clearer and clearer. On wholesale banking, we have created a fantastic franchise with clearly leading capabilities, and we are now going to take next steps to increase ROE in this area, where we are indeed competitive, not only towards our Nordic peers, but also towards international peers, very much because we hold much stronger customer relationships than they do. On wealth management, we are clearly competitive on a European scale, and we will take advantage of that situation and grow and stabilize also a number of areas here and work hard to also increase ROE, not least also in Life and Pension. They are contributing, as you can see, somewhat different.
It's a good mix of businesses. Some are heavy on cost, some are spending more capital, some have higher margins, and some have a lot of scale. We will go through this in detail during the day. We will continue to manage the business units. We have a large number of business units, market segments, and so on. Some of them are indeed delivering above 15% right now, and they actually have an opportunity to go further. There we have the very strong levers in cost, in capital management, which we are doing. That's just over a quarter of our business units. Nearly half of our business units are between 10% and 15% ROE today. Still here we have plans in place. We are using the levers, and plans are being executed on both cost and capital.
We have less than a quarter of the business units where we're below 10%. Here we have build plans to restore profitability, as we call it. More, you can say, detailed plans. Plans which take larger steps also on the traditional levers, but also restructuring some of the businesses and transforming them to move up. I clearly expect all businesses in this planning period to deliver above 10%, and quite a lot of them above 15%, of course, with average above 15%. We are committed to the 2015 plan. We have capital initiatives in place. Initiatives for income generation. We will do the flat cost initiatives, and we have the low-risk profile and the low volatility, which will be maintained.
The business development, as you have seen in recent years, will also be the ones that deliver the low volatility and the diversification in the years to come. This was my opening remarks, and I will now hand over to Torsten, who will dive into the strategies. Thank you.
Thank you, Christian. Yes. As said, I will double-click or focus on three key elements of our plan. The capital policy and why a CET1 ratio of 13%. The flat RWA target, how we are going to achieve that. The ROE target of 15% and the key levers, including mainly our flat cost target and how we are going to achieve that. I hope by the end of the presentation, we will have shared with you the key assumptions behind all of these elements in the plan. I think you are familiar with this, the key policies and the key targets of the plan. Let's go into this slide, which I will spend a little time on. We have announced the capital policy to be a CET1 ratio of about 13%. If we start from the far left, the first 4.5%, I think is obvious.
The capital conservation buffer of 2.5% is also quite obvious. We have the systemic risk buffer, and I think that based on also what we have seen lately, this is probably to mature in some way. We're pretty sure that our home country regulator will enforce 5% for Sweden. They might even try to convince the other countries of going above 3%. We have put into our plan that Sweden will go about 5%, Norway will go with 5%, and Denmark and Sweden, sorry, Denmark and Finland will go with 3%, which with the weighting we have, will mean around 4.3%. You can say give us close to 11.5%. We have some other buffers in play. First of all, we have the Pillar 2 requirements. We have long discussions with our regulator what type of capital they should be met with.
In our target of 13%, we have used the pro rata approach and have included 80% of our Pillar 2 requirements, equal to just about 1%. We have the countercyclical buffer, which of course, not yet are decided. The whole idea is, it is a volatility buffer. Of course, we have here included, we would say a good estimate of where we think it should be under what we call normalized business conditions. The whole idea is, of course, that this will fluctuate somewhat. We also have a management buffer in there so we can manage well around this level. All in all, we can discuss for lengths whether or not 13% is a lot. Our internal capital requirement is 10%, we think, of course, 13% is a lot. We think that looking into the regulatory requirements, that 13% is an adequate level.
On top of that, we have our total capital ratio policy of about 17%. Another important element of the capital policy is, as Christian said, we want to return all the excess capital to our shareholders, and we do expect to generate a lot. This is, of course, an interesting question. We would like to be more clear on which of the three main levers you can say that is available, we would like to use. Should we raise the ordinary payout ratio from 40% to a higher level? Should we use extraordinary dividend or share buyback or in some kind of combination? I think that we would very much like to keep the flexibility and the options open. There are still regulatory uncertainty, and as you're all familiar with, we have also a pending event, i.e., the Swedish government shares holding.
Until we have more clarity, we would like not to decide fully. On top of that, of course, we are making review on the more tactical levers of what should be included in consideration like investor tax consideration, market timing, et cetera. We are also a strong believer of optimizing our capital structure. As I said, we are challenging the requirement to meet the Pillar 2 requirements for Core Tier 1 capital. We would at least look into the opportunities of using instruments like CoCo to meet that kind of capital requirement. That is, of course, yet to be seen. Finally, based on the fact that we have a very strong capital position, we are, of course, reviewing all opportunities to optimize our balance sheet, and of course, bringing down our average cost of capital.
This was what I will say on the capital policy and in the returning of excess capital. To one very important lever behind all of this, the capital initiatives, i.e., the flat RWA target. I will flip quickly through this. Christian has shown it. We believe we will be able to fully Basel III and other regulations loaded. We will be able to stay above 13% Core Tier 1 going forward. As we also have just shown, we will do it in this way. We will be able to, by our efficiency initiative, to meet not only all regulatory requirements, but also the net of migration and the volume growth. Where does it come from, the regulatory impact? The majority is stemming from the CVA and CCP charges. The EUR 10 billion here. The far majority of this comes from the CVA risk.
This is a conservative number. We have the asset value correlation that gives a reasonable around addition of EUR 3 billion of RWA. We have a number of deduction effects, mainly life, deferred taxes and IAS 19, and a few other smaller things that explain the remaining part. A very interesting topic for the moment, the Norwegian mortgage risk weights. In the autumn when we built the plan, we looked into the proposals that was on the table that talked about a multiplier of between 1.5, 2 or 2.5, and we chose 2. The 2 meant that we would have to increase our RWA with around EUR 3 billion of RWA. The latest proposal is slightly more aggressive. It talks about LGD floors of up to 43%.
If worst case happens, we go for the 43% LGD flow, that would equal around 32% mortgage risk weight, and that will mean that we will have to add another EUR 3 billion on top of this number. Does that mean that we will change our flat RWA target? No, because as I will come back to, we have a number of initiatives and we have some buffers. In our initiative list, I'm pretty sure we will be able to meet continually the flat RWA target. One thing more, we have a mortgage portfolio of EUR 26 billion in Norway, and all of them are possible to reprice within six weeks. I'm pretty sure that Michael will do everything he can, not only to restore, but potentially more than restore the profitability of this product.
The initiatives to, as I said, mitigate the regulatory effects and the net of migration and volume growth. The majority will come from the rollouts, the majority of the EUR 21 billion is the Advanced IRB in the Nordic corporate. It has been a long process, and we are pretty sure that we will get the approval in 2013. Preferably earlier than later. On top of that, we have a number of Foundation IRB rollouts, and we have some other Advanced IRB rollouts within areas like treasury, finance, international units, et cetera. All in all, coming to around EUR 21 billion. As Christian was explaining, we are doing a number of model reviews, the main driver here is the segmentation of our corporate rating model. Finally, we have what you could define as housekeeping, or more efficient processes.
How we net, how we source collateral, we secure that we don't have unutilized lines or facilities, et cetera. All in all EUR 9 billion, as I said, we're quite confident that we will be able to deliver the EUR 35 billion and whatever it's taking to mitigate what we just discussed about the Norwegian risk weight effect. Of course, a key driver into the ambition of keeping our ROE or reaching an ROE of 15% on a fully loaded balance sheet. As I said, the regulatory effect we think we can mitigate fully. If the starting point was 11.6% for 2012, the full regulatory effect is 0. However, we have a little of a technicality in the way that this 11.6% is calculated as the average of the equity for 2012, i.e.
because of the capital accumulation, during 2012, of course, we have an effect of less because that effect will not materialize, you can say, seen in the 2015 perspective. That explains some of this minus 100 basis points. The other issue is that we will, of course, not operate at 13% Core Tier 1. We will have a small buffer. The combination of this, which is not really regulatory effects, is why we have to kind of, say, restate the ROE number to somewhat above 10%. From there on, we then believe we will grow it to somewhat above 13% without normalized interest rates and above 16% with normalized interest. I will now go through each of the levers and share with you the key assumptions behind. Income. As you can see, the main driver will not be net interest income.
It will constitute less than 50% of the total increase in income over the period. Back to the question of what we can control, the majority of this effect stems from repricing of our lending book, more business with existing customers, and only to a very little degree, increased deposit rates. Because as I will come back to this later. We have shown here the combined margin, the historical combined margin. Now we are really using the scale, so I'm sorry for that. It looks very dramatic, but we are talking about around 20 basis points. But we are coming from a level of around this, and we have now had a kind of flattish blended margin for the last couple of years and might continue into 2013, and from then on pick off.
What we have showed here is the effect of the normalized interest rate, which will kind of restore the level of blended margin we saw pre-crisis. And why this effect is so dramatic is, as Christian said, we have a very big and valuable base of deposits, which gives rise for an interest sensitivity of around EUR 500 million. This is not fully comparable with the numbers Christian showed. This is how we do it internally. This is the weighted short-term interest rate, and this is one-week interest rates. This is how we do the internal planning, and these are the numbers, the historical numbers, and the numbers we assume in the plan. So this is what built into the base case of the plan.
As you can see, the current level and the 2015 level is not very different, and that's why you see quite a small deposit margin effect in the base case net interest income driver. As Christian said, while normalized interest rates, we have assumed something around 3%, which is still somewhat below the pre-crisis level. We should not just why not, it's a conservative assumption, but that's how we have done it. Further on the net interest income line, it's not really impacted that much by our funding cost. This is the actual development of our funding cost. As you can see, we have had somewhat of an increase. We did issues a lot during the crisis, and therefore we have of course had an increased level of funding cost.
We have also in the same period extended the maturity of our long-term funding that have grown of cost. We expect them to peak in 2013, and we expect a slightly smaller spread on the long-term funding going forward, driving somewhat down the funding cost going forward. Into the ancillary income lever, which is bigger than the net interest income one, and I trust we believe we are in full control of this lever, of course, taking into account competition. That stems actually more or less equally from risk products within markets, asset management income, and transaction-related income. Just to illustrate here that we believe we have been pretty good at driving this source of income, also compared to peers. Into cost, the EUR 450 million cost efficiency program that will allow us to keep cost flat for the next eight quarters.
The EUR 450 million is equal to around 9% of our total cost base, which we think is a good level also compared to other banks, comparable banks. This will drive, of course, down, as Christian said, our cost income ratio somewhat. What we are trying to illustrate here is what we have said many times, that the EUR 450 million will not only mitigate the underlying inflation effects on our cost base, but they will also allow us to do some reinvestments. You can see here the indicated levels in the period 2013 and 2014 and in 2015. We have a number of prioritized areas. We have huge cost impact, of course, from all the regulatory requirements into processes, data, et cetera, and therefore you will see this area being ramped up. We also within the IT infrastructure area do ramp up.
I think we can also say that within selective specialist areas, we will ramp up somewhat. We have a number of initiatives ongoing require funding, which we will free up here. How will we do that? First of all, we are looking into process efficiency. Retail banking have carried out a big transformation of their distribution, and the full effect of that is not taken yet, so there are more effects to take out of that. We will come back to the FTE numbers, the expected FTE numbers. We have in all our advisory part, the frontline part of our business, we have more efficiency to do, which is mainly into cost avoidance type of approach. Finally, we have a big driver in centralizing, leanifying, and potentially offshoring a lot of our back office processes within our product areas, within IT and other places.
We are ramping up our We have a captive operation center in Poland. We will soon have two in Poland. We will ramp up significantly the capacity and the number of processes operating from there. That means, however, also that we are doing this, it's a captive center, and we are actually in certain areas doing insourcing because it's a good business case. Tracking our FTE development going forward will not be super precise as an indicator for cost efficiency. Just a warning. We will take down FTEs, as I said, mainly related to the process efficiency opportunities in the retail distribution network. They will go down a further 2.5%, and as I said, there will be some increases somewhere, mainly within IT, where we do insourcing. Yes. We have a number of initiatives.
Sorry, I forgot to say that slightly less than half of the 450 will come from these process efficiency, and slightly more than half will come from what we call infrastructure optimization, which is a number of different levers. We are basically going through the full asset register of the bank. We are looking on all physical items, starting with premises, which is a big cost category. We will significantly reduce the number of square meters, the number of locations, and we move to cheaper ones. We will sit closer to each other. We are basically doing the same both for headquarter facilities and for branch facilities. We have a huge lever in the digitalization project, which will reduce significantly amount of external papers and thereby postage cost, but also we will internally very much leanify the processes by having much fewer physical documents, much less storage.
Within IT, we have a lot of streamlining opportunities, a lot of cleanup possibilities. There again, we are reducing all the front-end drivers of cost, like printers and PCs and whatever, phones, and thereby driving down our running cost. Finally, we will of course continue to excel within the classical supplier management category, so they will be met with more and more requests for lower costs. These four drivers are more or less equal in size. Again, it's a well-balanced, I think, program. Again here, just to demonstrate that this is not completely new to us. It's basically more of the same. We have been able to keep this part of our cost base, i.e. the non-compensation part of our cost base, quite stable.
As we have seen, we have also been able to take significantly down cost in certain areas, and this is what we think we can continue to do for the next eight quarters. To the loan loss driver, the 100 basis point loan loss driver. I will not say much about it. Ari will come back. We feel quite confident in the statement saying that we believe that we from the current level, which is quite impacted, of course, by Denmark and shipping, we will approach during the period the 10-year historical actual level of 16 basis points.
This means if we sum up all of the expectations and give some guidance on how we see the plan, if we add all of this together, we believe in an income CAGR of around 4% without the normalized interest rate effect, and closer to 6% with the normalized interest rate effect. We will have a zero CAGR on cost for 2013 and 2014, and slightly higher in 2015, depending a little on how income picks up. We will approach this 60 basis point on loan losses during the period. The CAGR on RWA is also zero. It gets quite easy to remember, almost. Fully mitigating the regulatory effects. We will keep the Core Tier 1 ratio above 13%. As Christian indicated, the lending growth assumption will be around 2% in the beginning of the period, closer to 3% in the end of the period.
Again, this leads to our target of being well above 13% ROE in 2015, excluding the normalized interest rate, and surely above 15%, including the normalized interest effect. To recap, we believe we have made a plan that are not only within our control, back to Christian's point, also actually on the normalized interest rate. We have the sensitivity because of our deposit base. We believe we have used conservative assumptions behind the plan. As I said, we believe that many of our initiatives are well-balanced. We are not relying on one sub-driver of each of the key drivers like cost and RWA. We have a big variety of initiatives. I think we have also demonstrated that our commitment to executing on these kind of plans are clear. First of all, we are helped by our resilient business model.
This is actually more or less through two crisis. We have developed income, we have developed earnings all the way along. I think also we have demonstrated we have a proven track record of the preventive actions if needed. Finally, I think I can say we have full management commitment to deliver and follow that the plan will progress. This was the key elements of the plan and the key assumptions behind it. That was hopefully clear. Before I hand over to Michael, I want to make one clarification issue, that is that, as you have seen all along in my presentation, we are using ROE. This is very much our external communication. It's partly also internal. The main capital allocation framework driver internally is ROICR. What we have done is that we have tried to align economic capital and equity capital much more.
We only now have a difference of around EUR 4 billion between the two, mainly stemming from goodwill and other intangibles, meaning also that ROICR numbers and ROE numbers are getting closer. When you see ROICR numbers in the business area presentations, 15% ROE for the group is around close to 19% ROICR. It makes it easy to track how we are faring in each of the business area in getting closer to the 15% ROE. Yes, that's what I would say. Then I would hand over to Michael.
Thank you, Thor. Good morning, everyone. It's now my privilege to present retail. Retail represents 54% of the income in the group. As Christian also alluded to, we are also having the biggest retail franchise in the region. Our income stood in 2012 of EUR 5.5 billion, clearly ahead of our local peers. You can see from the latter part of the slide here that we have close to 950 branches, 11 million customers, 18,000 people, and we have market-leading positions in all the Nordic markets. We have, I will call it, a run-up position in the three Baltic countries, and we have a position in Poland which we are steadily improving. I will say the main characteristic of retail is the diversity.
You can see here that only 29% of our income stems from the biggest market, which is actually Sweden, and you can actually see here how diversified we are when it comes to geography. More importantly, we're also extremely well-diversified when it comes to customer segments. Noteworthy here is to mention that more than two-thirds of our income comes from the two preferred segments, large on the corporate side and gold on the household side. Even though that we have a clear Nordic operating model, a clear Nordic governance model in order to exploit all the scale and scope benefits, retail banking is local business. All our household customers perceive themselves as being local, our competition is local, more or less the same goes for the SMEs in this region.
Therefore, it's very important for us and a key ambition to be the or one of the leading banks in each of our market. When we define leading, it's first and foremost financial performance, it is customer satisfaction, and of course, also the general reputation. Here you can see our financial performance compared to the market in each of the market in 2012. You can see we are actually outperforming the local markets in three out of four. Only in the smallest market, the Norwegian market, we are lagging a bit behind. That's due to some structural differences between us and the market, especially the other leading bank there. You can also see from the orange bubbles here that we have improved our performance delta very much.
Most interesting maybe in Norway, where we have increased our ROE with 440 basis points, you can see that goes actually for all the markets. We've also, in 2012, improved the cost-income ratio, very drastic. 12 percentage points in Norway, four percentage points in Sweden and Denmark, and one in Finland. That stems, of course, from the very big deposit base and the very low general interest rate level there. Now I will move into the future, the value drivers. We have grouped those into these four categories. I will go into them, dive into it one by one. First I will look into the business system, the relationship banking business system, which we think in itself is a clear value driver and a very important lever for us.
The other very important lever is the distribution side and our aim and our commitment to optimize that and actually embark on a journey which we started years back. We have a very important income driver in our business system, we also have opportunities looking into the repricing and looking into new customer acquisition and getting new wallet shares. I will also dive into that. Of course, retail will still be primarily an efficiency gain, and therefore keeping cost and capital consumption under control will also be a very important driver for us when it comes to value creation. Moving into the first one, our business system. Christian has mentioned the relationship strategy many times, this is the core essence of retail on the household side. I think it's very important to mention here that this model is not newly invented.
This is actually a very strong structure, a very logic business system, the same value proposition, the same concept, same contract policy. We have been embarking for that for more than a decade, and it has been instrumental to help us to create Nordea as we have today. It has served us extremely well. The core content of this is actually that our customers are segmenting themselves due to the business volumes and the number of products they are buying. We are looking into the potential of more income, and we are then allocating the cost according to the segmentation and according to the potential income. We do that through our contract policy. Today, after some adjustment during 2012, 70% of our sales capacity is now tailor-made to productivity to harvest new businesses and going for new customers.
We use this also as the cost allocation tool, and you can see on the right-hand side that it has been extremely instrumental in ensuring that all our segments today are profitable. Moving into the corporate side, more or less the same methodology. The difference here is that the customers are segmenting themselves. On the household side, we have a fixed price regime that we do not have in this, where we are much more risk-based pricing. In essentially the same, the customers are segmenting more or less themselves due to income and income potential. Here we also do whatever we can to exploit cross-sell opportunities by looking into potential. We are managing this very carefully, and we have dedicated sales resources and contact policies in order to increase the share of wallet in this potential area, especially in the non-lending area.
Our large customers represent 60% of our total corporate income. I said a minute ago that we had 950 branches, but we have consolidated our services towards those large customers to only 45 places, meaning that we have a very tight management control, management awareness, management support to our SRMs in order to maintain our relationship and embark on an income journey together with our customers. Also here, we use this concept in order to allocate our resources, cost, and also capital here. You can also see here from the right-hand side that this concept have also been instrumental in ensuring that all our segments on the corporate side today are profitable, including full cost allocation. When I said that we really believe that our business system is in itself value creation, it is also because these things.
For retail banking in the future, also today, but more important in the future, it's also about customer satisfaction, and even more important, it's about retention. You can see here that even though that we have transformed our branch system during the last couple of years, we have been able to keep a lead to our competitors when it comes to customer satisfaction. This is primarily in the gold area, our most important segment. Actually, for the first time here, I think we are disclosing retention ratios. We're doing this because we think retention is primarily or the key driver for keeping a cost base and using our resources. It give us ability to cross-sell more, that we can keep our customers.
The way we have defined this is that we take 100 gold clients in the beginning of the year, we look into these 100 again at the end of the year. There's no inflow to the group. There you can see that between 98% and 99% are still with us in the bank one year after. It's also including customers who passed away, an average 1%. In reality, our retention is close to 99%. 99% of our gold clients in the beginning of the year are still with us in the bank one year after. This is, I think for, in all comparisons, very, very outstanding numbers when it comes to retention. This is really the result of our business system and our relationship strategy that we're seeing here. I will dive into the other value driver, that is the distribution.
Retail is the next two, three years, really a distribution and efficiency game. You can see from the left-hand side what is happening online. We can see that the number of manual transactions in our branches are down double digit. Actually, in 2012, we saw manual transactions going down with nearly 20%. You can see here from our online log-ins what is happening. Every second, 24/7, 365 days a year, 15 customers are logging into the bank. We can really see that the relationship is changing from a physical to a more online dimension. We have, of course, taken note of that. You can see it here, this is how we have constructed our branches. We have reduced the number of FT in our branches with 15% over those years.
At the same time, we have changed the composition of our people, and we today have much more advisors than service and support people. We are really increasing the focus on advisory and sales in our branches. We have taken note of this development. We can really see a change behavior among our customers. We actually took note of that years back. The last two years, we have simply transformed our physical branch network. Three years ago, 93% of our branches were full service branches, servicing all type of needs, all type of customers. You can see today, we are nearly at one-third. Three years back, only 7% of our branches were dedicated to specific relationship needs. Today, that is close to 50%. We have invented a new branch type, the service branch, taking care of the daily banking needs. A huge transformation.
You can also see what has happened. We have actually reduced the number of branches with close to 25%. Also from an efficiency point of view, the most expensive process, the cash handling, there we have reduced the number of outlets where we are doing this handling, is down with 50%. This distributions optimization have two sides. We have a clear change behavior among our customers, and we have a huge opportunity to be more efficient, to do more safe at the same time. These two aspects are converging. The very good thing is that our starting point is unique. We have done what have to be done in the last years. We are ready, meaning that we can now allow ourselves to optimize the distribution mix cross-countries, cross-channels from a return dimension.
Not only because the customers are saying to us they want to be serviced another way or because we have a specific efficient need. We can now allow ourselves to optimize exactly the journey towards a multichannel strategy and multichannel world. That is exactly what we are embarking on. We have now developed a clear strategy and clear target picture how will we do this in the next two, three years. This multichannel strategy has two dimensions. The first is the nature of the service, the nature of the task the customer are embarking on. The other dimension is, do the customer need support in the bank or through the channels in order to fulfill his needs? What we have been very good at for many, many years is this one, that the customer walks into the branch, get advisory services and buy a product.
This has been the core of our relationship strategy towards gold customers in our branch network. Of course, our relationship strategy have been very physical branch centric in the past. What we have been doing the last two, three years is to ensure that the daily banking needs are transformed away from the branches to the online channels. We have been extremely successful in this, on my slide I showed a minute ago illustrated that. The new trick, the new element in this is this part where we now establish advisory services remotely. Also our customers who want to be self-directed can actually receive advisory services, can buy products online. Meaning that in the next two, three years, we will be able to service all customer needs 24/7. Regardless if we are talking about daily banking needs or advisory needs.
As said before, we have adjusted our branch network and our distribution model accordingly in the last two, three years, where we are now ready really to grasp the potential in doing this. We can now allow ourselves to optimize the journey cross-country, across the channels. That's exactly what we're going to do. We have the prerequisites in place, a very logic business system and relationship strategy, so we can take that. We do not need to invent the new model. We have a very strong CRM system across the channels. We have a clear price regime, and we have a dedicated leadership resources in place because this is leadership to find the journey and to optimize the timing. That is the key, and we are ready to embark on that journey now. The other lever is the income side.
As I said before, retail, the next years is primarily a distribution and efficiency gain. Of course, we also have drivers when it comes to the income side. We expect that our retail income will be 10% higher in 2015. It's a little more than 3% a year. Here you can see the contribution to this growth. The repricing will account for 35% of that growth, EUR 200 million, that stems from repricing of the book to the present margin level. In our plans, we do not foresee that the customer margins on lending or deposit widen. We keep the level we have, but we have a huge repricing potential. Also when it comes to the mortgages in Norway. This is actually not in this number. We are very good on cross-selling.
I come back in a moment, we expect that 25% of this income growth will stem from cross-selling corporate and household, close to EUR 150 million. We will acquire new customers, primarily household customers. That will give us EUR 50 million more. These three components is what more or less what we can control ourselves. That is 70% of the income growth is actually coming from, you can say, our own activities. We have 10% coming from an interest rate increase in the area. Also here, maybe very modest assumptions. We expect in our plans here that the EUR rate in 2015 will be 65 basis points higher than we are seeing today. There will be some market appreciation. You can see that 70% is own activities and 30% is coming from external sources. A very diversified growth composition looking ahead.
Dive in a little more into this in a country dimension. We will do whatever we can to reprice our book. On the corporate side, this is the key that we adjust our margins to the capital required for having this relationship. We have a strict price discipline, strict rules for price exemptions. We are keenly following won or lost deals. Again, we are doing our utmost to ensure that this book will be repriced to the present level. Taking all income drivers into account, volume, margins, fees, this is how we see the potential on a countrywide dimension. We see the biggest potential stemming from Finland, even though we do not see a big hike on the interest rates, but we still see a very nice potential in Finland. Denmark and Norway coming in two and three, we see the modest potential in the Swedish market.
You can also see from the right-hand side that we have some track record in repricing our book. I said before, we are fully dedicated to do whatever we can to get this repricing of our book in place. The other income lever comes from the cross-selling. Here you can see the cross-sales ratio on gold customers. I think in any international standard, these cross-sell ratios are very, very, very high. Another example of how the relationship strategy and our business model have served us very, very well. Still you can see we are able to increase the cross-sell on our present stock. That is due to a very strong sales efficiency. We have a better efficiency than our peers.
We have increased it, we will further increase this as we have changed, adjusted our contact policy, having much more quality, much more advisory and sales orientation in our contact policy. Even though we have transformed our branches and our distribution model radically the last year, we have actually increased the number of meetings per PBA by more than 8% in 2012. We really see also here an organic growth driver when it comes to our present stock of customers. New customers. We have actually increased the net, net number of gold with 14% since 2009. You can see the growth in the new and number of new customers were also up in 2012, close to 3%.
Maybe we are a little conservative here, but we expect that the growth we saw in 2012 to continue, meaning that we have increased the gold customer base with 20% since 2009. Please keep in mind that we have a fixed price regime, meaning that a new customer Bronze, silver or gold will be profitable from day one. Every marginal customer we get in will actually help us on the profit line, and the return will be in place from the beginning. On the corporate side, we use the asset productivity notion as the cross-selling measure. Here you can see we have steadily increased our asset productivity with 10 basis points, despite the fact that we have not been able to realize any deposit income of corporate due to our interest rate level.
We do expect to continue this journey, adding 30 basis points to the 2012 number, and here 30 basis points is actually equivalent to EUR 270 million. That means that, again, that income growth is not only diversified when it comes to sources, when it comes to countries, but also to segments. Meaning that household will deliver 50% of the income growth and corporate the remaining 50%. Very diversified, very robust income growth pattern in the years to come. As I said before, it's primarily a efficiency gain. You can see here what we have done in retail. We have reduced the number of FTEs with 10% in 18 months, and we are dedicated to continue that in order to keep the costs flat, meaning that we will reduce the number of FTE with 2% every year.
We're also working a lot of all the other things in the value chain. We will reduce cash handling radically. We have plans for that, and we have a big digitalization process ongoing. We will automate, we will centralize, and we will, of course, offshore the processes which can be offshored. We are in the middle of that. Of course, we will increase the efficiency in our support functions. We have just changed the organization in order to capture those efficiency potentials. We will aim for flat RWA next years also. We actually were capable of reducing the RWA in 2012, but we will keep that. That will allow us to grow lending a bit, but it is actually more important to keep the capital consumption flat. We'll do that by embarking on a lot of household cleanup processes.
We will look into how we can optimize our models, but more importantly, we are even more focused on business selection, making sure that we are allocating the capital, especially on the corporate side, to the right customers and the right transactions. These four drivers will mean that our very well-diversified franchise will still deliver high growth and, as Christian alluded to, very low volatile income in the years to come. The income growth are based on different sources, different countries, and also different segments. A pretty robust growth is expected. We will keep the cost flat. We will still reduce the number of FTE by 6% in the three next years. We will keep up and work even harder on being more efficient on our capital consumption. We will not jeopardize on the credit side.
We have the same credit risks in risk profile and strong management awareness and focus on the strict credit risk management. All these things together will mean that the return on our allocated capital will increase. You can see here that from 2011 to 2012, our return was up to 170 basis points, we expect to some degree the same pattern in the future. If I may recap here. We have a very strong relationship strategy, we have a very strong business system. It's a business system developed over many, many years, fine-tuned on a current basis. It has been instrumental in getting our income, our cost allocation, and also our cross-sale to the level that we are having now, and also have been instrumental in getting our customer satisfaction and our retention at those very high levels.
We do whatever we can to maintain our positions there. We have embarked on a journey when it comes to optimization of our distribution model. We have transformed our physical branch network radically during the last years, taking down the number of branches with 25%. We have not only taken it down, we have restructured, we have changed the content on our staff composition and the branch composition as such. We are ready now to grasp the opportunities which we see from the customers because they're saying to us, they're showing to us they want to be served in another way, we are ready to meet those needs. We do that by developing the new multi-channel relationship strategy. We are backing on that.
We have clear roadmaps, clear plans country by country, now we can allow ourselves to optimize the journey country by country from a pure return requirement. We will grow the income. We'll do that by repricing the stock. We will grow the number of customers. We will attract new customers. We will also, on the corporate side, increase the asset productivity. We will ensure in all our segments, corporate and household, that we do our utmost to ensure that the repricing of book to the present level will be in place. Eventually, we will keep our strict resources, the capital consumption, the ROA, and the cost flat in the years to come. That was the retail story
Now I think we are in for a Maybe we're in for Rodney?
No, we have just learned that we are a very efficient bank, so we are actually ahead of schedule. We planned to be back here 11:10, but we will be back at 11, sorry, 10:45. You're welcome back. Let's have a coffee break, and then we will prolong the Q&A session.
18 months ago, I stood, not actually on this stage, but in the last Capital Markets Day, introduced, for the first time, Wholesale Banking. We'd actually had just formed Wholesale Banking. You may ask me now, how do I feel about the business 18 months into forming Wholesale Banking? I think the very short answer is that I feel actually very good about the business. I think we've done a lot, we've achieved a lot, probably more than I thought. We have actually delivered on all the plans that we set out. I feel very good about the business. The business, of course, as Christian Clausen said, is the largest wholesale banking business in the region. It's a broad, well-balanced platform. It's a big business. The businesses that we have cover pretty much all of our client needs.
It's a business with scale and size, but it's also a business which I think is very important, that has grown both in terms of the client dimension and the product dimension, and we've grown the business throughout the crisis years. It's also a business with a good return profile. We are nearing the ROCAR 15 in 2012, and a business with a good cost-income ratio. Very important that we actually have the operating leverage in this business. I think very importantly, again, the same as in all of our businesses, but also in Wholesale Banking, it's a well-balanced business, both in terms of customer groups and geographies. The biggest geography, 23% being Denmark. Denmark being big because we have a very big institutional business in Denmark. Also in terms of income generation, net interest income is roughly 40%.
Going forward, I would actually expect that that 40% either stays or goes down. This is not a lending business or pure lending business. We're using our capital very wisely. A very good balanced business. I always say this is a business which is relevant to our clients and is relevant to the real economy. We've done a lot, but I'm also convinced that we can do more. That's what I'm going to talk about. Before we go into steps that we take, I think it's still good and say, why do I say this is a unique business? Why are we unique in what we are? The uniqueness comes from what is our core strategic asset. Our core strategic asset is the customer and the product platform that we have put in place and the scale it has.
We are the only bank in the region with a meaningful lead banking footprint in every single country. It really starts of being local, that we are close to our clients. We have long-term relationships that go back many, many years. We have the intensity, and I always say the intensity is the important thing, and the intensity you only get if you're local, if you're close to your clients. We also have the relevance, and the relevance comes from our competence, the size, the scale in the products and services we deliver. It's actually a strategic position that if you look at that in terms of our competition, be it local or international, that actually levers well against them because we are both local and we are relevant in terms of our capabilities, and we can compete with the best international players.
That is actually the uniqueness. That's the asset we have. If you look at our position in the region, we are either number one or number two in each of the countries. I think probably a better way to say that is that we are number one in every country or joint number one, except in Norway where we are number two. That also means that we have 50% more core relationships than anybody else. That's the scale I'm talking about. That matters, and I'll tell more why that matters. From this strategic asset actually comes very clearly our vision, our strategy to be and maintain our leadership position, be the best in working capital management and be the best in capital markets advisory and so on. That platform gives us that vision. I think we're pretty close, but there's a lot more we can do.
From this also comes the model that we have adapted. The model being one, relationship driven. It's a relationship driven model. Two, it's a one operating model. It's not four or five country models. The scale comes from the fact that we have one organization aligned to serve, and that's where we get the scale. That asset actually gives us both the vision and the model how we operate. Look at the objectives. How do we actually drive this business forward? Our number one financial objective is to increase returns. Returns, returns. The way we increase returns is, and this has been repeated many, many times, by increasing income while keeping both capital, RWAs, which is the same, and cost flat. That's what we have been doing, and that's what we will continue doing.
The four levers that I will go in more detail are, first of all, relationship strategy. This is something we had been doing day in and day out, but I do think that we can still sharpen both our customer strategy, customer execution, and we can sharpen our product execution. That's definitely one of the key areas. The other one I already mentioned that we are for the first time, we have one operating model. We are 18 months into it. There's much more we can do. That will also drive both efficiency, but it will drive through better alignment. It will drive both the quality of service and it will drive the volume of business.
Micro-optimization, that's a fancy word, but what it really means is doing day in and day out the right decisions, business selection, pricing, and also saying no, day in and day out. Of course, strict resource management. All of these four, of course, are interlinked. Those four are the ones that we have been doing and we will continue doing, and that's why I say we can do more of what we have done and actually improve further the results and drive returns and create value. It's actually creating value, not only to the shareholders, this also creates value to our clients. If we look at the relationship, I repeat what Christian said, you will hear the word relationship probably from me equally many times. If you said Christian 21 times, I am probably pretty close to 10 already.
Deep long-term client relationships is at the heart of our strategy. It has always been, in the future banking model, it is even more important, that is the case. That is something I really want you to remember. Having clients trust you and then delivering. Christian mentioned about the Greenwich, about the quality index, I'm actually extremely pleased because Greenwich actually has renewed their study and the results came out last week for the I don't think they are in press yet. In that study, they looked at all the European markets and looked at the share leader, i.e., who has the biggest footprint, the quality leader, they again confirmed that we are the number one in share leadership, i.e., the coverage that we have, and we are number one in the quality leadership in the Nordic region.
Just confirming again back to the platform I mentioned. That is extremely important. It's not only about being quality leader and share leader, it is about generating the income. When you Oops, sorry. When you look at, again, the corporate income, we've actually grown the corporate income by 33% in the last four years. That's year-on-year of 7%. That's not a small number. It's not only about being share leader and quality leader, it's actually about delivering the numbers. I know that we can continue doing that. In retail banking, Michael mentioned that it's also about getting new clients, more clients, more core clients, higher revenue. That revenue that we are getting from the wholesale banking side is not more clients. Because as Christian said, 90% or more than 90% of our target clients already bank with us.
We're not going to get many more clients. It's about doing more with the same client. Getting closer to the client and then doing more. One of the indicators of that is, of course, cross-sell. It's a nice buzzword, cross-sell, then again, this is a Greenwich. Greenwich has looked at cross-selling in the Nordic region. The way they look at the 73% they give us is the products that we, on average, deliver to our clients, how many percent does that cover from the client product use? i.e., if you have 100, you actually are providing all the relevant products to that client universe. 73, you may ask, is that a good number or a bad number? I would say two things. One, we've improved it. Number two, our best competitor gets into the 50s.
I think that shows that we are doing something more than others. My own ambition, of course, is to say that there's no reason why that should not be 100. That should be our ambition to get that to 100. I do not see any reason why that should not be the case. I think this is important. A third thing that Greenwich came out with, which I found very interesting, is that they also said that on average, a Nordic client in key products, be it cash management, be it risk management, be it in trade finance, et cetera, they use on average two lead banks, core banks, maybe three, but two. Again, showing why it is so important that you have this lead bank relationship and lead bank footprint.
Many people say that the lead bank usually gets 40% of the wallet, and if you are a tertiary bank, not one of the lead banks, you may get 10, but usually less. There again, you see the leverage of relationship and having relationships at the core. What we have done in the last 18 months, we've actually renewed our whole relationship management process to align it with the new organization, to make sure that we are much more granular on how we plan, much more granular on how we deliver all our products to our clients, really to drive cross-sell and then eventually drive the operating income. It's been a big effort to do that, and that means that we are fully aligned throughout the products, the services, to make sure that our clients actually get the best both advice, product, and service from Nordea.
That's why I believe that we can continue on the path that we have embarked. Cross-sell strategic relationships, they tend to become buzzwords unless you actually have something to offer, right? You can have a great relationship, but if you have nothing to offer, that's not very long-lasting. Actually having a competitive product service platform is key. Our commitment and my commitment when I meet client is that we should be as good or better than the relevant competition. As good or better, ideally better. As good, many times, is enough if you have the relationship. Are we there in everything we do? Not yet, but I do think we can get there. That's the commitment we give to our client. In transactional products, cash management, trade finance, it is usually a given that, hey, you are the leader.
I think what I want to take up here is what Christian also mentioned, our capital markets franchise that we have developed over the years. We are today the Nordic leader, I think the positions here speak for themself. This is something we have developed over the years and maybe is not as well understood by the broader public, but our clients understand this. We are number one book runner, that's number one of every bank, book runner of bonds in the Nordic region, syndicated loans. Then in some segments, like M&A, we want to be the number one Nordic bank in the Nordic region. That's where we add value. All this again is integrated together. Remember, when we do this is not only for Wholesale Banking.
It's equally much a partnership with me and Michael to deliver this to Retail Banking where we get the scale. Again, league tables are always nice, but the real thing that matters is income. I think we have shown with 15% year-over-year growth in our markets activity what a deep customer penetrating business, a scale business, and a customer-centric approach, what it actually can deliver in the region. 15% year-over-year growth in markets. This is again not product driven. This is again extremely well integrated to our overall relationship approach, starting from understanding the client, advising the client, and then delivering. You may ask here, of course, also the market making and trading activities, they are there to support the customer activity. That's why it has a very narrow risk profile, but it's also very resilient.
It's a resilient business, narrow risk profile, and delivering service and product not only to Wholesale Banking, but all of Nordea's clients in Retail Banking and also in Wealth Management. That's a busy picture, but I do want to mention the organizational platform. I mentioned that we formed Wholesale Banking 18 months or 24 months ago. Apart from actually having relentless client focus, which has been, of course, the key of our business in the last two years, this actually creating, first forming and then transforming the Wholesale Banking organization has been the biggest achievement, at least when I look at what I have been doing and Peter and our leadership group. We now have one operating model, no silos. It's a much flatter, much more customer-centric organization with three objectives when we actually form this. Better alignment.
Alignment means how do we deliver products and services to our clients? How do we select clients? Jointly that we actually agree and then actually working together. Alignment, alignment. The second one has been strengthening the offering, actually by working together. Thirdly, efficiency. By when you do this, we get a lot more efficiency, so we can do more with less. Going forward, I think this is actually the biggest lever of future performance. Having people work together the right way, making quick decisions and understanding the client. We've brought in new people, and two-thirds of my leadership group is actually new in their jobs. Not new to Nordea, but new in their jobs. We have a very good leadership group driving this, and I think this, if anything, is something that will make a difference really long term.
You may not see it out there, but this is the thing that delivers. Actually, I'm proud on that because we've actually done that. You could say, isn't that disruptive? We've done that without taking the eye off the ball as it creates the clients. We've done that while we've actually delivered the numbers. In a way, we have the strategy in place, we have the relationship drivers in place, we have the organization in place. At the end of the day, it is about doing the right thing day in, day out. Right clients, right deals, right pricing. If relationship is one buzzword, the other one which we use daily is business selection. Business selection and pricing, that we select the right business, the right business in terms of long-term value generation to the client, but also value generation to us.
That we allocate capital to where it actually gives the return and where we get the business. I take 1 example, pricing. Pricing, of course, is key. Remember here again, net interest income is 40% of the income. It's not more than that, but it's still a big number. We set a target of increasing the average margin on the portfolio by 10 basis points per annum on the whole portfolio. Which means that, of course, we need to do more. What have we done? We've actually done it. We've actually achieved, in the last 2 years, 10 basis points. You may then ask, what does that mean? 10 basis points per annum is actually more than 1 return point in return. That's the lever, and actually, we've done that. That's on pricing.
Of course, it's not only pricing of loans and the loan capital, it's pricing on everything we do also in markets that we have the discipline to drive that. That is actually something you do day in and day out. One thing that has been mentioned, of course, is that, okay, isn't now customers shifting to the capital markets? How does that impact your business? One, I think it's a very positive, very healthy development that that is actually happening, because I think clients need to diversify their funding sources given the regulatory environment for banks. Actually, I see this as an opportunity. I think I've already mentioned the position we have on the bond side and the loan side, where we are a clear number 1, you may then ask, what impact does this have to your return on revenue?
There was no scientific way to do this, but we did an analysis, in this case, in Finland for last year, because Finland was a market where there were more than EUR 10 billion actually in capital raising in the bond market, EUR 10 billion in 1 country. We actually made a quick analysis. What would that have meant if that would've been on the bank's balance sheet? Our share, of course, not the EUR 10 billion, but our share of that. That analysis showed that everything else being equal, no auxiliary business, no nothing, our return actually went up by 2 percent points because we actually were, 1, the leader. The fees and commissions we did here then compensated for the revenue we did not have on having that on balance sheet.
Actually shows and proves that having a balanced business where we can actually have a holistic view in advising clients to use our balance sheet, use the capital markets, use risk management, and actually deliver the best product, is something that actually creates value. This is not a threat, this is an opportunity, and it's good for our clients, it's good for the economy, it's good for us. Very quickly, you say, how do I? I said we drive the business client by client, make decisions. Of course, how do I look at client by client? Of course, I cannot do that. The way I look at the business, I look at it by segment. I look at our real estate business, our private equity business, our multinational business, our blue-chip business, our institutional business. I look at our bank business.
I look at our energy business, shipping offshore, divided into that, and also per country. We monitor it on a monthly and quarterly basis, income development, RWA development, income mix, which is the cross-sell, the risk, how that develops, the return, how that develops, and also return clusters. Where do we have value destroyers? Very important to get them out. Lending margins and won and lost deals in terms of pricing. This actually creates discipline, but it also allows us to learn, because we may have one segment in one country, which lower return, and then we actually can learn, and it actually helps in capital allocation. We allocate capital based on that. This gives the discipline. This is actually real numbers, but I won't tell which segment.
It's very important because if we can get them out, just eliminating them will actually increase our return by one percent point again. Having the discipline on how you drive the business is also very key. Cost, I think most of that has been said. I think we've shown in Wholesale Banking that we've been able to take down FTEs by 6% in the last two years. Cost is key to maintain the operating leverage, but I do want to say one thing. Cost is not the main driver in Wholesale Banking. If we want to improve our return by one percent point, we actually need to take costs down by 12%. It's not a cost game, but we are extremely disciplined to make sure that we will maintain flat cost.
When I say flat cost, it does not include variable pay, but it is nominal, which means that we will take out cost in the business to maintain that leverage. Capital has disappeared, so it's not there. On capital, it's equally important, actually probably a bigger lever for us. In capital, we're actually taking the capital down by 15% in the last two years. Very much in line with what Torsten has said. We will continue doing that with flat capital also going forward so that we can drive the business. When you put all that together, the relationship, the organizational changes, the business selection that we do, that will drive return. It will increase income with flat cost and flat RWAs. If you look at what we've done, we've actually taken, as I said, the return, the [ROAA] cut to close to 15%.
You may say, "Isn't that just two percent points in the last from 11?" One thing you have to remember here, if I only look at two elements, one, Basel 2.5, and the liquidity premia increase, i.e. our funding, in that period, that in isolation would have reduced our return by two percent points. That would have all else being equal, being closer to 11. Like for like, I've taken it from 11 to 15, again, showing that I think we can continue on that path. Just to wrap up, there's something that I want you to remember. Deep long-term relationships is at the heart of everything we do. It's at the heart of our strategy. The platform we have, I think is unique. It is a unique platform.
The scale in terms of product platform and customer platform. We have now an organization in place, which I also think is unique, that can work together. From here on, the elements that I have laid out, it is about execution, and execution. On the relationship side, more intensity and relevance to our clients. That will drive income. On the organizational platform, I think we can continue to strengthen that, both in terms of alignment, how we work together, because it is not only about a structure, it is about behavior. How do we behave? How do we work more as one? I can say one thing is that the organization is extremely enthusiastic. Business selection, business selection, business selection. What business, how we take it in, how we price it, and how does that create value? Keeping capital and cost flat.
We have done it, and I am convinced that we can continue doing it. For me, it is about the quality of execution, and I know we can improve the existing business in the existing environment. Thank you.
Good to see you. It has been a long day already, but I hope you are ready for the presentation of the third and final business area, Wealth Management, which I have the pleasure of presenting to you. Wealth Management is a somewhat different business area. It carries only 2.5% of the RWA of the group, has 8% of the capital, and generates 16% of operating profit. My presentation will follow the same structure as my two other colleagues. First describing the position and the platform, and secondly, into the strategic plan for 2013-2015. The Wealth Management contains three business units. The first is Private B anking with EUR 68 billion in assets under management, and it is the largest Private Banking in the Nordics, and it is also the largest Nordic-based international Private Banking domiciled in Luxembourg, servicing 106,000 customers.
Second business unit is Asset Management with EUR 138 billion in assets under management, servicing retail clients, Private Banking clients, institutional clients, and third-party distribution. The third business unit is Life and Pension, which is also the largest Life and Pension provider in the Nordics with EUR 5.7 million in premiums and EUR 51 billion in assets under management. Typically, these businesses have not only the biggest in the Nordics, but it is also the biggest or the number one, two, or three position in each domestic market, which means that we have the benefit not only of scale, but also of being in a top-of-mind position. Roughly one-third of income and one-third of profit derives from each of these business units. They operate in a tightly integrated wealth value chain, delivering efficiency, process efficiency, gain on scale, and capabilities and value propositions to customers. It is a well-diversified business.
If you look at the assets, you will see that no market have more than 35% of the assets. Geographically, we are in the range of 10% in Norway, 35% in Denmark, 15% from international customers. If we look at the business lines, you will also see a diversification from Private Banking with 32%, life 26, institutional clients 20, retail 18, and third-party distribution 4%. The last pie chart show the asset mix of assets managed by asset management, with 55% in fixed income, and 45% in equities and multi-assets. This is the platform that has delivered the growth, and we are not only the largest, but also the fastest-growing wealth manager in the Nordics, with more than EUR 218 billion in assets under management. Passing the EUR 200 billion last summer was a very important proof of the trust that customers have placed with us.
As you see, we have also the strongest growth in the Nordics with 16.5%. The peers are clearly lower. The gap to the second-largest peer is now EUR 64 billion. It has actually doubled in two years' time. Not only the fastest-growing in the Nordics. On a European scale, we are the second fastest-growing in the European peer group of 35 wealth managers in Europe. The diversification of the business is important. I will not go through the details. You are, of course, welcome to study these afterwards, which shows the split of the assets under management on market and on business units. One question you might have is where has the growth come from? As you will see, there has been double-digit growth in all markets but Denmark and in all segments and business lines.
Especially, let me highlight the international growth, 29% last year came from international business. International Private Banking and asset management is growing in importance to us as an additional source of income and profit growth. The distribution model is well-diversified. It builds on 980 retail branches with, as Michael Rasmussen has just told, with an increasing focus on savings, utilizing the financial planning tool, resulting in higher sales of retail funds. We have 80 Private Banking branches with highly skilled advisors and with what we would claim is a market-leading concept of tools and advice. Institutional clients, servicing more than 600 clients. Third-party distribution. Just to give another example of the diversification, in third-party distribution in 2006, we had 90% of the funds in four funds. Last year, we had 90% of the funds in 30 funds.
No market stand for more than 21%, which was the German market in 2012. Life and Pension, the sales force there work in tandem with retail banking, Private Banking, and wholesale, and also capitalizing on third-party distribution and the composition of third-party premium. All together, this is the distribution model and the diversification of the business which has delivered the results. This concludes the description of the platform and the position of wealth management. I will turn into the strategic plan and what we will focus on going forward. As you will see, we work very much along the lines outlined in the Capital Markets Day in 2011. We have seen that these value drivers have worked, hence no reason to change strategic direction. Of course, we have done, I would say, fine-tuning and smaller adjustments and updates, of course.
The strategy review we have conducted started with the external factors, taking into consideration the changes we see and foresee in customer preferences, competitive environment, regulation, technology, demographic development, to mention the most important. I will not bore this audience with going into detail into these external drivers, as I guess they are well-known to all of you. I will just highlight on the demographic side that the prognosis show that the age group of 50 to 60, which we call the high-intensity savers, is expected to grow until 2020. Adding to that, we see an increasing propensity to save, both due to the focus on longevity, but also to, in the Nordics as well, government taking down expenditures on pensions. I could mention, as maybe a little interesting information, that the number of U.S. dollar millionaires in Norway actually increased with 6% last year.
There is an underlying growth in the Nordic market as well. We have chosen to focus on three value drivers, Capitalize growth momentum, the Enhanced value proposition, and Cost and capital efficiency and prioritization. Why these three? First of all, we have seen a strong growth momentum, and we believe there is still ample potential, both Nordic and internationally. Enhanced value proposition is core to customer satisfaction and customer delivery. Capital and cost efficiency is, of course, key to deliver returns to shareowners at the required level. This, I will not go through [elite science], but we have seen it work, and we know how we will run this. I will not go through all, as time is limited. Internally, we can double-click on each of these initiatives, and you will find detailed plans with milestones and follow-up structures.
On capitalizing the growth momentum, it's very much about levering the strength of the diversified business model we have and the strength of the distribution platform. I will elaborate a bit more on that later. The enhanced value proposition is very much about delivering the value proposition to customers. As we all know, what is a good enough or a strong value proposition? That's an ever-moving target. Hence, we continuously invest in competence building and also in increased accessibility for customers, not only to own data, but also to help yourself, tools to advise, and also to do transactions. Investing in online and mobile is crucial. We have seen that the wealth planning concept is very important in Private Banking, and that's now being planned rolled out in all countries. On the product side, we have seen the clear shift from equity to fixed income.
With the low interest rates we see, and still the risk averseness in customers, we believe there will be an increasing demand for absolute return and alternatives going forward, and we plan accordingly. The change in customer preference include that customers still focus on benchmark. It's just a different benchmark. It's not the index anymore. It's more the absolute return benchmark. On efficiency, it's a lot about improving the operation, working with the IT efficiency, not least through offshoring. We have worked a lot with offshoring to India the last years, which has been working quite well, and we plan to do that even further. Improve frontline efficiency is also very important to make room for investment in new products, new markets, new processes.
Just as an example, last year, we had a cleanup process in Private Banking of customers not fulfilling their criteria, which, by the way, is EUR 250,000 to EUR 300,000 in investable financial assets, and the high net worth segment runs from EUR 1 million. Customers not fulfilling these criteria or not needing the Private Banking value proposition anymore was then referred back to retail banking, and by that, making room for taking on new customers fulfilling their criteria. The capital efficiency in wealth is very much about life. We have EUR 3.5 billion in RWA, and after a review last year where we were able to take down the RWA by 10%, the potential there is limited. So capital efficiency in wealth is more or less about life. I will come back to that. The next two slides tell the story of the growth momentum.
Let me start with the very well-functioning elevating model we have with partnership with retail banking. Last year, 8,500 customers fulfilling these criteria was elevated from retail banking to Private Banking, which obviously is a very cost-efficient customer acquisition. The stock by year-end was 32,000. You could ask, how many years is this a potential? Interestingly enough, we saw that there was also new customers coming in because they get wealthier or because there are new customers joining Nordea. Actually, 6,000 new customers came into the potential customer base of 32,000, which has not been offered Private Banking services previously. This result in higher share of wallet. It results in a different asset mix, resulting in higher returns to customers and higher margins. Typically, we see that the revenue increase is 160% of these customers being elevated.
Not least, this is also increasing the customer satisfaction to get the advice and service tailored to their more complex need and higher investment returns. We actually saw the customer satisfaction index for Private B anking increasing in all four Nordic markets last year. We also work together with the corporate relationship managers to service company owners and entrepreneurs. External customer acquisition is also important in all markets. Also, to make sure that we have and to keep an eye on the competitive edge of our business, to always benchmark with the competitors. Especially for international Private Banking and Private Banking in Denmark and Finland, where we have a rather high market share, this is important. We work with it also in Private Banking, Norway and Sweden.
As the market share there is lower than the normal market share we have in the household market, we work with the more, let's say, low-hanging fruits, which are the potential customer base already in Nordea. As I showed, the non-captive distribution has grown in importance, 29% of our growth came from the international business and actually 46% from third party. Institutional sales is important. Consists of two parts. It's institutional clients, where we have 80% of assets coming from Nordic. We have the highest penetration in the tier 1 segment in the Nordics, both on equity and on fixed income. 20% managed internationally. If you look at the third-party distribution, as Christian already has mentioned, we now distribute through 14 of the 20 global wealth managers, which contain names like UBS, Credit Suisse, Morgan Stanley.
This is important not only as a source of additional growth and additional income, it's also very important as a source for challenges and ideas which we can benefit from the product innovation and to service the Private Banking and the retail customers in the best possible way. The growth in this area has been strong. Over the last six years, there has been a CAGR of 13%, almost doubling the assets under management. As you see at the top of this slide, the margin have been increased at the same time. Needless to say, we follow up this business not on flows and AUM alone, but on value of flow. Margins have increased. The investment performance and investment capabilities is also a key driver to this business, core part of the value proposition.
As you know, all of you participating in this CMD, it's difficult to know how should we measure performance. I have shown to do it here in the way that it's a Morningstar rating, and very shortly, if you're not all familiar with that. The 11% best performing and worst performing get 5 or 1 star, the second-best, 22.5%, get 4 and the worst, 2, leaving the 35% in the middle with 3 stars. As you see, 46% of our funds are in the top 2 category compared to the market average of 33.5%, and only 2% in the lowest performing compared to the average of 11%. On a basis of the last three years, we have had a higher than market average return and to an increasing degree. Internally, we measure investment performance according to benchmark and the GIPS standards.
87% of composites outperforming benchmark last year, 70% the last three years. This is, of course, a key driver to value satisfaction and hence a key value driver for the wealth management business also going forward. The integrated value chain in wealth drives customer value and innovation and also efficiency. I have described the investment product, and as you are aware of, we also deliver the life product. But on top of this, we have a unit called Savings and Wealth Offerings, which also work with the asset allocation advice, which actually had a value add to customers in all the four Nordic countries last year. This is a fine-tuned machinery, I would say, making it possible for us to follow and to read the customer needs and changes in customer preferences and to do the adjustments accordingly in a dynamic and cost-efficient way.
I should also mention that we do not only distribute the internal products, we also distribute carefully selected external products. Actually, two-third in the third-party distribution came from external products, and also two-thirds in non-Nordic products. Efficiency is key, not because a cost as such is the most important driver for delivering profit growth in wealth management. That's obviously the top line. As we also operate with a flat cost for 2013 and 2014, to improve the efficiency is very important in order to make room for the investment. Last year, we saw a decrease in cost income of 4.3%. However, if we adjust for the extra fee income we had last year from Life Denmark, the reduction was 1.5%, and roughly half of that coming from growth at a lower marginal cost and half from other efficiency measures.
What we will work with going forward are the initiatives which include increased use of straight-through processes, further IT offshoring, the Frontline Efficiency Program, and not least leveraging on UCITS IV, which make it possible to merge funds and also to limit the number of fund management company. We are in the midst of the process, and this process will be concluded in 2014. But as we have worked with efficiency for some years, the low-hanging fruit has been harvested, and hence we also need to do the tougher prioritization and business deselection in order to deliver on the cost efficiency needed. So going forward, Wealth will deliver top line and profit growth with a reduced cost income and with improved capital efficiency. This turns me to the next slide, which is life.
Capital efficiency in life is, as I'm sure you are well aware of, it's about reducing the traditional life insurance and increasing the portion of market returns and the unit link. As you see, we have worked consistently with this over the last years, reducing the percentage of traditional business and increasing the market return and unit link. It was 47% in 2008. Last year it was 77%, and we expect it to be at the level of 83% in premiums in 2015. If you measure it in assets under management, you see the same development, and we expect the non-guarantee business to be 47% at the end of 2015. If you look at this slide, you see the composition, the non-guarantee 47%.
As you also will observe, the level of the bracket of guarantee above 3% is now down to 20% as compared to 29% four years ago. This is, of course, something we will work on continuously to migrate customers from the traditional product to market return and to unit link. The average guarantee has now been reduced to 2.2%. The life business is measured on return on equity, and the target is still 15% ROE. Last year we did deliver 14.2%, but if we adjust for the shadow account extra fee recognition in Denmark, the adjusted return on equity was 11.9%.
The way we will bring it to this 15% ROE, which is the target by 2015, is to work with the cost efficiency, is to work with the capital efficiency to optimize the product portfolio by the migration from traditional to unit link market return, and also the growth, which will be in the banc assurance channel, which is, of course, a cost-efficient way of working. I should also mention that, of course, we follow the development in Solvency II very closely, and we expect to manage the transition to Solvency II without any equity capital injection to the life business. Summing up, the strength of the Wealth value chain, and the Wealth platform lies in the integrated and leveraging on the Nordea relationship model.
Building on the strong distribution, the well-diversified business we have, and not least, also the potential we see in the distribution, both Nordically and internationally, both in the captive and in the non-captive channels, which will deliver profit growth, top line growth, and not least, also value add to the customers. This concludes my presentation, and I'm happy to leave the floor to my colleague, Ari Kaperi. The floor is yours.
Thank you, Nina. In minutes, we are spending time with the credit risks. As you have heard today, one important lever in our ROE increase or improvement is our belief that we will see lower level of credit losses in this period of time, 2013 to 2015. Also as Torsten has indicated, we expect that during this period, we are approaching the level of this long-term average, 16 basis points. Let me give you some background that why do we believe like that. I know this diversification is a familiar picture already to you from the presentations. Of course, that's a very important lever also for the credit risk. This long-term average, I would like to a little bit point out a few issues. Our total level of losses, average losses 16 basis points.
That's a low level, both in absolute terms as well as relative terms. In absolute terms, remember that in this period of 10 years, we have lived through IT bubble, we have had Baltic crisis, we are now living through this global financial crisis. The peak of our loan losses during this period has been roughly 50 basis points in a quarterly level. That's very low in absolute terms. In relative terms, as well as you can see, of course, this means this good diversification that we are performing on average better in this respect compared to our peers or the market. If you would break down this average 10-year to its individual years, you would see that actually there's no single year we have had highest loan losses in the market, but there are years that we have been the lowest.
Then there are also other strengths we have from this kind of diversification and our size. It's clear that, of course, compared to some local peers, we have more resources to allocate to those parts of the portfolios which are in problems. We have better experiences, perhaps even more, let's say, competency in addressing those. We have also some other ways to handle, perhaps better ways to handle problem customers with our extensive clientele we have in the bank. Okay, one question may be thinking about the future loan losses that have we provided enough for the current risk we have in the portfolio? My answer to you is that yes, our provisioning level is adequate. This is the provisioning level, i.e., how much loan provisions we have compared to our impaired loans. The important line here is this gray line.
How much loan loss provisions for individually assessed customers we have made compared to impaired loans as such. It has been very stable, and as some kind of back test for this adequacy of this level is that when taking a look our final write-offs during this period of time, the final write-offs, they have been within this loan loss provisioning level, as well as our LGDs in our various portfolios, they are within these levels. It's a fact that our total provisioning level has come down, the total provisioning level, including collective provisions. That's very natural, so that when the downturn starts, then the models and the banks, they are building up collective provisions.
When the downturn continues, then when we identify individual customers problems, of course, then in a way what happens is that the collective provisions, these cushions, they are transferred to individual provisions. Unless there is some kind of negative development in the healthy part of portfolios indicating that you need more collective provisions and the future is more negative. Still, we do have a cushion in terms of collective provisions on top of these individual provisions. As you can see, we have roughly, let's say, close to this long-term average level of loan losses, annual level of loan losses, these 16 basis points. Close to that amount, we have still a cushion in the collective provisions. As you can see from this breakdown of the loan portfolio in terms of geography and business sectors, you can see that the problem areas are very concentrated as we know.
It's in geographies, it's in Denmark, as well known. As you can see in other countries, actually, we are, or geographical areas, we are already more or less within this average long-term loan loss levels. In sectors, of course, shipping is sticking out with 200 basis points. These Danish figures, they of course split into various other segments so that you can see some other segments also above these averages. Nevertheless, of course, as soon as we can see that the situation is normalized here and then here, then of course, that is when we see the normalized levels. Let me show you some background figures and pictures from both these areas, Denmark and shipping. Start from Denmark. How does the Danish macro look like? Perhaps the best word to describe it is stable, stabilized. It's not become worse.
That's also reality that there are no very concrete signals that now the recovery has fast started, but it has clearly stabilized. Unemployment being stable, public finances strong. This public budget deficit, yes, it is there, but it's manageable. What is of course important to follow up and understand what is happening in the housing market in Denmark. After this substantial drop, which happened in 2009, you could see that there started to be a recovery. There was another drop in late 2011, early 2012. After that, the situation has stabilized. In some parts, actually slight pick-up. How our portfolio in Denmark has reflected this development, you can see from here. Yes, our impaired loans in the Danish portfolio, they have increased during last year, but towards the end of the last year, the increase was stabilized.
Our impaired loans, they are very much focused in two areas actually in the Danish book. It is household and it is agriculture. Whereas for example the problem area, which some other banks, perhaps the smaller banks have faced, is real estate management construction. They are very low in our case. We are not so much even exposed to the commercial real estate market in Denmark. Our market share is quite limited or low. Important factor is this what is happening, what is the quality, how the quality is developing in our healthy portfolio. The not impaired portfolio. You can see that this is the exposure weighted average probability, PD probability of default, it has come down, which is a strong signal. The likelihood that there would be a new flow of problematic customers coming from the healthy portfolio to the impaired loans is reducing.
As a result, it is quite understandable what has happened in our loan loss levels in Denmark. They have been in the recent quarters, relatively stable. We have seen few peaks. It was in the beginning of 2011 where we made this relatively big loan loss provision covering this type of smaller loans we had in the smaller problem customers we had in the portfolio. As well as the other peak, what happened in Q2, Q3 last year when we took into account these new Danish impairment and provisioning rules. Cleaning from these specific issues, it has been relatively stable as you can see. Now lately, as you can see, we have been a little bit down. How we compare to the local players in terms of loan loss levels in Denmark.
You can see here it is a five-year average more or less throughout these times of crisis in Denmark. We compare relatively well so that we are among the lowest in terms of 50 plus basis points together with the market leader. Then there are some banks who have suffered a lot. Those banks who have been more exposed to the commercial real estate and agriculture than we have been. What this means for the future and our expectations for the Danish loan losses. Yes, we believe that during this period of time, we see this kind of normalized situation. When we see the, let's say, faster improvement, how big that improvement is, it is very difficult, impossible actually to say.
All the indicators are pointing out to the fact that at least it has been stable for a long time and now we start to see some kind of improvements at least in our loan portfolio. Moving to shipping. Diversification is also the key here in shipping. Our shipping book is EUR 13 billion. It is more or less 4% of the total loans to the core shipping is 2% of the total loans in Nordea Bank. We are well diversified. The only sectors we have made these kind of intentional choices has been oil and offshore, which are here. There we are overweight. The other is container, where we are underweight. They have been good choices. Oil and offshore has been strong all the time. Container is one of the problematic segments. Unfortunately, we have a few other problem segments in shipping. It is tanker and dry bulk.
We are exposed to those two segments. You can see that our losses are coming more or less only from these segments, tankers and then dry cargo, dry bulk, and then we have collective provisions. Otherwise, it's more or less, let's say clean. What is now the current situation in the shipping market? There also we see clear signs of stabilization. Ship values, as you can see in these three problematic segments, containers, tankers, dry cargo. They have, of course, dropped, but the drop has stabilized. They came down also in the last year, but now we see that the situation is bottoming out. The most important explanation is on the right-hand side. The supply of new ships has come rapidly down. Now we are approaching to the sustainable levels. How do we see the market outlook?
This is the external view, external market research company for the market outlook for these problematic segments we have in our portfolio, tankers and dry bulk. Based on this lower supply of new ships and also this gradual improvement in world economy, at least the outlook starts to look a little bit more positive, optimistic. We don't see a fast pickup in 2013. These are the freight rates or as they are now described, this is the daily earnings in the shipping companies. The pickup is not very strong this year, but at least it's not any more down this year. 2014, the expectation is upwards. How this is reflected in our loan book? Impact loans also in shipping, they have stabilized.
This quality or healthy portfolio, that has also been, of course, volatile because it's a small portfolio, but nevertheless, it has not been deteriorating anymore. Finally, the loan losses in shipping. You see elevated levels for five quarters back and forth. Here we also, the way we see that the future is that definitely we are closing to the day when we start to see a drop in the level of loan losses. When that happens, difficult to say, but at least as you saw from the previous slides, that the market is expecting improvement as from 2014. That for shipping and then Denmark. Of course, a very important point is that, okay, what happens in other countries which are very low currently in terms of loan losses and credit risk?
We don't see any kind of major signs of, or more or less any signs of concern in other countries. Impact loans in Finland, Sweden, Norway, very stable, as you can see. Unemployment rates, they are not moving up in these countries. There is some kind of GDP growth expected. Number of corporate bankruptcies, they have been stable and relatively limited. As a result, these are the quarterly loan losses in these three countries, very low and stable. What is important indicator to follow up is the housing market in Nordic countries. As you can see now what has happened is that, of course, understandably, the Danish housing market has weakened and stabilized. In Finland, that has not been a big issue. This, let's say, asset appreciation at all, more or less. In Sweden, the situation has stabilized already 2011, 2012.
The only country which is still going up is Norway. Are we concerned about this situation in Norway, development in Norway? Not necessarily. We can still see good, strong macro fundamentals in Norway, good GDP growth, very low unemployment. We have not been aggressive in the mortgage lending market in Norway. We have not increased our market shares. We have applied our prudent credit policies throughout the time also in Norway. On top of that, if everything would go wrong and there would be this kind of burst in the bubble in the Norwegian housing market, according to our own stress test we have made, that the impact would be relatively limited in terms of loan losses. Once again, we have to remember that we are a diversified bank. This Norwegian market portfolio is roughly 7% of the lending.
That in that way, that would not change materially what we are now talking about. We don't believe that there would be any kind of burst in the Norwegian market. Okay. These macro indicators, diversifications, all those issues, they are important levers in credit risk and loan losses. It's not only that. It is as important that how the bank is running its credit risks. Then we have been focusing this from the very beginning, so that since Nordea was created, we have applied more or less the same type of basic credit policies, credit principles. What is very important, one bank approach. We do these issues in the same way in each market we are operating. We apply same credit policy, same credit industry policies in all the countries.
We have same processes, we have same type of monitoring, we have same type of way to address problem customers. Right allocation of capital is a very strong incentive to do this right, because when you allocate the risk capital right to the customers, to the profit centers, to the business units, that's a very strong incentive to do right things in the business and way you treat your customers and to whom you grant the credits and with what price. We have very transparent credit processes. There are credit managers out there close to the business which are not belonging to the business organization who are there to make judgments and ensuring that we do things according to our credit policies. We have centralized the credit analyst teams who are taking care of our own analyses for the customers, larger customers and high-risk customers and so forth.
We have people, credit controllers out there who are all the time monitoring that the units are applying our principles. By the way, they are also the people who are ensuring that our provisioning levels and provisions are right. They are independent from the business and so forth. It's a risk-based approach. When customer is in good shape, that goes both for household and corporate, then our credit process is quite light. When that's not the case, when we have some kind of indicators that that's not the case, then it's a full Monty and very high focus. On top of this hands-on credit risk management, we have built and established this type of risk appetite framework from top-down to be sure that our portfolios from the Nordea perspective, they are what they should be, and we are not starting to do things we should not do.
This risk appetite framework covers credit risk, market risk, operational risk, equity, liquidity, compliance and regulation, all what you can imagine. From the credit risk, I would just want to highlight that what are the factors we are controlling and where we have set boundaries and borderlines in Nordea. It's a customer concentration, it's a single customer concentration because in the Nordic countries it's typical that we have very big exporting companies. We are mindful that how much concentration we take for single customers. It's also industry concentration because we are exposed in the Nordic countries quite much usually, for example, to commercial real estate. It's also geographic concentration. It's this quality of the overall loan book, expected losses, probability of defaults.
Also we are assessing in our own stress test that what would be the maximum loan loss we would have in any kind of these kind of adverse scenarios. This is the way we manage credit risk. As to conclude and sum up, we think that our track record is good in the way we are managing and controlling our credit risk. There's a big awareness. We have applied more or less the same type of principles since the beginning, of course, adapting to change environments and so forth. Nevertheless, the core has been always there. We are low in terms of credit risk appetite witnessed in low loan loss level over time.
Coming to the current situation, we believe that during this period or next two, three years, we are approaching the levels of this 16 basis point average loan loss explained by the reduction in Denmark and on shipping, which are coming sooner or later. Thank you. That was my part. I think that the time next section is Q&A. Or is it Christian?
No.
Yes.
We're going to open now for Q&A. You're here on stage. Maybe even have a chair. We have a flower. Our presentations you already seen. I'm not going through that again. Invite all GM members on stage. Of course, invite all of you to ask questions. I think Rodney will conduct the sequence.
Okay, now we start the Q&A. Since this is webcasted, there will be microphones here. Please state your name and firm. You who watch this at the computer, you are also able to send in questions so we can have them here. We start with a question here in the auditorium, please.
Good morning, everyone. It is Nick Davey from UBS. I have got two questions if I can. The first is on your retail revenue target. You talked about 10% income growth, about 3% CAGR. I am just interested to understand a bit better the Norwegian component of that, because you said there is no Norwegian margin repricing baked into that number. I think in Torsten's presentation, he was quite positive about at least repricing up to defend profitability under the new rule book. My question really is, why is not that your base case? Do you expect there to be some doubt about the regulation coming in? The repricing is uncertain. Why are you not targeting more margin expansion in Norway?
First of all, there is some margin expansion expected, the effect from this new risk weights are not fully in. Meaning that a very big part of our book is the floating rates we can do with change in six months. This is something not only, you can say, hurting the bigger banks, it is hurting the full sector. We expect absolutely a repricing due to this to take place. We will, of course, also exploit those opportunities.
Remember it was a proposal we received yesterday, the new proposal.
You didn't restate your 100 slides. Okay. Fair to say that if and when this regulation changes, your 3% CAGR revenue target in retail will change as well.
That is a fair assumption.
Thank you. A second question, please, on a capital return, which was mentioned quite early on in the presentation, and again, some reference to the government stake. Can I just ask a question as to how far along the process of exploring a buyback of the government stake you are, whether you've had some dialogue with the Swedish government themselves, whether there's any agreement in place or whether this is just a nice idea?
We haven't commented on the fact that we will buy back the government stake. We have just said that we will get next week from the AGM, a mandate to buy back shares in general. That mandate the board will take a stance on when we got it and when some of the outstanding uncertainties, which are still there during the year, they will take this decision on how to balance between dividend buybacks and extraordinary dividends. We're not specifically targeting anything, and whether the government will sell or not, we don't know. They're saying they will sell, but we don't know. We just think it's an important mandate to have if a possibility to go in that direction. We have no concrete things to say. We are very open. We're saying we keep full flexibility in that decision.
The ambition is to return quite a lot of capital to shareholders because we have already built the necessary Core Tier 1, and accordingly we should return a fairly big proportion of what we've built this year and going forward.
Thank you.
Matti Hakala, Handelsbanken. Two questions if I may as well. We just got the proposal of the minimum risk weight floor for residential mortgages in Norway. Based on your exposure across the other countries in the Nordic region, do you expect similar kind of things in Finland and Denmark? The other question is regarding your ROE target in 2015. Is that based on the current structure of Nordea, or assume any kind of divestments or potential acquisitions?
We start by commenting on Denmark and Finland, maybe Michael you will start.
Of course we have in those markets a very nice market share when it comes to the household mortgages. We actually have seen some higher risk weights in some of the markets. Also there, I think if it happens, we will also look into the repricing opportunities there. Of course, it will maybe harm the Core Tier 1. Torsten can discuss with that. Also there, I still think that our ROE target is still valid there. When these things are happening due to new regulation and it's actually happening in all markets and hitting all competitors, I sincerely look into repricing opportunities if they may occur.
Do you believe that's going to happen in Finland and Denmark?
I think your guess is as good as mine.
As you can say, there's nothing on the plate right now, maybe the move in Norway should more be seen as a macro potential move than a bank regulation. I think nobody have the fantasy in the world to imagine losses like that in the Norwegian household market. No matter what happens, we've never seen it ever in history in any country in the Nordics, so why should it suddenly happen? This is more macro potential move, I think the Swedish move was also macro potential. There's absolutely no reason to believe macro potential moves in Denmark and Finland. I don't think we will see it. We don't know, of course. We have to understand that these moves are neutral to our ROE targets because they will reprice. That's obvious. That's even encouraged by the authorities.
I don't think we should see it as an ROE impact as such. It may have some Core Tier 1 impact, but these are small numbers as we saw. I think they're within our flat ROE target anyway. The 15%. I will stand up so I can see you. They include everything we will do in the coming years. We will, on the units that deliver less than 10%, we will use all levers. We'll use the cost lever, the RWA lever. We'll restructure the business lever. We will maybe look at exiting segments or moving up in other segments, changing the business model in that unit, in that segment. That can include structural changes as well. We will move each unit up. As I said, I expect all units to be above 10% ROE, hopefully even higher by 2015.
That will, of course, change the picture. We will also move the other units up in ROE. That's more I would say operational changes in terms of being efficient and distribution and the things we have described today. The 15% includes all the actions we have on plans, and some of the plans are not very detailed yet, because as I said, there are so many dynamic effects right now. We have segments which have been looking non-profitable just a year ago, and suddenly they reprice because of the new regulations. I think it's important to take note of where we believe that dynamic effects will be before we take structural measures. We are ready to do that, and we have in some areas also started on that, and that will be part of the whole journey.
Which are the most problematic areas that need attention at the moment, in your opinion?
The most-
The most problematic areas that need attention at the moment.
I will not go into details. We had a small segment of units below 10%. Of course, we focus in on that a lot. In some of the low-return units, it is important to take a very clear stance whether we want to be there or we should change. In some of these areas, we changed our segment composition because we may have segments in those countries or in those areas which are not profitable. It is a mix between what we do per unit and per country. We have full focus on everything in there. We have plans and they are being executed all over. Once again, the dynamic effects are important to take notice of, because we do not want to do things we will regret when we have seen repricing changing the dynamics in the market.
Hi. This on? Omar Keenan from Nomura. I just had a question on risk-weighted assets. You mentioned at the full year stage that you expected the full rollout of the corporate portfolio across the four Nordic geographies by the end of the first half, and I think Torsten mentioned 2013 in the presentation today. I was just wondering if you have had any update as to the regulatory, the timetable with the regulators, and whether you still expect that you will have full rollout across the four geographies before early Basel III rules come into play in Sweden, and how that ties into the timing of the buyback that you are proposing. Thank you.
No, as I think it has become relatively clear, CRD IV most likely will not be in full force before January 1st, 2014. Yes, we have had a long journey with Swedish regulator on the Advanced IRB, and we are still pretty confident that we will get the approval in due time before.
Is that the same case with the other three geographies as well? I think they all have.
Yeah. They have to make that consent to the Swedish approval.
It's one approval.
It's one approval.
The Swedish college
The consent from
I think it's a very simple equation. All these approvals take a long time for all banks, and this is a trade-off between speed and magnitude. It's not difficult to get the approval fast, maybe the magnitude of the approval is not that big. What actually happens in practice is that we are challenged on a number of parameters, assumptions and some data, we provide more data, more assumptions, more parameters, more documentation, that slot will fall into as well. It's a question of how long will we keep doing this until we get the approval. Since we are above 13, it doesn't really matter whether it's Q1, Q2, Q3 or Q4, because as we said, the Basel III will not come in at the earliest Q4, now it really looks like Q1. We're working with this.
It's also because we use these models for our internal risk management, we want them to be right. This is not only to do with the RWA relief, it has a lot to do with having right models. If a parameter is not documented well enough or questioned, instead of have a margin of conservatism on an add-on to a parameter, we'd rather get it right so we can use it for our management. Because if we believe that parameter is right, why should we work with a higher parameter that will give wrong allocation of credit capital, typically, and thereby bad incentives for the business? If you want to run the bank by the models, we better make them right. We are pretty patient in doing this right, and it's working well.
We're approaching, we're pretty comfortable about the pace of this and the way it works. It's one college of supervisors, so there's one approval. It's not per country. Now, they may have a small discussion internally every now and then, the countries, which just shows that they are not aligned. The countries in Europe are not aligned in this area, which of course, unfortunate, and it's not something that is liked by the ECB, the single supervisor, and it's not liked by EBA either. We'd rather have one approach. I hope we will get this convergence, as I spoke about. I also think that will actually happen in coming years and make these things much more fluent and easy to work with.
Sorry, how does that time into when your buyback plan could actually start? Is that probably early as 2014? Have you had any feedback from the regulator as per your plans so far?
Now, there are a number of items in that bucket, not only the advanced, there are a number of other items, we also grow the Core Tier 1 as we could this year. I don't think it really has a lot of connection. I think the buyback program can be decided later this year anyway.
We have very high confidence in these approvals, they're not instrumental to that effect. I think it's more capital planning purpose. I can only repeat again, we are very transparent. We'll take the decision later. We have some instruments to work with, we will put them together in the most shareholder-friendly way. That's the only objective we have. Buybacks could be an interesting opportunity for obvious reasons. Let's leave it there and come back maybe Sorry. Autumn. That was a bit wrong. That was a misstatement. Not in the afternoon, in the autumn, or possibly later.
Okay.
Henry Christensen from Citigroup. I have two questions, please. One on the smaller geographies which you operate in, and here I'm thinking Baltic, Russia, and the Polish operations. As to which criteria you use when you choose to invest or divest, and also if you can give an update where you stand on these geographies. The second question on Denmark and retail. Some of your peers have talked about charging clients with low or no profitability. Is that something you would consider? If not, why?
Let me take the latter question first. First of all, remember that the business model that we have been embarking on for many years is actually the meaning that all our customers are profitable today. Of course, we are considering every means on this. I think we prefer another route. There are some other players who want actually to charge being a customer. I think our way of doing the business is more that we charge how they're doing business with the bank, and how they actually are using us. Of course, we will not rule anything out. We are looking keenly into this, but our preferences are more to ensure and look into how they are utilizing our services than just being a customer. If I may continue with the questions to the smaller markets, the Baltic and the Polish market.
The return requirement is actually the same there. Of course, we are looking into these things. We have been moving very fast on the efficiency side because that was a natural thing to do. We were a little oversized, now we have resized the operations in all four markets. We're now applying the relationship strategy, focusing on the savings side, focusing on the mass affluent customers. We are doing whatever we can to increase returns. Of course, we're not ruling anything out in order, you can say, to ensure that those markets also will fulfill our long-term return requirement. Russia, I think I will leave that to-
No, it's the same. I mean, the same return, same RWA, same cost disciplines that we have in place. Russia, we have actually tightened up, have been less aggressive on the retail side, focusing more on the wholesale side. Actually, we have good returns, and we actually are building a good corporate franchise in the top 100. In that sense, then Russia actually meets our return targets, actually exceeds those. The same discipline RWA cost apply, and hence, we run a tight ship there.
Maybe I could add in now. Michael wouldn't say it because he's already said it, but I will repeat it anyway. We have a decade of experience in running customer programs. We started 10 years ago or more in having customer programs with fixed price grids and all sort of things. We have a lot of experience how to price right. We follow very keenly the price-value parameter in our customer satisfaction. We know very well when price to value for the customer is moving in the right direction or not. We have done a lot in years. We have tried many things. We think we have a good grip on what to do. The clear conclusion for us is exactly as Michael says, we want to price or to charge the customers for using the bank, not for not using the bank.
That's a typical parameter, which is very important to most household customers.
Just a quick follow-up there. Strategically, do you see these smaller geographies, Poland, Baltic, and Russia, some markets where you want to be in the long term? Does that fit with your vision of Nordea if you look sort of five, 10 years ahead?
I would say that these markets are an integral part of Nordea today. They're part of our platform. It's also clear that in this period of time, we are working to get the ROE above 15, and we'll get all units above 10, as I said. We will take the decisions needed to do that. As I said, it is a mix between, as Michael said, to assure the cost level is the right one. The second one is how we deploy capital. In each segment to be very clear on what part of segments we are actually going for. It has been very clear, and we have stated that clearly. For example, in Poland, we moved up in the household segments successfully recently, taking down the cost and so on. We'll keep doing that.
In any unit, wherever it is, even in the Nordics, if we cannot meet the hurdle rate, we will take structural measures to ensure that we don't misallocate our capital.
Thank you. It's Andreas Håkansson from Exane BNP Paribas. A few questions. First one is on your cost side. Christian, in your CEO comment, you talked about IT problems you had in the Nordic region in 2012. For us that have looked at you for a very long time, we remember the old days when we talked about one IT platform and so on. I remember in media over Christmas, one of the reasons that were given for the IT failures were that you still don't have one IT platform. Could you tell us out of the cost increase that we expect over the next couple of years to EUR 450 million, or sorry, EUR 550 million, how much is driven by IT costs and what are you really doing on that side?
The total IT cost as such is not a net driver of cost. We are having also within the IT area, we have a lot of growth movement. We have both on the one side, which we also try to illustrate. We have a number of areas where we can clearly improve cost efficiency. This is also one of the areas where we then deploy a relatively big share of the reinvestments we are also mentioning. You cannot say they are net driver, but they are a relatively big receiver of the reinvestments we have mentioned.
Okay.
I think this thing about having one IT platform or one IT system is not in the plan. I think no bank really have it, to be quite honest. Torsten's team is working very intensively in creating a situation where we create a platform on which we can develop applications on top of, and where we can merge applications to reduce the complexity. That's a program over these three years which will deliver not one platform, but a number of clusters which are connected in a very efficient way, on which we then, when that is done, can start to merge applications and take down the complexity further. It's not to build one platform. It's more, you can say, to do the platform that is more efficient.
On top of that, we have a number of platforms, which I still like to repeat, which is often forgotten, which are very efficient, which are one platform. Our whole capital markets area is working on one platform, which is highly efficient. We have the asset management side, the front side is on one platform. We have a number of other things which are on one platform. There are some core elements in the core systems, and they will remain, and they will not be changed. I think I've not met a lot of banks that have actually changed those. To make them more efficient and thereby more stable, which is of course a concern we had last year where we had a number of instability issues, that is already paying off now. It will pay off in the coming years.
When that, you can say, hard work is done deep down in the basement, then we can actually merge more applications and thereby become both more efficient and less complicated. That's the drive we are on to now. That's not a quick fix. That's hard work.
Okay, a different question. I see that you're forecasting 1.5% GDP growth for Denmark, which I think is the highest in the market. How sensitive is your improvement in Denmark to GDP growth? If we assume it's going to be 0% again or even negative, what would have as an impact on your provisioning?
Well.
By provisioning, sorry, yes.
We are not so sensitive related when it comes to Danish GDP. What would be the biggest negative driver for us in the Danish book would be high increase in unemployment, because that would drive then some negative implications. Just simply this kind of overall GDP growth as such, it would not have a very direct impact. Perhaps over longer period of time, if it is not picking up, of course, sooner or later there would be negative consequences. This is not the main driver, what is the forecasted GDP next year.
One last very short question. The buyback mandate you are asking for, remind me, have you done that in the previous years as well, and should we see it as something you need to do in order for the markets to function, or is it really an indication that you are going to do buybacks?
We need the mandate to buy back shares. We get the mandate so we can do that. We did not get it last year because there was no reason to ask for it. We have had it previously in other years. I would say going just some years back, we had it every year as a standby thing. This time we flag it is to have flexibility in how to return capital to shareholders. Not necessarily that we will use it, but we have it so it can be used. On your other question, just one thing. The whole plan is not dependent upon the GDP forecasts I mentioned, just to make it clear. Those are the forecasts. I am not sure we are out of line with the best analysts. We actually have some of the best macro analysts because they have hit very well recently, I would say.
Anyway, it is not dependent upon that. I distinctly said that our growth forecast in lending, and for that matter in loan losses, are not dependent upon that. We have more conservative estimates in our plan. We may be positively surprised, which is clear if those growth rates actually come out as an upside, clearly, because 2% GDP growth real, and then inflation is of course significantly more than 2% lending growth. We do not put that in because the world is very uncertain right now. It has stabilized, but there are still uncertainties out there. We are not dependent upon those forecasts. I just flagged that it is looking like that. The general picture, at least. Maybe Denmark is slightly different, I do not know, but that is the general picture. We have not either factored in the full forward rates in interest rates, just to make it clear.
Okay.
Adonis Katic, ABG. Hi, I have two questions, if I may. The first one is regarding that you said that you will take all the business units to a ROE level above 10%. When I see at this chart, you have a huge part that is between 10% and 15%. It says that these are deposit margin sensitive. Could we expect that all units should be above 15% with normal interest rates? That's the first question. The second question is regarding the capital distribution. You said that you from 2013 distributed more capital to the business units. My question is, can you say something about the key that you used when distributing this capital? Thank you.
Yeah. On the last one, we distribute accordingly with the economic capital, and as we stated, we have brought our economic capital closer to our equity capital. We have distributed another EUR 6 billion of economic capital to the business area, i.e., where the exposures are sitting, meaning that our economic capital now is EUR 24 billion towards EUR 17 billion last year. Equity is EUR 28 billion, and the only difference is goodwill and other intangibles. All these EUR 24 billion is put out to business, meaning that you have the risk-adjusted profit, and then you have the ROIC target, which is the way we are measuring all business areas. As I said, the average or the ROE of 15% equivalents around close to 19% ROIC. That is how we internally manage capital according to this. Your first question was-
Yeah, just on that question. Do you allocate 13% of, so that you have a 13% quarter one when you do that, or do you have another key when allocating the capital?
Yeah. You allocate according to exposure. It's a bottom-up process. You have exposures, and then you allocate capital accordingly to our internal capital requirements. Yes.
That pie chart I showed was the number of units and subunits which are in that pie chart. You cannot calculate the average ROE out of that, of course, because some of the units may be small and some may be big. I hope that we will have all units above 15% by 2015. I look forward to our meeting here in our Capital Markets Day 2015 with everything above 15%. I'm not quite sure it will be that way because the market is, after all, uncertain, and you cannot predict completely the behavior. We can just say that we have now put a plan in place for all units to increase ROE. All units increase ROE. That's the first one.
The second one, those with the lowest ROE, we take most measures, of course because typically, if you have a too low return, it's because something needs to be fixed, which is a bit more structural than it's just operational. Those who perform very well, we still top tune it, and we will have some units delivering 20% and above, and we have that today. I would not speculate in exactly which ones are there. We can just say that we put in a plan where we don't think the return is efficient. If we do not think that can be done, as I said, we don't want to allocate our capital wrongly, we'll take more structural changes. Today we have plans which will take us up, and there will be units below 15%, of course.
The reason why we put in the deposit sensitive is exactly the coming back to my statement that an asset to our strategy is these transaction accounts. Of course you don't want to kill a segment, which right now is at 14%, but had a lot of transaction deposits, which will be at 20% when things normalize. You have to think in this dynamic perspective.
Thank you.
Well, you can hand it back to Per.
Yes. Thank you. Per Tronborg, Danske Markets. I have two questions. The first one related to your risk-weighted asset ladder. Clearly, a quarter ago, I don't think anyone talked about Nordea buying back shares, returning capital. What has happened? You got a new CFO. Suddenly you are promising that your risk weights can be reduced by more than 20% due to new modeling. If I don't recall wrongly, your Basel III guide is now the lowest impact of any of the Nordic banks. I hope to come today and get some impressions and get a better visibility into why I should have faith in those figures and why you should be able to move your figures so much more than any of the other Nordic banks. Same question as related to our presentation and Danish loan losses.
You addressed that the accumulated loan losses for Nordea Denmark over the last five years has been in line with the key peers, but the timing has been very, very different. Can you tell us a bit about what happened during 2012 when you needed to make a significant pickup to catch up with peers, and you got this quite nasty Q4 FSA review, basically forced you to take additional provisions? Can you give us a bit more insight into what happened? Bit surprised at that development, taking into account that next to you have Michael sitting that is chairman of the Danish Bankers' Association. I just thought that would be in the key forefront of the new agreements that were reached between the Danish FSA and the banking sector. Thank you.
If I should start. Well, I would be happy to say it was a CFO effect, unfortunately, I don't think that is explaining a lot. First of all, I don't think you can say that we have reduced the expected impact by Basel III and other regulations since earlier. If you look on the impact in basis points, which is still around, as we say, around the 20 now. We have the Norwegian risk-weight, the latest proposal. It is still a proposal. It's around EUR 23 billion, EUR 24 billion, which is around 160, 70 basis point, which is I think is slightly higher than we have earlier indicated as the Basel III impact. Now, I'm not 100% certain on the impact from others, but we have had movements in the meantime, of course, because the RVE usage have also gone down.
You can say some of the effects are mitigated by the fact that our RVE are lower, or is changed by the fact that our RVE are lower than we expected at that point in time, for other reasons also. On top of that, you can say, if we look on the mitigating effects, I think what has changed is not so much on the rollout, which is more or less according to what we have said all along. We did initiate a program to move forward a lot of our efficiency initiatives. We have moved forward some further rollouts that was anticipated to come slightly later. We have moved forward and upgraded a number of other initiatives, that's correct. I don't think as such our number has changed significantly compared to what we have said earlier.
We have seen somewhat lower growth and somewhat different migration picture and so on, we have been able to move forward, which is already including in the numbers some efficiency measures. Of course we are coming in lower on RVE already by end of 2012 than we had expected earlier. I think the picture is slightly different, yes. I don't think as such the implication or the measures are significantly different.
Isn't the issue that after Q3 you promised EUR 15 billion-EUR 20 billion over the next 2 years? When you realized a visible amount in the fourth quarter, you increased the promise going forward from the 1st of January 2013 to EUR 35 billion.
As I said, RVE have come down somewhat more than earlier. When you're then measuring the impacts in basis points, for example, then of course, if the denominator goes down, and the numerator is the same, then the basis point effect goes up, you can say. I'm not sure we have changed that much. Of course, some of the compositions of when we're looking on the impact, some of the compositions have changed slightly, what we expect from the different type of impacts. On-
I should say, I think we are doing more. We have launched the new plans. Of course, that's something new, otherwise we wouldn't be here. That's the first thing. That's not very big. Maybe it's from the last EUR 5 billion or something in our mitigating action. We have identified more things. We are doing things faster, much faster than we anticipated. That's of course always the difficult thing in guiding the market. How fast could we do this? That's the next thing. We came in lower in 2012 because we worked at it, and we have guided for that in every single quarter. It seems that very few people believe that actually. We have actually guided for that we would take a tough stance on capital efficiency.
Compared to peers, the others got all the approvals one or two years ago. I think in the match race, we don't have low risk weights. We're just, maybe even you could say, coming in a bit later than the others for many good reasons. Maybe the most important reason that two years ago we were the highest capitalized bank, so that was maybe not on top of the agenda to do it very fast. If you look just in a three or four-year perspective, you will see that the other peers have done significantly more, which we are doing now. On loan losses in Denmark, which I also think is the explanation.
Yes. As I said that we are applying this kind of one bank principle in integrated policies and processes and also that relates to provisioning policies. That we assess every single customer and portfolio with the same principles all over. That is also what we have been doing in Denmark since the beginning of the crisis. According to our own estimation, the level of provisions we had before this pickup in Q2, Q3 last year was sufficient. Still, I believe that that would have been at the right level and sufficient. Because of these new Danish rules, of course, what we have to apply, then in our mind, actually, we are now doing too much provisions, individual provisions.
We won't lose that money in that magnitude, what we have now been, in a way, forced little bit to provide because we are applying these new rules. That is exactly the reason that then, as you said, that in last year, we took this type of, that we ended up in the same level as the other Danish players who are also applying to the same rules. According to my own assessment, according to our own processes and Nordea policies and experience, we have provided too much now in Denmark. That was exactly the reason that we were a little bit critical towards these rules introduced in Denmark. That is as simple as that.
Do you want to comment?
There was a question related to the inspection in December, I have to say that was more or less a non-event. There was a discussion with them. We actually already identified some of the problem customers among the biggest one, these provisions have been taken anyway, nothing there.
Actually, I want to also point out that in their assessment letter or this inspection which was also published, they also said that Nordea's this kind of credit processes are, let's say, in a way, state of art compared to the local players. Actually we also got very positive surprise.
You were also mentioning the horizon, the five-year horizon. You can take one, two, three, four, five years, you will see the same picture. There's actually no time issue related to the average here. We will still have been among the best when it comes to provision level.
As long as we don't look at 2012 isolated. That is a special reason.
Second.
Okay. We have a question here from the webcast, John Bolton of Deutsche Bank. It looks as if repricing is a material part of reaching the 15%.
My question is if Nordea is prepared to sacrifice market share to achieve the repricing?
Yes. No, it's probably overstated. It's material. Michael demonstrated that it's part of it's like 20%, I think, of your-
35.
Sorry?
35%. EUR 200 million.
Yeah, 30%-35%. For Casper, it's also part of it, but I wouldn't say material. The whole growth comes from a number of pockets, and this is one of them. Of course, we will reprice, but I think it was also stated clearly that we're repricing the back books. I think we have the right level on the front books, the new business we do, but we're repricing the old one as we, for contractual reasons, can do that. Market share is a difficult animal. We do not have a market share objective at all. I think, on the contrary, we are doing business selection and deselection, and we are doing business that is profitable and meeting our hurdle rates. We're very careful about our capital allocation.
I think all banks will be that going forward, and they have to be it, and we will do that. Whether we, for this period of time, lose a little market share or gain some in some areas is not the objective. The objective is to move the profitability level of the bank to 15% on 13% capital.
Kimmo Räme, Evli Bank. Three questions, if I may. Firstly, on the Danish loan loss provisions, Ari, you mentioned that those drove up the provisions in Q2, Q3. Is it fair now to assume that there are no further such provisions in the coming quarters? Also, as a follow-up on that, how do you see this if we assume that the house prices start to increase, is it fair to assume that you make releases on these specific provisions? My second question is on the fact that you said that loan losses are trending towards 16 basis points. If I remember correctly, you previously used credit risk appetite at 25 basis points. What's now the difference in these? Have you basically reduced the credit risk appetite, or how should we view these two terms? Finally, question on Poland.
I understand there has been some speculation on the fact that you might be selling your Polish operations. What is your comment on that? Thank you.
That is whether or not we have a risk of this kind of additional one-offs coming in the Danish portfolio. The risk is not there anymore because we have now introduced these new rules, and it took two quarters to introduce those to our lending book. Now it is done. Of course, we run the provisioning process according to the new rules, but no more this kind of one-off impact. Whether or not you expect the reversals if and when the market is recovering naturally, if that happens, and as I also mentioned, that we feel that we are over-provided now in terms of customer-specific loan losses in many cases. Even when we see the evidence that that is the case, definitely we will then reverse provisions.
That is one, of course, this kind of factor that we are relatively confident that over this period of time, we see a drop in the loan loss levels in Denmark. Related to this risk appetite of loan loss is 25 basis points compared to this what we now show this 16 basis points. Both numbers are still valid so that we have made this or set this 25-basis point loan loss risk appetite when Nordea was created so that we want to be a bank which does not have, let us say, higher risk portfolio than this. That is the target. That is the ultimate risk appetite. This 16%, though, is now actual what has happened, so that we have been well within this 25 basis points.
That simply when we are now giving little bit more guidance and outlook scenario that how do we believe that our coming, in the coming years, our loan losses will develop. We have now referred to this actual average, not to this target level. The target level is still there.
When it comes to Poland, we can and will, of course, not comment on rumors, but I think it's important to understand what we have been doing there. We have actually reduced the branch network with 30% in order to rightsize it because we had too many branches. Now we have 138 branches, very well located, and we are now having a very strong customer stock, many good household mortgage customers in, and now we want to apply the relationship strategy to a full extent. When you see into Poland, it's also important to note that Poland is also different segments and different business lines. Of course, we are assessing each business line, each segment, in order to fully understand will these, on a sustainable level, will they meet our return requirement?
As Christian also stated, we are ready to take structural moves and look into an active portfolio management if needed. We have a lot of things to do. We have done a lot, and we have still huge expectations that we can grow also the return in Poland.
Sofie?
Hi, it's Sofie Peterzens from J.P. Morgan. I had a couple of questions. First of all, in Finland, especially in retail, your ROE is under 10%. I realize rates are low, but under the base case scenario, we still don't really expect any tailwind from higher rate increases. Also, the losses are very low in the retail bank at the moment. How are you looking to actually improve the Finnish retail operations? I also recognize that you're going to get the new tax or the new tax in Finland hit already as of 1st of January. My second question is around the internet bank. From your presentation, it seems like internet banking and mobile banking is the future, but if I compare Nordea's active internet banking customers to some of your Swedish peers, you're still lagging behind.
Also, if I look at international studies, most people seem to think that Nordea's internet bank is one of the weakest. What are you doing to not lose customers as banking becomes more online? Thanks.
First of all, we have a fantastic market position in the Finnish market. We have a very strong bank there. We have a lot of deposits, and you can also see from my chart that we actually do not expect the general interest rate level to go up that much. That would be the contribution from the deposit side will actually be very limited going forward. We can also see that we still have a vast material possibility in repricing the lending book, because it's very legally structured, and there we can actually follow and monitor when we will do that, and we will do that. We also see some new market dynamics in Finland, and we can also see a decent growth. There will also be a lot of market activity. The contribution from market appreciation will also come through in Finland.
As you were seeing, we have also changed the organization there. We are ready to capture that and to enhance our position there. When it comes to one channel, the internet, of course, we cannot lose out. All our channels, of course, have to be okay, and the license to operate is of course there, and we are still investing heavily in all our online channels. I also have to say our relationship strategy is actually a shield. We do not need to be superior in all our channels, but we need to be superior in how we're managing all our channels across countries, across all segments. That is actually what we're aiming at. Of course, we cannot lose out on different or single channels. We are investing, and some of the reinvestment Torsten was alluding to is also in this area.
Of course, we have to stay with the best, but we do not need to be superior in all our channels. How we take it together and how we present it to our customers, there we want to be superior. I think actually we have the track record.
I think you had one observation which I do not agree upon, and we have no research showing that that's correct. Our customers are happy. We are maybe not the front-runner, but we release all the time, continuously release new functionality, and we actually just in Sweden come out with a new mobile app, which is highly appreciated by the customers. Maybe we are not the front-runner right now, but it actually works extremely well, and we have very strong penetration. Our customers use it, and they're quite happy with it. We can always improve. I think internet and mobile banking is not a very big investment.
It's something we do continuously, and that's very much to follow trends and to ensure that we have sort of, as Michael points out, the basic functionality in place. Then you always add in some features which are very popular right now, but they change all the time. I don't think it's any concern for us. We have to keep investing. That's not where the big money goes, that's for sure. It's not expensive.
If I just may add one point related to this Finnish profitability. As Michael showed in his presentation, our ROE is however much higher than the peer average in Finland, so that we are at about, let's say, close to 10, where peers are on average six, seven. Meaning that we believe that this repricing will be much, much easier going forward in Finland because everybody has to do that.
My understanding is that in Finland, the loans are on average have a five-year tenor compared to, for example, in Norway, where you can reprice in six weeks. Isn't it a lot more difficult to reprice in Finland, but that's still the country where you see the highest repricing opportunities?
We were not specific. You saw the repricing potential. You saw the country dimension. We are not disclosing, we can say how much in the repricing and volume and fee in Finland. That we're not commenting on.
I do not understand your question because we have moved the margins up in Finland to a new level, significantly higher. I mean, the mortgage margins have moved up towards 100 basis points or whatever from, say, 20, 30 basis points. The repricing will happen. I mean, it is more or less mathematical. You can calculate how fast you are repricing. This happened, say, one and a half, two years ago, the margins moved up. We are sort of repricing the back book on a continuous basis. That is going to happen. As Ari said, the competitive dynamics have changed. We will move up the ROE in Finland as well.
What is the average loan then, or tenor of the average? What is the average tenor of a loan in Finland and what is the average tenor of a mortgage loan in Sweden?
It is not the tenor that, I mean-
The repricing, how-
Yeah. That's another, yeah.
Can't you, isn't it a lot easier to reprice, for example, in Sweden and Norway compared to Finland?
Much easier. You can say Sweden has repriced, and Norway has repriced to a level that they may reprice once again. Finland is gradually repricing over this, [not at center], I think we can say that we expect that to happen over some five years.
Yeah. The average, this kind of behavior on maturity in the Finnish mortgage loan will be quite short. Actually, it's seven years, between six and seven years. Compared to Sweden, where the Swedish maturity is very long. I don't now recall, but it's 15 or something like that. In actual terms, in Finland, the maturity is quite short. The problem is that according to, let's say, in line with the current regulation, we can't touch on the stock. Whereas we can do that in other countries, that we have to do this repricing little by little for the new loans when customer is changing the repayment schedule for the old loan. That it will just simply take a little bit more time in Finland.
Okay. Thank you.
We have one final question here.
A few final questions. It's Ronnie here from Kepler. three on revenues. The first one in wealth management, asset management. What's the outlook for gross margin this year and after, and the key drivers? The second one is on the sort of potential impact on the revenues from future regulation, things like financial transaction tax, OTC derivative reform. What is in your numbers, in your 2015 targets? How much have you considered? Lastly, again, on margins, as things are seemingly getting better in terms of GDP outlook as we move into 2015, loan loss charges fall. Do you bake in margin pressure actually in some margins, as asset margins come down again, as some players get more aggressive? There is plenty of capital in the system to chase assets eventually. That was on the revenue side.
Then just quickly on costs, why have you decided not to cut costs on an absolute level? Do you have scope to do so if need be? Lastly, just on Poland, should you sell it, would you be happy to commit to the funding, particularly the non-Polish wholesale funding, in order to get a deal done? Thank you.
Maybe I should start with the asset management. What we have observed in asset management is that the margins has actually been stable if you look at the asset classes and the product categories. Of course, the shift in the customer's preferences has led to a lower margin for the business as such. Going forward, on the institutional, I actually showed that the margin had increased. Measuring on the value of loan, we believe that we will see an increased margin on the institutional side. As we see that the international competition Nordically is actually not driving the fee margin pressure Nordically as the Nordic are priced actually lower than the institutional mandates internationally. On the Private Banking and on the retail side, we see the cost pressure from for example, index funds. Yes, there are a margin pressure.
On the other side, we also believe that there will be a shift in the asset mix going forward. What we plan for in the Private Banking unit is a margin which is stable going forward. However, we believe the deposit margin will go back also in Private Banking because the competition right now for deposits has been very fierce and driving down the margin on that.
On cost, I would say we are cutting costs by EUR 450 million. We have been cutting costs. We are taking out 50% of the cost base over these three and a half years. We are just doing it another way, so we don't do it the typical way you see for international players, a huge restructuring cost and then lowering the cost. We are doing it as we go, and that is a better way to do it in our opinion, because we then create more efficiency. Our cost cutting is efficiency measures, and Torsten went through all the details. That is sustainable cost levels we are building and not sort of one-off things, but more a sustainable lower cost level. We certainly believe we're doing that.
We also have to note that we are one of the most cost-efficient banks in Europe actually, according to more or less all studies coming out, not least in the retail area. I think this way of driving efficiency is a sustainable way to build the model that I was talking about. On Poland, I didn't actually understand the question, but if you're asking about a potential Polish transaction-
When you look at the KBC Santander deal, a key part of the transaction was that KBC committed to keep the funding from the parent in place.
Oh.
Would you have significant funding there because you've been a big FX mortgage player, right? Would you be able to commit to that, which would help a deal if any or not?
We don't comment on all these rumors about transactions.
Fair enough. What about financial transaction tax, this kind of non-capital regulatory kind of considerations?
We have in the plan a large number of taxes. We have taxes in Finland and Norway. Maybe they're not called taxes, but then we have fees in Denmark and in Sweden. All this is in. It may go up and be higher, and we have on European level, maybe resolution funds coming in. That picture may be a bit uncertain, but still, it's not fundamental to the plan. Financial transaction tax we are following keenly. We will not really be impacted on our core markets, but depending on exactly how it's formed, then it may change some areas, as we know if it's extraterritorial in its nature. We have to see the actual way it's described. We will not have it in our markets, as you probably well know.
Thank you.
This concludes this Capital Markets Day. We were happy that you were here and participated. Now it's lunch buffet upstairs.
Thank you all for coming.