Good morning and welcome to Nordea Capital Markets Day 2013. My name is Rodna Alviyan, I'm heading at the Investor Relations department here at Nordea. There will be a comprehensive presentation today. And we start up with Christian Clausen and then we will have a presentation of the financials of the business areas and of the credit risks. And then we will end up with a Q and A.
So we'll have all the questions and answer session after Ade Kapolei's presentation. So 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 performance as you always want a full audience. So I hope we will have a good day.
We will go through Nordea and our plan in the future in quite a lot of detail. I will do the overview and where we are and why we are here and then we will get on with it as we go. And I hope when we are done, when we have the Q and 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.
And also then go into what we have actually delivered before I actually turn into the plan. But 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. And the Nordic area is macroeconomically a sound area. The public finances are in good shape. All four countries are below the fiscal compact level of 60% public debt. And even on the public budgets, it looks fairly good.
Denmark is the only one sort of with somewhat of a deficit looking better into 2013. And when you look at the big macro picture, if we look at the AAA rated countries, even in that comparison, the 4 Nordic countries come out well with the low debt levels. So a sound background and sometimes we get too used to this when we are in the Nordic area. So last week I was visiting a number of banks further down south in Europe. And 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. So after 2012, we had negative growth in 2 of the countries, only Norway really sticking out and but also Sweden doing well. Then in 2013, we're moving into quite a more a nice picture with 1.5% growth rate according to our projections, pretty well spread and in 2% starts to look like 20 11. 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 3 months 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 and L.
And the Nordic Bank market is very well penetrated. Actually the 4 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. But the online banking penetration is at a very high level and the number of cards per customer.
So this reflects pretty sophisticated customers and 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. So also a very sophisticated bank market. And in this environment, we have indeed delivered.
We have built a superior customer franchise on the retail banking side, 11,000,000 customers, a clear number 1 ranking in all countries, number 1 or 2. And 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. And 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 5 years, as you can see from the blue line, actually significantly. At the same time, our operating income has gone up.
So a very simple business model in essence, more customers, more business with the customers and more operating income. And this is close to sort of a straight line, so a very stable business model. And this is building on our relationship banking model. And 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'll 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, will it will be a superior business model, because it will mean that we work close 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. Risks. We will see the risk clearly.
We are monitoring all the customers. We know exactly the cash flows and everything. Also we know the customers' 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 and where we have an opportunity all the means that makes it possible to do a real efficient bank model. We were going to hear much more about that.
Michael is spending time on it. But I'm sure that we will see that this is a superior model. We have worked with it for many years. So of course, we are getting much more granular and much more precise in how we do it. So we know exactly where the levers are to gain efficiency and exactly where the levers are to get profitability.
But 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. And you can see we are in a league of it 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.
And on quality, we are also there close to the 80 mark, so also customers perceive the quality of the services they get from the DAO Superior to our peers. And that's not surprising, because we are close, we are intimate with the customers, not only geographically, but also with our advisers. We have a large number of advisers and these big customers service them on a daily basis with all sort of needs. But 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, because any bank can do lending, maybe not in the size Nordea can do, but they can do lending, they can do transactions, but to do the capital markets, the advisory, all the various products, which are going forward. And we have developed that capability over many years and 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.
So today, we stand out as a clear number 1 in all the league tables, which I mentioned here, which are more or less all the ones, which the corporate customer will 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. So going forward, it is of course key to be number 1 here to still service the customer, provide financing, equity and 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 Koen will explain a lot about this.
We are clearly the leading Nordic asset manager by a margin with €218,000,000,000 We have over the last 3 years had a CAGR of 11% growth in this area. Clearly above peers, we are number 1 on Life, number 1 in Private Banking, number 1 in International Private Banking, number 1 in Real Asset Management and we have built a global fund distribution, which is actually very unique. We're distributing our funds in 16 countries. And as you can see from the slides, we're distributing through 14 of the 20 biggest global wealth managers and 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. And this is, of course, key because without the product capabilities in this area, it is not very easy to run the business.
And this of course goes very strongly hand in hand with the resale relationship strategy, because this product capability, these services are the ones, which we filter in. And as you have noticed, we have a very large savings growth in the area. And going forward, we may see a period of time where lending growth may not be too big, but the savings area is growing quite rapidly. We see growth rate in the savings area much higher than that. And 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. So we are very well diversified. And this of course comes out in low volatility. Not too bad. Demonstrating the diversification and of course our risk profile.
And this comes out in our redevelopment, which is pretty interesting, because back in 2000 and 7, we delivered 20 percent ROE on 6% capital, as you can see. Now we delivered 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 0.
So delivering 12% at 13% now is actually showing that this business model has indeed delivered. And on volatility, no quarter below 8% ROE, no year below 11% ROE. And the risk profile has been maintained in 2002. It's stable. Of course, we are through the cycles with our loan losses as you can see, but the average is 16 basis points compares well with our peers.
And we maintain that risk profile also as we go forward. And this low volatility has been recognized by debt investors. Our CDS spread is among the lowest in Europe. And this means that we attract long term funding at very attractive rates. And this is, of course, a key competitive factor especially vis a 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.
And 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're also compliant on the LCR, not only in general, but also in the main currencies. But of course, more regulation is coming. Of course, there's some uncertainty remains out there, but I think we also see some visibility.
The main outstanding issues are recovery resolution coming through this year both in Financial Stability Board through the directive in Europe. We are well underway with our recovery plan and resolution plan is also being made for Nordea. And I don't think it would be a major issue, maybe some cost, but 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.
1 single supervisory manual will drive discipline in Europe. And 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 that and that is of course positive to Nordea being in several countries. And Likinin is outstanding later this year. The commission will decide.
Today it's not likely we will see a legal proposal like in the report. More likely, we'll see something like the German or the French proposal. But 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. At the Nordic FSAs, they have this conservative stance.
They've had it all the way through. It's pretty predictable. And it's actually a stance in which we are in good constructive dialogue and we follow it continuously. And I think actually they are driving a very sound financial system in the Nordic area. So all in all, of course, some uncertainty about future regulation, but we have seen most of it and I think the visibility is pretty good by now.
And we have indeed during the whole journey delivered on all our targets. So 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 7 years, very significant retail growth. We're talking about premium customers with an annual growth 7 years of 4.5%, very significant shift. We have driven up operating income by more showing we have penetrated each customer better and we have increased risk adjusted profit by nearly 9%.
This is a very important and I can tell you that my first appearance was actually here in London as an announced CEO in December 2,006, not in this hotel, but another one. And my first target I announced was to double risk adjusted profit over 7 years. Now 6 years has gone and we are right tracking, right exactly tracking that target, which is quite interesting. In those days December 2006, we didn't know about a financial crisis coming out in 'seven and 'eight. So obviously, this is a target I'm pretty fond of having, because we are following it very closely, even that target.
And then, of course, we have doubled our core capital, growing at more than 9%, which 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. So we have indeed during this period of time delivered on our targets. And this is a lot of confidence to have when we shape the future and the future relationship strategy and the plan we are presenting is a sustainable business a sustainable business model that will on a sustainable level deliver clearly above cost of capital in return. And 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. But 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. And 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 over 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.
So, so far, we have actually delivered very significant capital generation nearly $20,000,000,000 A lot of it as you can see have been retained earnings to build Core Tier 1. So 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 return to shareholders in 1 or the other 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 about 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.
So every single quarter we expect the 13% to be made even maybe with some margin. And this is of course very much due to the fact that RVAs remain flat. We have taken down RVAs. 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 has a lot to do with the way we post every we handle every single element in the equation calculated the risk weights and the potential losses. And 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. And we have now 9 quarters of flat cost behind us, and we will continue at for another 8 quarters. This is actually a cost saving program of €450,000,000 This will offset inflation, but it will also leave room for some investments in our franchise, which we'll come back to later.
And this leaves us with a return on equity target. We said in the spring of 2011, nearly 2 years ago that we would deliver 15% ROE on 11% capital, 11% capital was a high number in those days nearly 2 years ago. Today, we are repeating the target 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 costs, taking down cost income ratio another 1% and lower loan losses, which will normalize gradually, which will deliver more than 13%. And then the normalized interest rates will deliver 2 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. But the reason that interest rates can deliver 2% ROE is inside our control, its 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 over the 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. So this is an asset to our strategy transaction accounts. So 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 return. And that's the reason why we indicated this is actually a conservative interest rate forecast that delivers to 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. So this is the way we're going to do it. Thorsten is going to dive much deeper into this.
So 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 We actually have positive rating migration in institutional and household portfolios. But we have these two areas, which of course some loan losses, shipping in 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. And we clearly expect this situation to improve during 2013. It's difficult to say how much and which quarter, but it was 20 13. As we see the Danish macro conditions stabilizing as we are seeing it happening right now, we see ship values bottoming out. So this is an important part.
Ari will of course come back to this in much more detail later on. But we will continue on the core relationship strategy. And as I already said this relationship banking model are delivering a very stable and low risk profile in our lending book and we'll continue to run our business this way. So you can rest assured that the risk profile will not change. And the business areas are ready to deliver on the plan and we're going to hear more about that today, but I will take the opportunity to introduce the business area heads who will actually present this.
Thorsten Hejernsen, our CFO will right after me dive into the numbers and logic of the strategy. Michael Rasmussen, Head of Retail Banking will of course talk about Retail Banking. Kasper von Kotzkull, Head of Wholesale Banking will describe in more detail our Wholesale Banking strategy Peter Nygard, Chief Operating Officer in Wholesale Banking will not present, but he will be on stage for Q and A later on. Gull Verstert 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.
And 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 in the book. But we have the business are well positioned. We have plans. They are being executed.
So on retail, this large well diversified model with a becoming still more With distribution model Michael will go into which is very interesting, 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. And 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're now going to take next steps to increase ROE in this area where we are indeed competitive not only towards Nordic peers, but also towards international peers very much because we hold much stronger customer relationships than they do. And 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 RE, not least also also in life and pension.
And they are contributing as you can see somewhat different. It's a good mix of businesses. Some are heavy on costs, 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. And 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 about 15% right now and they actually have an opportunity to go further. There we have the very strong levers in cost, and 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% 15% ROE today.
Some of them are deposit margin sensitive, but still here we have plans in place. We are using the levers and plans are being executed on both cost and capital. And then we have less than a quarter of the business units where we're below 10%. Here we have built to restore profitability as we call it. So more you can say detailed plans, plans would take larger steps also on the tradition levers, but also restructuring some of the businesses and transforming them to move up.
So 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%. So we are committed to the 2015 plan. We have capital initiatives in place, initiatives for income generation. We'll do the flat cost initiatives and we have the low risk profile and the low volatility, which will be maintained. So 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.
So this was my opening remarks and I will now hand over to Thorsten who will dive into the strategies. Thank you.
Thank you, Christian. Yes, As said, I will double click or focus on 3 key elements of our plan, the capital and why a Core Tier 1 ratio of 13% the flat RVA 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. And I hope by the end of the presentation, we will have shared with you kind of 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. So let's go into this slide, which I will spend a little time on.
We have announced the capital policy to be a core Tier 1 ratio of about 13%. And if we start from far left, the first 4%, 4.5%, I think is obvious. The capital conservation above of 2.5% is also quite obvious. Then we have the systemic rig buffer. And I think that based on also what we have seen lately, this is probably to mature in some way.
We are pretty sure that our home country regulator will enforce 5 percent 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%. That you can say give us close to 11.5 percent. Then we have some other buffers in play.
First of all, we have the Pillar 2 requirements. We have long discussions with our regulator how 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%. And then we have the countercyclical buffer, which of course not yet are decided. The whole idea is that it is a volatility buffer.
But 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. So 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. But all in all, we can discuss for links whether or not 13% is a lot. Our internal capital requirement is 10%.
30% is an adequate level. And then on top of that, we have our total capital ratio policy of about 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. So this is of course an interesting question. And we would like to be more clear on which of the 3 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? And I think that we would very much like to keep the flexibility and the options open. 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. And until we have more clarity, we would like not to decide fully. On top of that, of we are making review on the more tactical levers of what should be included in consideration like investor tax consideration, market timing, etcetera.
Then we are also a strong believer of optimizing our capital structure. And as I said, we have we are challenging the requirement to meet the Pillar 2 requirements for Core Tier 1 capital. And we will at least look into the opportunities of using instruments like COCO to meet that kind of capital requirement. But that is, of course, yet to be seen. And 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 would say on the capital policy and in the returning of excess capital. Then to one very important lever behind all of this, the capital initiatives, I. E, the flat RBA target. I will flip quickly through this. Gretchen has showed it.
We believe we will be able to fully Basel III and other regulation loaded. We will be able to stay above 13% core tier 1 going forward. And we as we also have just shown, we will do it in this way. We will be able to buy our efficiency initiatives to meet not only all regulatory requirements, but also the net of migration and volume growth. And where does it come from the regulatory impacts?
The majority is stemming from the CVA and CCP charges. The €10,000,000,000 here, the far majority of this comes from the CVA risk. I think this is a conservative number. Then we have asset value correlation that gives reason for an addition of €3,000,000,000 of RVA. And 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.
And finally, and 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 1.52 or 2.5 and we chose 2. The 2 meant that we would have to increase our RVA with around 3,000,000,000 of RWA. Now the latest proposal is slightly more aggressive. It talks about LNG flows of up to 43%.
If worst case happens and we go for the 43% SGD flow that would equal around 32% mortgage risk weight and that will mean that we will have to add another SEK 3,000,000,000 on top of this number. Now does that mean that we will change our flat RBA target? No, because as I will back to, we have a number of initiatives and we have some buffers. So in our initiative list, so I'm pretty sure we'll be able to meet continually the fair RVA target. And one thing more, we have a mortgage portfolio of €26,000,000,000 in Norway and they are all all of them are possible to reprice within 6 weeks.
And 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. Then the initiatives to, as I said, mitigate the regulatory effects and the net of migration and volume growth. The majority will come from the rollout and the majority of the SEK 21,000,000,000 is the advanced IFB in the Nordic corporates. It had been a long process and we are pretty sure that we will get this approval in 2013.
Preferably
earlier than later. And on top of that, we have a non pot foundation IRB rollout. And we have some other advanced IRB rollouts within areas like treasury, finance, international units, etcetera. All in all, coming to around €21,000,000,000 Then as Christian was explaining, we are doing a number of model reviews and the main driver here is the segmentation of our corporate rating model. And finally, we have what you could define as housekeeping of more efficient processes, how we net how we source collateral and how we secure that we don't have unutilized lines or facilities etcetera.
All in all, SEK 9,000,000,000 and as I said, we are quite confident that we will be able to deliver the SEK 35,000,000,000 and whatever it's taking to mitigate what we just discussed about the Norwegian risk rate effect. So, of course, a key driver into the ambition of keeping ROE or reaching an ROE of 50% on a fully loaded balance sheet. So as I said, the starting point or sorry, as I said, the regulatory effect we think we can mitigate fully. So if the percent for 2012, the full regulatory effect is 0. However, we have a little of a technicality in the way that these 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. So that explains some of this minus 100 basis points. And the other issue is that we will, of course, not operate at 13% core Tier 1. We will have a small buffer. So 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%.
And from there on, we then believe we will grow it to somewhat above 13% without normalized interest rate and above 16% with normalized interest. I will now go through each of the levers and share with you the key assumptions 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. And back to the question of what we can control, the majority of this effect stemmed 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.
And 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. It might continue into 20 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 of around €500,000,000 And our this is not fully comparable with the numbers Christian show. This is how we do it internally. This is the weighted short term interest rate and this is 1 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. So as you can see, the current level and the 15 level is not very different. That's why you see quite a small deposit margin effect in the base case net interest income driver. And as Gretchen said, well normalized interest rates, we have assumed something around 3%, which is still somewhat below the pre crisis level.
We should not judge whether or 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 out cost. And 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. Then 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.
And that stems actually more or less equally from risk products within markets, asset management income and transaction related income. And just to illustrate here that we believe we have been pretty good at driving this source of income also compared to BiS.
Then into cost, the €450,000,000
cost efficiency program that will allow us to keep cost flat for the next eight quarters. The €450,000,000 is equal to around 9% of our total cost base, which we think is a good level also compared to other banks comparable banks. And 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 €450,000,000 will not only mitigate the underlying inflation effects on our cost base, but they will also allow us to do some reinvestments. And you can see here the indicated levels in the period 2013 and 2014 and 2015.
And we have a number of prioritized areas. We have huge cost impact, of course, from all the regulatory requirements into processes, data, etcetera. And therefore you will see this area being ramped up. We also within the IT infrastructure area do ramp up. And I think we can also say that within selective specialist areas, we will ramp up somewhat.
So we have a number of initiatives ongoing require funding, which we will free up here. And 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. And finally, we have a big driver in centralizing, minifying and potentially offshoring a lot of our back office processes within our product areas, within IT and other places. And we are ramping up our we have a captive operation center in Poland. We will soon have 2 in Poland.
So 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 capture center and we are actually in certain areas doing insourcing because it's a good business case. So tracking our FTE development going forward will not be super precise as an indicator for cost efficiency. Just a warning.
But we will take down FTEs, as I said, mainly related to the process efficiency opportunities in the retailer distribution network. So they will go down a further 2.5%. And as I said, there will be some increases somewhere mainly within IT where we do in sourcing. Yes, then we have a number initiatives. And sorry, I had to I forgot to say that slightly less than half of the 450,000,000 will come from the and slightly more than half will come from what we call infrastructure optimization, which is a number of different levers.
And 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 category. We will significantly reduce the number of square meters, the number of locations and we'll move to cheaper ones. We will sit closer to each other and we are basically doing the same both for headquarter facilities and for branch facilities. Then 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 identify 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. And 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. And 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.
So again, it's a well balanced, I think, program. And 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, either non compensation part of our cost base quite stable. And 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 8 quarters.
Then to the loan loss driver, the 100 basis point loan loss driver, I will not say much about it. Ariel will come back. But we feel quite confident in the statement saying that we will believe that we from the current level, which is quite impacted of course by Denmark and shipping, we will approach during the period the historical the 10 year historical 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 percent with the normalized interest rate effect. We will have a 0 CAGR on costs for 2013 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 cargo and RVA is also 0. 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. And again, this leads to our target of being well above 13% ROE in 15% excluding the normalized interest rate and surely above 15% including the normalized interest effect.
So to recap, we believe we 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 shop driver of each of the key drivers like cost and RVA.
We have a big variety of initiatives. And 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 model. This is actually more or less true prices. 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. And finally, I think I can say we have full management commitment commitment to deliver and follow that the brand will progress. This was the key elements of the plan and key assumptions behind it. And that was hopefully clear.
And before I hand over to Michael, I want to make one clarification issue and 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. But the main capital allocation framework driver internally is Raorokan. And what we have done is that we have tried to align economic capital and equity capital much more.
So we only now have a difference of around SEK 4,000,000,000 between the 2, mainly stemming from goodwill and intangibles, meaning also that Raoul Card numbers and ROE numbers are getting closer. So the when you see Raoul Card numbers in the So it makes it easy to track how far we are faring in each of the business area in getting closer to the 15% ROE. Yes, that's what I would say. And then I would hand over to Michael.
Good morning, everyone. It's now my privilege to present retail. Retail represents 54% of the income in the group.
And as Christian also alluded to,
we are also having the biggest retail franchise in the region. Our income stood in $2012,500,000,000 clearly ahead of our local peers.
You can see from the latter part
of the slide here that we have close to 9.50 branches, 11,000,000 customers, 18,000 people and we have market leading positions in all the Nordic markets. We have, I will call, run up position in the 3 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 percent 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. And noteworthy here is to mention that more than 2 thirds of our income comes from the 2 preferred segments large on the
on
a clear Nordic government's 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 and more or less the same goes for the SMEs in this region. So therefore, it's very, very important to us and a key ambition to be the or one of the leading banks in each of our market. And when we define leading is 1st and foremost financial performance, it is customer satisfaction 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. And you can see we're actually outperforming the local markets in 3 out of 4. Only 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. But 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 4.40 basis points, but you can see that goes actually for all the markets. We've also in 12 improved the costincome ratio, very drastic 12 percentage points in Norway, 4 percentage points in Sweden and Denmark and one in Finland and 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 1 by 1.
And 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 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, but 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. And of course, retail will still be primarily to to value creation. Moving into the first one of business system.
Christian has mentioned the relationship strategy many times and 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 and 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. And then 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 and we do that through our contract policy. And 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 regime that we do not have in this where there are much more risk based pricing. But in essentially the same, the customers are segmenting more or less themselves due to income and income potential. And here we also do whatever we can to exploit cross sell opportunities by looking into potential. We 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.
And I said a minute ago that we had 9 50 branches, but we have consolidated our services towards those large customers to only 45 places, meaning that we have a very, very tight management control, management awareness, management support to our SMS 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. And you can also see here from the right hand side that this concept have also 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. Retail banking for retail banking in the future also today, but more important in the future is also about customer satisfaction and even more important is 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. And this is in the primarily in the goal area, our most important segment. And actually for the first time here, I think we are disclosing retention ratios. And 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.
Again at the end of the year. There's no inflow to the group. These 100 again at the end of the year. There's no inflow to the group. And there you can see that between 98% 99% are still with us in the bank 1 year after.
It's also including customers who have passed away, in average 1%. So in reality, our retention is close to 99%. So 99% of our Gold clients in the beginning of the year are still with us in the bank 1 year after. This is I think for in all comparisons very, very outstanding numbers when comes to retention. And this is really the result of our business system and our relationship strategy that we are seeing here.
Then I will dive into the other value driver that is the distribution. Retail is the next 2, 3 years really a distribution and efficiency gain. You can see from the left hand side what's 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%.
And you can see here from our online logins what's happening. So every second 20 fourseven, three 65 days a year, 15 customers are logging into the bank. So we can really see that the relationship is changing from a physical to a more online dimension. And we have of course taken note of that. And you can see here this is how we have constructed our branches.
We have reduced the number of Feet in our branches with 15% over those years. And at the same time, we have changed the composition of our people and we today have much more advisers than service and support people. So 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.
But we actually took note of that years back. So the last 2 years, we have simply transformed our physical branch network. Full service branches servicing all type of needs, all type of customers. And you can see today, we are nearly at 1 third. 3 years back, only 7% of our branches were dedicated to specific relationship needs.
Today that is close to 50%. And we have invented a new branch type, the service branch taking care of the daily banking needs, a huge transformation. And you can also see what has happened. We have actually reduced the number of branches with close to 25%. And also from an efficiency point of view, the most expensive process, the cash handling, there we have reduced the number of outlets where we change behavior among two sides.
We have a clear changed behavior among our customers and we have a huge opportunity
to
We have done what have to be done in the last years. So we are ready, meaning that we can now allow ourselves to optimize the distribution mix across countries, across channels from a return dimension, not only because the customers are saying to us they want to be served another way or because we have a specific efficient need. Now 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 we will do this in the next 2, 3 years.
This multichannel strategy has 2 dimensions. The first is the nature of the service, the nature of the task the customer are embarking on. And the other mentioned is do the customer need support in the bank or through the channels in order to fulfill these needs. A is to ensure that the daily banking needs are transformed away from the branches through 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 we establish advisory services remotely. So also our customers who want to be self directed can actually receive advisory services, can buy products online meaning that in the next 2, 3 years, we will be able to service all customer needs 20 fourseven regardless of 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 2, 3 years, where we are now ready really to grasp the potential in doing this. And we can now allow ourselves to optimize the journey cross country, cross the channels.
That's exactly what we're going to do. And we have the prerequisites in place and 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. But 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. And here you can see the contribution to this growth. The repricing will account for 35% of that growth €200,000,000 and that stems from repricing of the book to the present margin level. In our plans, we do foresee that the customer margins on lending or deposit widen. We keep a 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'll come back in a moment and we expect that 25% of this income growth will stem from cross selling corporate and household close to €150,000,000 Then we will acquire new customers primarily customers that will give us €50,000,000 more. So these three components is what's more or less what we can control ourselves. That is 70 percent of the income growth is actually coming from you can say our own activities.
Then we have 10% coming from a interest rate increase in the area. And also here maybe very modest assumptions. We expect in our plans here that the euro rate in 2015 will be 65 basis points higher than we are seeing today. And there will be some market appreciation. So you can see that 70% is own activities and 30% is coming from external sources, but a very diversified growth composition looking ahead.
Diving a little more into this in a country dimension. We 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 and loss deals.
And again, we'll do 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 country wide dimension. We see the biggest potential stemming from Finland. Even though that 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 2 and 3 and 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 our book. And as 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. And I think for in any international standard, these cross sell ratios are very, very, very high.
Another example of how the relationship strategy in our business model have served us very, very well, but still you can see we are able to increase the cross sell on our present stock. And that is due to a very strong sales efficiency. We have a better efficiency than our peers. We have increased it and 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. And even though that we have transformed our branches and our distribution model radically over the last year, we have actually increased the number meetings per PPA by more than 8% in 2012.
So 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, net number of gold with 14% since 2,009. You can see the growth in the new number of new customers were also up in 12%, 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 customer gold customer base with 20% since 2000 and 9. And 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 1. So every marginal customer we get in will actually help us on the product 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 $270,000,000 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%. So very diversified, very robust income growth pattern in the years to come.
As I said before, it's primarily an efficiency game. 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. And we're also working a lot of all the other things in the value chain.
We will reduce cash 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 offshore. And we are in the middle of that. And of course, we will increase the efficiency in our support functions. And we have just changed the organization in order to capture those efficiency potentials. We will expand our VA next year also.
We actually were capable of reducing the ROE 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're allocating the capital, especially on the corporate side to the right customers and the right transactions.
These four drivers will mean that we our very well diversified franchise will still deliver high growing and as Gretchen alluded to very low So a pretty robust growth is expected. We will keep the cost flat. We will still reduce the number of FTE by 6% in the 3 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 and risk profile and strong management awareness and focus on the strict credit risk management and all these things together will mean that the return on our allocated capital will increase. You can see here that from 11% to 12% our return was up 170 basis points and we expect to some degree the same pattern in the future. So if I may recap here. We have a very strong relationship strategy and 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 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 branch composition as such. So we are ready now to grasp the opportunities, which we see from the customers because they're to us, they're showing to us they want to be served in another way and we are ready to meet those needs. And we do that by developing the new multichannel relationship strategy.
We are embarking on that. We have clear roadmaps, clear plans country by country. And 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. And we will also on the corporate side increase the asset productivity. And we will ensure in all our segments corporate household that we do our utmost to ensure that the repricing of book to the present level will be in place. And eventually, we will keep our strict resources, the capital consumption, the ROE and the cost flat in the years to come.
That was the retail story. And now I think we are in for a maybe we're in for Rodney.
No. We have just explained
that we are a very efficient bank. So we are actually ahead of schedule. So we planned to be back here at 11:10, but we will be back at 11:0:45. So then you're welcome back. So let's have a coffee break and then we will prolong the Q and A session.
18 months ago, I stood not actually on this stage, but in the last Capital Market Day and introduced for first time wholesale banking. We'd actually had just formed wholesale banking. And you may ask me now, how do I feel about the business, 18 months into forming wholesale banking? And 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. And we have actually delivered on all the plans that we set out. So I feel very good about the business. The business of course as Christian 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. So 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 grown the business throughout the crisis years. It's also a business with a good return profile.
We are nearing the RARAKA 15 in 2012 and a business with a good cost income ratio. Very important that we actually have the operating leverage in this business. And 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. And then also in terms of income generation, net interest So this is not a lending business or pure lending business.
We're using our capital very wisely. So a very good balanced business. And 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? And the uniqueness comes from what is our core strategic asset. And our core strategic asset is the customer and the product platform that we have put in place and the scale it has, because we are the only bank in the region with a meaningful banking footprint in every single country. It really starts of being local that we are close to our clients.
We have a long term relationship 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 are local, if you are close to your clients. So that's but we also have the relevance and the relevance comes from 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. And that is actually the uniqueness.
That's the asset we have. If you look at our position in the region, we are either number 1 or number 2 in each of the countries. I think probably a better way to say that is that we are number 1 in every country or joint number 1 except in Norway where we are number 2. So that fully is and that also means that we have 50% more core relationships than anybody else. That's the scale I'm talking about.
And that matters and I'll tell more why that matters. And from this strategic asset actually working capital management and be the best in working capital management and B, the best in capital markets advisory and so on. That platform gives us that vision. I think we're pretty close, but there's not more we can do. From this also comes the model that we have adapted.
The model being 1 relationship driven, so it's a relationship driven model. And 2, it's a one operating model. It's not 4 or 5 country models. We have the scale comes from the fact that we have 1 organization aligned to serve and that's where we get the scale. So that asset actually gives us both the vision and the model how we operate.
Then if we look at the objectives how do we actually drive this business forward? Our number one financial objective is to increase returns. Returns, returns, returns. And the way we increase returns is and this has been repeated many, many times by increasing income while keeping both capital, RVAs is the same and cost flat. That's what we have been doing and that's what we will continue doing.
And the 4 levers that I will go in more detail are 1st 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 definitely one of the key areas. The other one I already mentioned that we are for the first time we had one operating model. We are 18 months into it. There's much more we can do.
That will also drive both and it will drive the volume of business. Then 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. And then of course strict resource management, All of these 4 of course are interlinked. But those 4 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.
And it's actually creating value not only to the shareholders. This also creates value to our clients. If we look at the relationship and I repeat what Christian said. You will hear the word relationship probably from me equally many times. So if you said Christian 21 times, I'm probably pretty close to 10 already.
But deep long term client relationships is at the heart strategy. It has always been. And in the future banking model, it is even more important than that is the case. So 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 and 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.
But in that study, they looked at all the European markets and looked at the and we are number 1 in the quality leadership in the Nordic region. Just confirming again back to the platform I mentioned. That is extremely important. But then again, it's not only about being quality leader and share leader, it is about generating the income. And when you oops sorry.
When you look at again the corporate income, we've actually grown the corporate income by 33% in the last 4 years. So that's year on year of 7%. That's not a small number. So it's not only about being share leader and quality leader. It's actually about delivering the numbers.
And 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 with us. So 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. But cross sell and then again this is Greenwich. Greenwich has looked at cross selling in the Nordic region. And the way they look at the 70 3% 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. So if you have 100 then you actually are providing all the relevant products to that client universe. So 73, you may ask is that a good number or a bad number? I would say 2 things. 1, we've improved it.
And number 2, our best competitor gets into the 50s. So 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 shouldn't be 100. And that should be our ambition to get that to 100. I don't see any reason why that should not be the case.
So 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 no decline in key products risk management, be it in trade finance etcetera, they use on average 2 lead banks core banks maybe 3 but 2. Again showing why it is so important that you have this lead bank relationship and lead bank footprint. Again, many people say that the lead bank usually gets 40% of the wallet. And if you're a tertiary bank, not one of the lead banks, you may get 10%, but usually less.
So there again you see again the leverage of relationship and having relationships at the core. And what we have done in the last 18 months, we've actually renewed our whole relationship 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. So 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. And that's why I believe that we can continue on the path that we have embarked.
Cross
right? I mean, if you can have a great relationship, but if you have nothing to offer I mean that's not all very long lasting. So 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. But 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 transaction products, transactional products cash management, trade finance, it is usually a given that hey, but you are the leader.
I think what I want to take up here is what Christian also mentioned our capital franchise that we have developed over the years. We are today the Nordic leader and I think the positions here speak for themselves. 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 1 book runner and that's number 1 of every bank book runner of bonds in the Nordic region, syndicated loans. And then in some segments like M and A, we want to be the 1 number 1 Nordic bank in the Nordic region.
That's where we add value. And all this again is integrated together. And remember when we do this, 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.
And I think we have shown with 15% year on 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 on year growth in markets. And again, this is not product driven. This is again extremely well integrated to our overall relationship approach starting from understanding the client, advising the they are there to support the customer activity. And that's why it has a very narrow risk profile, but it's also very resilient. So 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 and also in wealth.
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. And apart from actually having relentless client focus, which has been of course the key of our business in the last 2 years, this actually creating 1st forming and then transforming the Wholesale Bank 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 3 objectives when we actually form this: better alignment.
I mean 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, alignment. The second one has been strengthening the offering actually by working together. And then thirdly, efficiency. But when you do this, we get a lot more efficiency. So we can do more with less.
This has been 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 brought in new people and 2 thirds of my leadership group is actually new in their jobs, new not new to Nordea, but new in their jobs. So 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.
And 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 of the ball as it creates the clients and we've done that while we've actually delivered the numbers. So then we have in a way we have the strategy in place. We have the relationship drivers in place.
We have the organization in place. But at the end of the day, it is about doing the right thing day in day out. Right clients, right deals, right pricing. And 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 us the return and where we get the business.
I take one example pricing. Pricing of course is key. Remember here again net interest income is 40% of the income in so 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 random on the whole portfolio, so which means that of course you need to do more. And what have we done?
We've actually done it. We've actually achieved in the last 2 years 10 basis points. And you may then ask is that what does that mean? 10 basis points per annum is actually more than one return point in return. So that's the lever and actually we've done that.
And that's on pricing. And 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. Out. One thing that has been mentioned out. One thing that has been mentioned of course is that okay, but isn't now customers shifting 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. But actually I see this as an opportunity. I think I've already mentioned the position we have in on the bond side and the loan side where we are a clear number 1, but you may then ask what impact does this have to your return on revenue? And 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 SEK 10,000,000,000 actually in capital raising in the bond market SEK 10,000,000,000 in one country. And we actually made a quick analysis what did that what would that have meant if that would have been on the bank's balance sheet.
Our share of course and also SEK 10,000,000,000 but our share of that. And that analysis showed that everything else being equal, no the fees and commissions we did here then compensated for their revenue we do 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. So 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. But of course, how do I? Do I look at client by client?
Of course, I cannot do that. But 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 pay country. And I monitor and we monitor it on a monthly and quarterly basis income development, RVA 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 and lending margins and won and loss 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 this gives the discipline. Get But it's very important because if we can get them out just eliminating them we'll actually increase our 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 2 years. Cost is key to maintain the operating leverage. But I do want to say one thing.
Cost is not the main driver in cost So it's not a cost game, but we are extremely disciplined to make sure that we will maintain flat cost. And 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. And capital has disappeared, so it's not there. But on capital, it's equally important actually probably a bigger lever for us. And in capital, we've actually taken the capital down by 15% in the last 2 years, very much in line with what Torsten has said.
And we will continue doing that with flat capital also going forward so that we can drive the business. So 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 RVAs. If you look at what we've done, we've actually taken as I said the return the RADA cut to close to 15%. You may say that isn't that just 2% points in the last from 11%.
But one thing you have to remember here, if I only look at 2 elements 1 Basel 2.5 percent and the liquidity premia increase I. E. Our funding in that period that in isolation would have reduced our return by 2% points. So 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.
So 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.
Unique that can work together. And from here on, the elements that I have laid out, it is about execution, execution and execution. On the relationship side more intensity and relevance to our clients on the and that will drive income. On the organizational platform, I think we can continue strength that both in terms of alignment how we work together because it's not only about the structure, it's about behavior. How do we behave?
How do we work more as one? And I can say one thing is that the organization is extremely enthusiastic. And then business selection, business selection, business selection. What business? How we take it in?
How we price it? And how does that create value? And then keeping capital and cost flat. We've done it and I'm convinced that we can continue doing. So 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's been a long day already, but I hope you are ready for the presentation of the 3rd and final business area Wealth Management, which I have the pleasure of presenting to you. Wealth Management is a somewhat different business area. It carry only 2.5% of the risk My presentation will follow the same structure as my 2 other colleagues, first describing the position the platform and secondly into the strategic plan for 2013 to 2015. The Wealth Management contains 3 business units.
The first is private banking with €68,000,000,000 in assets under management and it's the largest private banking in the Nordic and it's also the largest Nordic based international private banking domiciled in Luxembourg Luxembourg servicing 106,000 customers. 2nd business unit is asset management with 130 €8,000,000,000 in assets under management servicing retail clients, private banking clients, institutional clients and 3rd party distribution. And the 3rd business unit is life and pension, which is also the largest pension life and pension provider in the Nordics with €5,700,000 in premiums €51,000,000,000 in assets under management. Typically these businesses have not only the biggest Nordic, but it's also the biggest or the number 1, 2 or 3 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 1 third of income and 1 third of profit derives from each of these business units.
They operate in a tightly integrated wealth value chain delivering process efficiency, gain on scale and capabilities and value proposition to customers. It's a well diversified business. If we look at the assets, you will see that no market have more than 35% of assets. Geographically, we are in the range of 10% in Norway, 35% in Denmark, 15% from international Life 26% Institutional Clients 20% Life 26% institutional clients 20% retail 18% and third party distribution 4%. The last pie chart shows the asset mix of assets managed by asset management with 55% in fixed income and 45 percent in equities and multi assets.
So this is the platform that largest, but also the fastest growing wealth manager the Nordics with more than SEK 218,000,000,000 in assets under management. And passing the SEK 200,000,000 or SEK 1,000,000,000 last summer was a very important proof of the trust that customers have placed with us. And as you see, we have also the strongest growth in the Nordics with 16.5%. The pairs are clearly lower. And the second the gap to the second largest peer is now €64,000,000,000 It has actually doubled in 2 years' time.
And not only the fastest growing in the Nordics on a European scale, we are the 2nd fastest growing in the 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. But one question you might have is where have the growth come from? And 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 and international Private Banking and Asset Management is growing in importance to us as an additional source of income and profit growth. And the distribution model is well diversified. It builds on 9 80 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 advisers and with what we would claim is a market leading concept of tools and advice institutional clients servicing more than 600 clients 3rd party distribution. And just to give another example of the diversification in 3rd party distribution in 2,000 and 6, we had 90% of the funds in 4 funds.
Last year, we had 90% of funds in 30 funds. And no market stands 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 3rd party distribution and the composition of 3rd party premium. So altogether, this is the distribution model and the diversification of the business, which has delivered the results. I will this concludes the description of the platform and the position of Wealth Management.
And I will 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. But of course, we have done, I would say, fine tuning and smaller adjustments and updates, of course. The statutory review we have conducted started with the external factors taking regulation, technology, demographic development to mention the most important.
And I will not bore this audience with going into detail into these external drivers as I guess they are well known to all of us all of you. But 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. And adding to that, we 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. So there is an underlying growth in the Nordic market as well. We have chosen to focus on 3 value drivers: capitalized growth momentum the enhanced value proposition and cost and capital efficiency and prioritization. Why these 3? Well, 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. And capital and cost efficiency is of course key to deliver returns to shareowners and at the required level. This I will now go through a little 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. But 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 about delivering the value proposition to customers. And 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 advise and also to do transactions. So investing in online and mobile is crucial.
We have seen that the well planning concept is very important in private banking and that's now being rolled out or planned to roll 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 IT efficiency, IT 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.
And 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 €250,000,000 to €300,000 in investable financial assets and the high net worth segment runs from €1,000,000 But 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. Then capital efficiency in wealth is very much about life. We have €3,500,000,000 in risk weighted assets. And after a review last year where we were able to take down the asset risk weighted assets by 10 percent, 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 tells 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. And the stock by year end was 32,000.
So you could ask how many years is this a potential? But interestingly enough, we saw that there was also new customers coming in because they get wealthier or because there are new customers joining Nordea. So actually 6 1,000 new customers came into the potential customer base of 32,000 which has not been offered private banking services previously. And this result in higher share of wallet. It results in a different asset mix resulting in higher returns to customers and higher emergence.
And typically, we see that the revenue increase is 160% of these customers being elevated. And not least, this is also increasing the customer satisfaction to get the advice and service tailored to the more complex need and higher returns. We actually saw the customer satisfaction index for private banking 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 edge of our business to always benchmark with the competitors.
And especially for international private banking and private banking in Denmark and Finland, where we have rather high market share, this is important. In we work with it also in private banking Norway and Sweden. But 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 3rd party.
So institutional sales is important. Consists of 2 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 we look at the 3rd party distribution, as Christian already have mentioned, we now distribute through 20 to 14 of the 20 global wealth managers which contain names like UBS, Credit Suisse, Morgan Stanley.
And this is important not only as a source of additional growth and additional income, but 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. And the growth in this area has been strong. Over the last 6 years, there have been a CAGR of 13% almost doubling the assets under management. And as you see at the top of this slide, the margin have been increased the same time. So needless to say, we follow-up this business not on flows and AUM alone, but on value of flow.
So margins have increased. The investment performance 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. Best performing and worst performing get 5% or 1 star. The 2nd best 22.5% get 4% and the worst 2% leaving the 35% in the middle with 3 stars.
And as you see 46% of our funds are in the top two category compared to the market average of 33 point 5% and only 2% in the lowest performing compared to the average of 11%. So on a basis of the last 3 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 standard 87 percent of composites outperforming benchmark last year, 70% the last 3 years. So this is of course a key driver to value satisfaction and hence a key value driver for the Wealth Management business also going forward. 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 4 Nordic countries last year. And 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 2 third in the 3rd party distribution came from external products and also 2 thirds in non Nordic products.
Efficiency is key, not because cost as such is the most important driver for delivering profit growth in Wealth Management that's obviously the top line. But as we also operate with the flat cost for 2013 income of 4 0.3%. However, if we adjust for the extra fee income we had last year from Life Denmark, the reduction was 1 0.5 percent 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 processing, further IT offshoring, the frontline efficiency program and not least leveraging on UCITS 4 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.
14. 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 in with a reduced cost income and with improved capital efficiency. And this turns me to the next slide, which is Life. And 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 market returns and unit linked.
And 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 linked. It was 47 in 2,008. Last year, it was 77 percent 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 2015. And if you look at this slide, you see the composition of the non guaranteed 47%.
And as you also will observe the level or the bracket of guarantee above 3% is now down to 20% as compared to 29 percent 4 years ago. And 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 side of account extra fee recognition in Denmark, the adjusted return on equity was 11.9%. And 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 linked market return and also the growth which will be in the bank 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 value the wealth chain and the wealth platform lies in the integrated and leveraging on the Nordea relationship the 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.
In minutes, we are spending time with credit risks. And 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. And also as Thorsten 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 don't 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. But then this long term average, I would like to little bit point out a few issues. Our total level of losses average loss is 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 financial global financial crisis. And the peak of our loan losses during this period has been roughly 50 basis points in a 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 could If you would break down this average tenure to each individual years, you would see that actually there is no single year we have had highest loan losses in the market, but there are years that we have been the lowest.
And then it's there are also other these kind of 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, competence in addressing those. We have also some other ways to handle perhaps better ways to handle problem customers with our extensive clientele deal we have in the bank. Okay.
One question maybe 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 loans provisions we have compared to our impaired loans. And 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. And it has been very stable and there's some kind of back test for this adequacy of this level is that when taking a look at our final write offs during this period of time, the final write offs they have been The total provisioning level including collective provisions. The total provisioning level including collective provisions and that's very natural. So that when the downturn starts then the models and the banks they are building up collective provisions. But then when the downturn continues then when we identify individual problem customer problems of course then in a way what happens is that the collective provisions discussions they are transferred to individual 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 is 16 basis points close to that amount we have still a cushion for in collective provisions. As you can see from this breakdown of the loan portfolio in terms of geography and then business segment 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 of 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. And then these Danish figures, they, of course split into various other segments, so that you can see some other segments also above these averages.
But 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 study 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 these kind of very concrete signals that now the recovery has fast started. But it has clearly stabilized. Unemployment Public Finance is 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.
And 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. But after that the situation has stabilized. In some parts actually slight pickup. 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 stabilizing. Our impaired loans, they are very much focused in 2 areas actually in the Danish book. It's household and it's agriculture.
Whereas for example the problem area which has which some other banks perhaps the smaller banks have faced is real estate management and 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, so that not impaired portfolio.
You can see that this is the exposure weighted average PD probability of default it has come down, which is a strong signal. So the likelihood that there would be a new flow of problematic customers coming from the healthy portfolio due to impaired loans is reducing. As a result, it's quite understandable as what has happened in our loan loss levels recent quarters relatively stable. There have been we have seen a few peaks. It was in the beginning of 2011 where we made this kind of 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. But cleaning from these specific issues, it has been relatively stable as you can see. And 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's a 5 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. And then there are some banks who have suffered a Those banks who have been so more exposed to the commercial real estate and agriculture than we have been. What this means for the future in our expectations for the Danish low losses? Yes, we believe that during this period of time, we see this kind of normalized situation. When we see, let's say, fast improvement, how big that improvement is, it's very difficult, impossible actually to say.
But 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 portfolio loan portfolio. Moving to shipping. Diversification is also the key here in shipping. Our shipping book is SEK 13,000,000,000. It's more or less 4% of the total loans.
The core shipping is 2% of the total loans in Nordea. And we are well diversified. The only sectors we have made this kind of intentional choices has been oil and offshore, which are here. There we are overweight. And then the other is container, where we are underweight.
There 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's tanker and dry bulk and we are exposed to those two segments.
You can see that our losses are coming mainly from more or less only from these segments tankers and then dry chloroquel, dry bulk and then we have collective provisions. Otherwise, it's more or less, let's say, clean. What is now to the current situation in the shipping market? There also we see clear signs of stabilization. Ship values as you can see in these 3 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 situation is bottoming out. And 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?
Or this is the external view external market research company for the market outlook for these problematic segments we have in our portfolio tankers and drybulk. Based on this lower supply of new ships and also this gradual improvement in further 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. So as they are now described, this is the daily earnings in the shipping companies.
So that the pickup is not very strong this year, but at least it's not anymore down this year. And then 2014 the expectation is upwards. How this is reflected in our loan book? Impella loans also in shipping they have stabilized. This healthy portfolio the quality of healthy portfolio that has also been of course volatile because it's a small portfolio, but nevertheless it has not been deteriorating anymore.
And then finally the loan losses in shipping. You see elevated levels for 5 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 Denmark.
Then 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 more or less any signs of concern in other countries. Impact loans in Finland, Sweden and Norway very stable as you can see. Employment rate 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. And as a result, these are the quarterly losses loan losses in these three countries very low and stable.
What is important indicator to follow-up is the housing market in Nordic countries. And as you can see now what has happened is that, of course, understandably today in this housing market has weaker than 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, the impact would be relatively limited due to in terms of loan losses. And once again, we have to remember that we are diversified bank. This Norwegian market portfolio is roughly 7% of lending. So in that way that would not change materially what we are now talking about.
But we don't believe that there would be any kind of a burst in the Norwegian market. Okay. These macro indicators diversifications all those issues they are important levers in credit risk and loan losses. But it's not only that. It is actually important that how the bank is running its credit risks.
And 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 we
we
problem customers. Right allocation of capital is a very strong incentive to do this right, because when you allocate the capital 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 where you treat your customers and to whom you're trying to credit 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 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 When customer is in good shape that When customer is in good shape that goes both for household and corporate then our credit process is quite light. But 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 management, 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 border lines 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. Then we are mindful that how much concentration we take for 1 for single customers.
It's also industry concentration, because we are exposed into Nordic countries quite much usually, for example to commercial real estate. It's also geographic concentration. Then it's this quality of the overall loan book expected losses probability of defaults. And also we are assessing in our own stress test that what would be the maximum loan loss we would have in any kind of this kind of adverse scenarios. So this is the way we manage credit risk.
And 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, adopting to change the environment and so forth. But nevertheless, this core has been always there. We are low in terms of credit risk appetite witnessed in low loan loss level over time.
And then coming to the current situation, we believe that during this period or next 2, 3 years, we are approaching the levels of this 16% average loan loss explained by the reduction in Denmark and shipping, which are coming sooner or later. Thank you. That was my part. And then I think that the time next section is Q and A. Or is
it Christian? All GM members on stage and of course invite all of you to ask questions. I think Rodney will conduct the sequence. Okay. And we'll start the Q and A.
And since this is webcasted,
there would be microphones here. Please state your name and firm. And then also you who watch this at the computer, you're also able to send in questions so we can have them here. So but we start with a question here in the auditorium please.
Good morning, everyone. It's Nick Davy from UBS. I've got two questions if I can. The first is on your retail revenue target. You talked about 10% income growth about 3% CAGR.
I'm just interested to understand a bit better the Norwegian component of that because you said there's no Norwegian margin repricing baked into that number. But I think in Thorsten's presentation, he was quite positive about at least repricing up to defend profitability under the new rule book. So my question really is why the repricing is uncertain? Why are you not targeting the repricing is uncertain? Why are you not targeting more margin expansion in Norway?
First of all, there is some margin expansion expected, but the effect from this new risk weights are not fully in, meaning that a very, very big part of our book is the floating rates. We can do change in 6 months. And this is something not only you can say hurting the bigger banks, it's hurting the full sector. So we expect absolutely a repricing due to this to take place. We will of course also exploit those opportunities.
And remember it was a proposal we received yesterday, the new proposal. Restate
didn't restate your 100 slides. Okay. So 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.
Then a second question please on a capital return, which was mentioned quite early on in the presentation. And again, some reference to the government state. Can I just ask a question as to how far along the process of exploring a buyback of the government state you are, whether you had some dialogue with the Swedish government themselves, whether there's any agreement in place or whether this is just a nice idea?
Now we haven't commented on the fact that we will buy back the government stake. We just said that we will get next week from the GM mandate to buy back shares in general. And 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. So we're not specifically targeting anything.
And the government will sell them out, we don't know that Stenel can a possibility to have in that direction. But we have no concrete things to say. So we are very open with saying we keep full flexibility in that decision. Thank you.
Matti Halkers, Handelsbanken. Two questions if I may as well. We just got the proposal of the minimum risk weight 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?
If 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 hospital mortgages. We actually have seen some higher risk rates in some of the markets. And but 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. But also there, I still think that our RVA target is still valid there. And when these things are happening, it's new regulation and it's actually happening in all markets and hitting all competitors, I sincerely look into re pricing opportunities if they
may occur.
But 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 and maybe the move in Norway should more be seen as a macro potential move than a bank regulation. I think nobody has 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? So this is more a macro prudential move.
And I think the Swedish move was also macro prudential. And there's actually no reason to believe macro prudential moves in Denmark and Finland. So I don't think we will see it, but we don't know of course. But we have to understand that these moves are neutral to our RE targets because they will reprice as obvious and that's even encouraged by the authorities. So I don't think we should see it as an RE impact as such.
It may have some Core Tier 1 impact, but these are small numbers as we saw. So I think they're within our flat RDA target anyway. And the 15% yeah, for the 15% I'm going to stand up so I can see you. They use all levers. We'll use the cost lever, the RBA lever.
We will restructure the business lever. We will lose maybe look at exiting segments or moving up in other segments, changing the business model in that unit, in that segment. And that can include structural changes as well. So we will move each unit up. As I said, I expect all units to be about 10RE, hopefully even higher by 15.
And that will of course change the picture. We will also move the other units up in RE. But that's more I would say operational changes in terms of being efficient and distribution and the things we have described today. So 15% includes all the actions we have 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 regulation.
So I think it's important to take note of where we believe that an MFX will be before we take structural measures. But 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. Yes. I will not go into details. We had a small segment of units below 10% of course. We focus in on that a lot.
And in some of the low return units, it's important to take a very clear stance whether we want to be there or we should change. And in some of these areas, we change our segment composition because we may have segments in those countries or in those areas which are not profitable. So it's a mix between what we do per unit per country. But we have full focus on everything in there. We have plans and they're being executed all over.
But once again, the dynamic effects are important to take notice of, because we don't want to do things we regret when we have seen repricing change the dynamics in the market.
Hi. 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 4 Nordic geographies by the end of the first half. And I think Thorsten mentioned 2013 in the presentation regulators and whether you still expect that you'll have full rollouts across the 4 geographies before early Basel III rules come into play in Sweden?
And how that ties into the timing of the buyback that you're proposing? Thank you.
No. But as I think it's become has become relatively clear, I mean, CRD form most likely will not be in full force before January 1, 2014.
And 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 3 geographies as well? Because I think
they all
have Yes. But they have to make their consent to the Swedish authorities.
It's one approval.
It's one approval that can't send from your
But I think it's a very simple equation. I mean all these approvals take long term for all banks. And this is a trade off between speed and magnitude. So it's not difficult to get the approval fast, but then maybe the magnitude of the approval is not that big. So what actually happens in practice is that we are challenged on a number of parameters assumptions and data and we provide more data, more assumptions, more parameters, more documentation.
And then that slot will fall into as documentation. And then that slot will fall into as well. So it's a question of how long will we keep doing this until we get the approval. But since we are above 13, it doesn't really matter whether it's Q1, Q2, Q3 or Q4 because as we said about the positive treatment of lock in at the earliest Q4, but now it really looks like Q1. So we are working with this.
It's also because we use these models for our internal risk management. So we want them to be right. So this is not only to do with RBA relief. It has a lot to do with having right models. So if a parameter is not documented well enough or questioned, so instead of having margin on conservatism on add on to a parameter we'd rather get it right.
So we can use it for our management. Because if we believe that 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. So if you want to run the bank by the models, we better make them right. So we are pretty patient in doing this right.
And it's working well. We're approaching and we're pretty approval. It's not per country. Now they may have a small discussion. 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. And I mean the countries in Europe are not aligned in this area, which is of course unfortunate and it's not something that is liked by the ECB, the single supervisor and it's not liked by EPA either. We rather have one approach. So 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. And sorry how does that time into when your buyback plan could actually start? Is that probably early as 2014? And have you had any feedback from the regulator as per your plans so far?
Now there are a number of items in that bucket and not only the advance, there are a number of other items. And we also I mean, grow the core Tier 1 as we quote this year. So I don't think it really has a lot of connection. So I think the buyback program can be decided later this year. Anyway, we have very high confidence in these approvals, but they're not instrumental to that effect.
I think it's more capital planning purpose. So I can only say repeat again. We are very transparent. We'll take the decision later. We have some instruments to work with and we will put them together in the most shareholder friendly way.
That's the only objective we have. The buybacks could be an interesting opportunity for obvious reasons. So let's leave it there and come back maybe even sorry afternoon. Autumn. That was a bit wrong.
That was a misstatement. Not in the afternoon. In the autumn or possibly later.
Okay. Henry Christiansen from Citigroup. I have two questions, please. 1 on the smaller geographies operate in and here I'm thinking Baltic, Russia and the Polish operations. As to which criteria you use when you choose invest or divest?
And also if you can give an update where you stand on these geographies? 2nd question on Denmark and the retail. Some of your peers have talked about charging clients with low or no profitability. Is that something you would consider? And 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, many years is actually meaning that all our customers are profitable today. Of course, we are considering every means on this. But I think we prefer another route. There are some other players who want to 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 customer with the bank and how they actually are using us.
So, 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. And
of course, we
are looking into these things. We are we have been moving very fast on the efficiency side, because that was a natural thing to do. We were a little oversized. So 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.
And we are doing whatever we can to increase returns. And 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. And Russia, I think I will leave that too.
No. It's the same.
I mean, the same return, same RVA, same cost disciplines that we have in place. Russia, we have actually kind of tightened up, have been less aggressive on the retail side, focusing more on the wholesale side. And actually we have good returns and we actually are building a good kind of corporate franchise in the kind of the top 100. So in that sense then Russia actually meets our return targets actually exceeds those. But we've the same disciplined RVA cost apply and hence we run a tight ship there.
Oliver, I could add in. Now Michael wouldn't say it because he's already said it. 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 price fixed price grids and all sort of things.
And we have a lot of experience how to price right. And we follow very keenly the price value parameter in our customer satisfaction. So we know very well when price to value for the customer is moving in the right direction or not. So we have done a lot in the years. We have tried many things, but we think we have a good grip on what to do.
And 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 apparently that 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 5, 10 years ahead?
I would say that these markets are an integral part of Nordea today. They are part of our platform. But it's also clear that in this period of time, we are working to get the RE about 15% and we'll get all units about 10% as I said. So we will take the decisions needed to do that. And as I said, it is a mix between as Michael said to assure the cost level is right one.
The second one is how we deploy capital. And so in each segments to be very clear on what part of segments we're actually going for. And it has been very clear and we stated actually for example in Poland we moved up in the household segments successfully recently taking down the cost and so on. So we'll keep doing that. And in any unit wherever it is even in the Nordics, if we cannot meet the hurdle rate we have structural measures to ensure that we don't misallocate our capital.
Thank you. It's Andreas Wortensohn from Exane BNP Paribas. A few questions. First one is on your cost side. In Christian in your CEO comment you talked about IT problems you had in the Nordic region in 2012.
And for us I've done looked at you for a very long time. We remember the old days when we talked about one IT platform and so on. And I remember 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 dollars sorry $550,000,000 How much is driven by IT costs? And what they're really doing on that side?
No. But the total IT cost as such is not a net driver of cost. But we are having also within the IT area we have a lot of growth movement. So we have both on the one side, as we also try to illustrate, we have a number of areas where we can clearly improve cost efficiency. And but this is also one of the areas where we then deploy a relatively big share of the reinvestments we are also mentioning.
So you cannot say they are net driver, but they are a relatively big receiver of the reinvestments we have mentioned.
I think the thing about having 1 IT platform or 1 IT system is not in the plan. And I think no bank really have it to be quite honest. We are working Thorsten'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. And that's a program over these 3 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. So 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. So our whole capital markets area is working on one platform, which is highly efficient. We have the asset management side, the fund side is on one platform. We have a number of other things which are on one platform.
So but there are some core elements in the core systems and they will remain and they will not be changed. And I think I've not met a lot of banks that have actually changed those, But 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. And when that you can say hard work is done deep in the basement then we can actually merge more applications and thereby become both more efficient and less complicated.
So that's the drive we are on to now, but that's not a quick fix. That's hard work.
Okay. And then 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? Let's if we assume it's going to be 0% again or even negative, what would have has an impact on your provisioning?
Provisioning
What is the most what would be the biggest this kind of negative driver for us in the Danish book would be a high increase in unemployment, because that would drive then some negative implications. But simply this kind of overall GDP growth as such it's not it's going to vary it would not have a very direct impact that perhaps then over a longer period of time if it's not picking up then of course sooner or later there would be negative consequences. But this is not the main driver what is the forecasted GDP next
year. And one last very short question. The buyback mandate you're 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 to put the markets to function? Or is it really an indication that you are going to do buybacks?
Well, we need the mandate to buy back shares. So we get the mandate so we can do that. We didn't get it last year because there was no reason to ask for it. We have had it previously in other years. So I would say going just some years back we had it every year as a standby thing.
This time we flag it's 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'm 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. But anyway it's not dependent upon that. I distinctly said that our growth forecast in lending and for that matter in low 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 there's an upside clearly, because 2% GDP growth real and then inflation is of course significantly more than 2% lending growth.
But we don't put that in because the world is very uncertain right now. It has stabilized, but there's still changes out there. So we are not dependent upon those forecasts. I just flagged that it is looking like that. The general picture at least maybe the market is slightly different I don't know, but that's the general picture.
And we are not either factored in the forward rates in interest rates just to make it clear.
Adonis Kjatik, 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%. But then when I see at this chart, you have a huge part that is between 10% 15%.
And 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. And the second question is regarding the capital distribution. You said that you from 2013 distributed more capital to the business units.
And my question is can you say something about the key that you used when distributing this capital? Thank you.
Yes. On the last one we distribute accordingly the economic capital. And as we stated that we have brought our economic capital closer to our equity capital. We have distributed another €6,000,000,000 of economic capital to the business area I. E.
Where the exposures are sitting and meaning that our economic capital now is €24,000,000,000 towards €17,000,000,000 last year. Equity is €28,000,000,000 dollars And the only difference is goodwill and other intangibles. So all these $24,000,000 is put out to business meaning that and that you have the risk adjusted profit and then you have the raw car target, which is the way we are measuring all business areas. And as I said, the average or the ROE of 15% equivalents around close to 19% raw account. So that is how we internally manage capital according to this.
And then your first question was
Yeah. But just on that question, do you allocate 13% of so that you have a 13% core Tier 1 when you do that? Or do you have another key when allocating the capital?
You allocate accordingly to exposure. And so it's a bottom up process. So you have exposures and then you allocate capital accordingly to our internal capital requirement,
yes. That pie chart I showed was the number of units and subunits which are in that pie chart. So you cannot calculate the average ROE out of that of course because some of the units may be small and some may be big. But I hope that we will have all units above 15 by 2015. Then I look forward to our meeting here in our Capital Markets Day 2015 with everything above 15.
But I'm not quite sure it will be that way because the market is of the old 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 will perform very well. We still top tune it. And we will have some units delivering 20 and above and we have that today. So 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.
And if we do not think that can be done, as I said, we don't want to allocate our capital wrongly then we'll take more structural changes. But 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 transaction accounts. So 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.
So you have to think in this dynamic perspective.
Thank you.
And you can hand it back to Per.
Yes. Thank you. Per on board, 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 rates can be reduced by more than 20% due to new modeling. If I don't recall wrongly, your Basel III guidance is now the lowest impact of any of the banks.
I hope to come today and get some impressions and get a better visibility into why I should have paid 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 is related to Arik's presentation and Danish loan losses. You addressed that the accumulated loan losses for Nordea Danmark over the last 5 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.
It gives us a bit more insight into what happened. A bit surprised that that development taking into account that next to you you have Michael Sissing that is Chairman of the Danish Bankers Association and his 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. But unfortunately, I don't think that is explaining a lot. But first of all, I don't think we you can say that we have reduced the expected impact by Basel III and other regulation 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 weighted proposal, which is still a proposal.
So it's around the $23,000,000,000 $24,000,000,000 which is around 100 and 60, 70 basis points, 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 moments in the meantime of course because the RVA usage have also gone down. So you can say some of the effects are mitigated by the fact that our AVA lower or is changed by the fact that our EMEA lower than we expected at that point in time for other reasons also. Then on top of that, you can say, if we 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.
Now we did initiate a program to move forward a lot of our efficiency initiatives. So we haven't moved forward some further rollouts that was anticipated to come slightly later. And we have moved forward and upgraded a number of other initiatives. That's correct. But I don't think as such our number has changed significantly compared already already including in the numbers some efficiency measures.
So of course we are coming in lower on RVA already by end of 12 than we had expected earlier. So I think the picture is slightly different, yes, but I don't think as far as the implication or the measures are significantly different.
This is the issue that after Q3 you promised €15,000,000,000 to €20,000,000,000 over the next couple of next 2 years. And you realize the visible amount in the Q4 and then you increased the promise going forward from the 1st January 13 to $35,000,000,000
Yes. But as I said, RVA have come down somewhat more than earlier. So I mean, when you're then measuring the impacts in bps for example then of course if the denominator goes down then and the denominator is the same then the bps effect goes up you can say. So I'm not sure we have changed that much. But then of course some of the compositions of the we are when we're looking on the impact some of the compositions have changed slightly what we expect from the different type of impacts.
But
on But maybe I should say, I think we are doing more. We have launched the new plants. Of course, there's something new. Otherwise, we wouldn't be here. So that's the first thing.
But that's not very big. I mean, maybe it's from the last €5,000,000,000 or something in our mitigation action. So we have identified more things. We are doing things faster much faster than we anticipated. And that's of course always a difficult thing in guiding the market how fast could we do this.
So that's the next thing. And then we came in lower in 2012 because we worked at it and we have guided for that in increasing every single quarter. But it seems that very few people believe that actually. So we have actually guided for that we would take a tough stance on capital efficiency. But then compared to peers, I mean the others got all the approvals 1 or 2 years ago.
So I think in match rates we don't have low risk weights. So we are just maybe even you could say coming in a bit later than the others for many good reasons. Maybe the most important reason that 2 years we were the highest capitalized bank. So that was maybe at not on top of the agenda to do it very fast. So if you look just in a 3 or 4 year perspective, you will see that the others have the other peers have done significantly more, which we are doing now.
But then on loan losses in Denmark, which I also think is
the explanation.
Yes. As I said that we are applying this kind of 1 bank principle in integrated policies and processes and also that relates to provisioning policies, so that we assess every single customer and portfolio with the same principles all over. And that is also what we have been doing in Denmark since the beginning of the crisis. And according to our own estimation, the level of provisions that we had before this pickup in Q2, Q3 last year was sufficient. And still I believe that that would have been at the right level and sufficient.
Then 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, but we have now been in a way forced a little bit to provide, because we are applying these new rules. And 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. But according to my own assessment according to our own processes and no debt policies and experience, we have provided too much now in Denmark.
And that was exactly the reason that we were a little bit critical towards these rules introduced in Denmark. But that is as simple as that. You want to?
There was a question related to the inspection in December. And 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 are problem customers among the biggest one. And we have not changed anything.
So this provision have been saying anyway. So nothing there.
And actually I want to also point out that in their assessment letter of this inspection and 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. So actually we also got very positive surprise.
You were also mentioning the horizon the 5 year horizon. You can take 1, 2, 3, 4, 5 years you will see the same picture. So there's actually no time issue related to the average share. We will still have been the among the best when it comes to provision level.
As long as we don't look at 2012 assets. So that is the special reason. 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%. So my question is, if Nordea is prepared to sacrifice market share to achieve the repricing?
Yes. No, but it's probably overstated its material. Michael demonstrated that it's part of it, but it's like 20% I think of you
percent. Sorry?
€35,000,000 €200,000,000
Yes. 30 percent. And for cash, but it's also part of it, but it's I wouldn't say material. The whole growth comes from a number of pockets and this is one of them. And of course we will reprice, but I think it was also stated clearly that we're reprising 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. But market share is a difficult animal. We do not have market share objection at all. And 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 are 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. So 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 probability level of the bank to 15% on 13% capital.
Kim Rama, Everly 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?
And 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? Then 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?
I mean, have you basically reduced the credit risk appetite? Or what's the how should we view these two terms? And then finally question on Poland. I understand there has been some speculation on the fact that you might be selling your Polish operations. What's your comment on that?
Thank you.
Okay. If we take these in orders. So these whether or not we have a risk of this kind of additional one offs coming in today's portfolio, the risk is not there anymore, because we have now introduced these new rules and it took few quarters to introduce those to our lending book. Now it's done. Now of course we had run the provisioning process according to the new rules, but no more this kind of one off impact.
Then whether or not you expect the reversals if and when the market is recovering. Naturally then 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. And if and when we see the evidence that that's the case, definitely we will then reverse provisions. And then 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. Then related to this risk appetite of loan losses 25 basis points compared to this what we now show these 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 doesn't have a let's say higher risk portfolio than this. That's the target. That's the ultimate risk appetite. This 16% though is now actual what has happened, so that we have been well within this 25 basis points.
And now that's just 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, But the target level is still there.
And 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%. We also rightsized it because we have 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. But as you when you see into Poland, it's also important to note that Poland is also different segments and different business lines. And 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. And as Christian also stated, we are ready to take structural moves and look into an active portfolio management if needed.
But 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.
Sophie?
Yes. Hi, Sophie Petta Sands from JPMorgan. I had a couple of questions. First of all in Finland your 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 tailwinds from higher rate increases.
And also the losses are very low in the retail bank 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 January. And then 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. And 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 will be the contribution from the deposit side will actually be very limited going forward.
But we can also see that we still have a vast 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. So there will also be a lot of market activity. And so the contribution from market appreciation will come
through in Finland. And as you
are seeing, we have also changed the organization there. So we are ready to capture that and to enhance our position there. When it comes to course, have to be okay. And the license to operate is, 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. But 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 the segments. And that's actually what we're aiming at. But of course, we cannot lose on different single channels.
So we are investing and some of the reinvestments Thorsten was alluding to is also in this area. So of course, we have to stay with the best, but we do not need to be superior in all our channels, but how we take it together and how we present it to our customers that 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 this time continuously release new functionality and we actually come out with a new mobile app which is highly appreciated by the customers. So maybe we are not the front runner right now, but it actually works extremely well and we have very strong penetration. Our customers will use it and they're quite happy with it.
But we can always improve. I think Internet and mobile gaming is not a very big investment. It's any concern for us, but we have to keep investing. I don't think it's any concern for us, but we have to keep investing. But 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, whereas peers are on average because everybody has to do that.
But my understanding is that in Finland the loans are on average have a 5 year tenure compared to for example in Norway where you have you can reprice in 6 weeks. So 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 and you saw the contract I mentioned. So we are not disclosing you can say how much and then repricing and new
level, to a new level significantly higher. I mean the mortgage margins have moved up towards 100 basis points or whatever from say 20, 30 points. And then the repricing will happen. I mean it's more or less mathematically you can calculate how fast you're repricing. And this happened say 1.5, 2 years ago the margins moved up.
So we are sort of repricing the back book on a continuous basis. So that is going to happen. And as Ari said the competitive dynamics have changed. So we will move up the RE internal as well.
But what's the average loan then or tenure of the average? What's the average tenure of a loan in Finland? And what's the average tenure of a mortgage loan in Sweden?
Yes. But it's not the tenure that I mean Or the repricing
can't you isn't it a lot easier to reprice for example in Sweden and Norway compared to Finland? Yes.
Much easier, but that you can say Sweden has repriced. Norway has repriced to a level and they may reprice once again. Finland has is gradually repricing over this there's not a 10, but I think we can say that we expect that to happen over some 5 years.
Yes. So the average this kind of behavior on maturity in the Finnish mortgage loan book is quite short. Actually it's 7 years between 6 7 years compared to Sweden where the Swedish maturity is very long. I don't recall, but it's 15 or something like that. So in actual terms in Finland, the maturity is quite short.
But 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,
old loan
and so that it will just simply take a little bit more time in Finland.
Okay. Thank you.
We have one final question here.
Few final questions. That's Ronny here from Keith Reit. 3 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? And 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? I mean there is plenty of capital in the system to chase assets eventually. That's what was on the revenue side.
And 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? And lastly, just on Poland, should you sell it? Would you be happy to commit to the funding, particular the non Polish wholesale funding in order to get a deal done? Thank you.
Maybe I should start 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. But of course the shift in the customers' preferences has led to a lower margin for the business as such. Going forward, what we and on institutional, I actually showed that the margin had increased and measuring on the value of flow, we believe that we will see an increased margin on the institutional side. Also as we see that the international competition Nordically is actually not driving the fee margin price 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. So yes, there are a margin pressure. But on the other side, we also believe that there will be a shift in the asset mix going forward. So what we plan for in the Private Banking unit is an asset 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 €450,000,000 We have been cutting costs. We are taking out 50% of the cost base over these 3.5 years. So we're just doing it in other ways. So we don't do the typical way we see for international players a huge restructuring cost and then 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. So our cost cutting is efficiency measures and Torsten went through all the details. And that is sustainable cost levels we are building and not sort of one off things, but more sustainable lower cost level. So 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 all studies coming out at least in the retail area.
So I think this way of driving efficiencies is a sustainable way to build the model that I was talking about. And on Poland, I didn't actually understand the question. But if you're asking about a potential Polish transaction
When you look at KBC Santander deal, what a key part of the transaction was that KBC committed to keep the funding from the parent in place.
Oh, never did.
So would you I mean 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 the deal if any or not?
We don't comment on all these rumors about transactions. Fair enough. What about plan a
large number of taxes.
We have taxes in Finland and Norway. 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. So all this is in.
It may go up and be higher. And we have a European level maybe resolution funds coming in. So 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 and it may change some areas as we know if it's extraterrestrial in its nature.
But we have to see the actual way it's described. But we will not have it in our markets as you probably will
know. Thank you.
Okay. So this concludes this Capital Markets Day. We were happy that you were here and participated. Now it's lunch buffet upstairs.
Yeah. Thank you