Good day, and welcome to the Nordea Third Quarter Report 2012 International Telephone Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rodney Alzan. Please go ahead, sir.
Thank you, operator. Welcome to this telephone conference where we will present our Q3 numbers. We will start with the presentation by Christian Clausen, the President and Group CEO Fredrik Reister, Group CFO and Ari Kaffari, Group COO. And then we open the floor for questions and answers. So Christian, please go ahead.
Yes. I will shortly give some highlights and key messages. And the key message is that we deliver on our new normal plan on cost, capital and income. And you can say we are delivering a Q3, which is very much in line with our expectations, slightly lower than Q2, clearly better than Q3 last year and the 1st three quarters combined is clearly better than previously. Actually, it's a record.
So everything is moving in the right direction, I would say. It's very important that we keep costs unchanged. During this year, we have done that for 7 quarters now and we keep doing that excluding FX effects. We have a cost income ratio, which is down. We have an improved return on equity.
We have improved our core Tier 1, because we had good control over our risk weighted assets and it became more efficient. Loan losses are slightly higher. I'm sure we're going to have a lot of questions on that. But the main reason is, of course, that we have this new rules in Denmark, which have made some more provisions necessary, especially general provisions. The underlying credit quality is improving and looks good and the individualized relations are also down.
So as I said, income in Q3 highest ever, year to date profit up 14%. And very much important, we have good business momentum. We attract new customers and we work very closely with these customers. Also we have good progress in building the future bank business model, not only on cost, capital and income. The retail banking area is very much developing the distribution model.
A lot of efficiency is taken out, but also a lot of value added is delivering very much the big move towards the mobile banking, which we have is very important. I will come and speak back to that. Also efficiency, Wholesale Banking, we're mostly developing relationships and adding on a lot of fee income and value added solutions. We're clearly the leading poguana both on syndicated loans and bond issuance in the Nordic area, which is of course a very important service and which also makes it possible to make the long term financing of our corporate customers go on the capital market. And on Wealth Management, we've used very good results with increased efficiency in a much sharper offering and also getting more capital efficient.
And I will turn
it over to Fredrik. Thank you, Christian. As you can see from slide 8, we've had a good start to the year. The 1st 9 months has been good. We didn't come up by 10% cost down by 2% and operating profit up by 24%.
Also the quarter is reasonably good in light of the fact that it's a seasonally lower activity level in Q3 versus Q2. And we have also been affected by accounting issues relating to our structured bond issuance and I'll come back to that issue. But generally a strong result in the Q1. Let me just give you a couple of highlights on the individual lines and sorry with net interest income. Generally, the quarter was fairly slow in terms of demand and especially so on the corporate side.
And as you can see on slide 9, we've had fairly little impact from volumes in more general terms in NII. So from lending impact slightly down and compensated by a volume growth in deposits and primarily on the corporate side. We have compensated for 3 consecutive quarters the decline in deposit income through repricing of our lending book and we have continued to do so, however, not at the same pace in this quarter. So as you can see, we have a continued margin pickup in lending in more general terms, but slightly less than the deposit income loss that we've had from lower interest base this quarter. Treasury continues to do reasonably well at high levels as we had both in Q2 and also now in Q3.
So just go a little deeper into the volumes and margins you can on the following slides, you can see the lending developments for the retail bank. We're in different Nordic countries and CIB is shipping. As you can see, we had to ship more or less in total a flat development in the core retail banks, a decline in CIB and a slight decline also in shipping. But it's worth actually noting that we have increased a lot and done a lot of issuance. We're helping our customers with a lot of issuance of eurobonds and syndicated LUD bonds.
So to a large degree, this decline in lending on the balance sheet has been compensated by strong issuance, which is, of course, for the customers a good solution and it's also in the context of capital consumption and profitability also good for the bank. So generally good service to the customers. If you look at the margin side, you can see that household margins have been largely flat, a little varying over the different corporate margins generally slightly up. Looking at deposits, a very similar picture, but a really strong performance in CIB. And as we have seen before, flight to quality element is clearly in that picture.
So you can see a very significant increase of deposits in CIB at 11% as you can see on that slide, slide 9. Looking at the margins, we're largely affected on the household side and as before not that much on the corporate side. Margins are generally down on deposits on the back of lower interest rates. We're quite pleased with the development of net commission income. It's down 1% quarter on quarter, which is typically a little lower than what is normally the case in the seasonality of Q3 and Q2.
We have an increased asset management. We're up to $211,000,000,000 now in assets under management. And that's a result of good performance and it's also a result of continued strong inflows. Slide to seasonal decline in commissions on payment cards and custody. I touched upon the fair value before in structured bonds.
We have approximately €6,000,000,000 outstanding in structured bonds. And contrary to all the outstanding liabilities of the group that we normally do with amortized costs, The structured bond issuance is done at mark to market. So over the maturity profile of these bonds, we will create volatility in the P and L. That's not really real because in the end, we keep it to maturity. So the fluctuations will only affect in terms of accounting.
This quarter, we've had a negative impact of minus €50,000,000 in the first quarter or in the second quarter, we had plus €50,000,000 So the net swing is €100,000,000 And if you adjust for that, as you can see, the activity level in net fair value was roughly at the same level as we had also in Q2. So continued good performance in net fair value and customer business is holding up. 1 of the strong points of Nordea is of course the funding access and funding conditions. And we have issued SEK 26,000,000,000 up to date for SEK 25,000,000,000 in the 1st 3 quarters of the year, out of which a majority is senior unsecured funding and the rest is largely covered bonds. As you can see on slide 12, we have done approximately €10,000,000,000 or €11,000,000,000 more than the redemption we have for 20 12.
So this continues to be good. And the funding spread and the funding conditions in more general terms as well as the access continues to be really good. And you can see that on slide 12 that we are trading favorably or in comparison to also major countries very, very good condition. Risk or strong capital generation continues. We have had a continuous growth rate of 9% over the last several years since 2,006 and we have nearly doubled the amount of capital in the last 5.5 years.
So that continues to be very strong. And in addition, we have also maintained a very strict control of the risk weighted assets as you can see on slide 14. So this quarter on the back of a little lower growth, a little lower market risk, we have actually decreased risk weighted assets by 2,000,000,000 euros And we continue all the efforts which is a new normal relating to capital efficiency. And of course, that's also something that has been beneficial to that rate. And all in all, if you sum that up, our core Tier 1 ratio, just in line with our planning, is continuing to strengthen in reaching 12.2% at the end of the quarter.
And with these words, I'd like to leave over to Ari.
Thank you. And the credit loss picture is quite familiar to you so that we still have elevated loan loss levels in shipping. And in Denmark, we were in other parts of the loan portfolio, the losses are at moderate level. And the basis the level of loan losses in terms of basis points we have to remember that we are still quite close to our long term average where we are estimated to be. What Christian already said in his opening remarks, Mark, that it's important to realize and observe that now our individually assessed loan loss provisions actually they were down now in Q3 compared to the previous quarter whereas now the move in collective provisions was different so that we increased the collective provisions, whereas in Q2 we made a relatively big release.
I'm coming back to that. On the following page, you see this split to the geographical areas in Nordic countries. As you can see in Denmark still we are at a high level and that was up from the previous quarter. In the following page, I will a little bit more elaborate on that. Still, the reason for these losses in Denmark is household and agriculture customers in large extent not so much on the corporate side.
And then when we go to page 18, then our metrics have been in previous quarters and that's still the same in this quarter that we see signs of stabilization in Denmark. And as you can see, the house prices have been relatively stable now in the last quarters. They have come down from the peak by some 20, 30 percentage points. But now they have been relatively flat with some kind of quarterly volatility. Number of our sales with the improvement prior has been favorable and also the number of bankruptcies which is of course explaining more than what is happening in the corporate side that has come down slightly now with some kind of volatility.
What is important in this page is this bottom right hand side where we decompose this Volus level in Denmark within net terms was up. But then as you can see that what happened in Denmark was that individually assets loan loss provisions to BUVA. That's what was actually quite much down from the previous quarter. And that is that has been at a stable level now for 1.5 years more or less. What was now the change we made in Q3 in Denmark in terms of provisions was that now we started to build up again collective provisions, Whereas in Q2, as you can see, there was a quite high release of collective provisions.
With this release in Q2, we just simply mitigated the impact of these new rules, one off impact of
the new rules.
We saw also in Q3 this kind of tail of this new impact. If we mention some numbers in Q2, the impact of the new rules was roughly €80,000,000 whereas this quarter the impact was some €45,000,000 €50,000,000 The way we see the impact in the next quarters that will be definitely declining impact, so that still we have had some tail on this new implementation impact in Q3. But as you can see, it's important to see that the underlying quality is still relatively stable. Going to shipping there in this quarter, we had a little bit lower loan losses. Actually, we didn't have any new loan loss customer in shipping in Q3.
The reasons for this level of loan losses was partly our increased collective provisions also in the shipping portfolio and then partly then the increased provisions we made for existing old problem customers when their asset values were down. And also the net impact loans in shipping in this quarter, they were somewhat down because the exposures we have to existing debt loans then we were able to take those somewhat down. But on the next page, we see some we show some market factors from shipping. On the right hand side, you see that now we start to be at this long term stable level of shipping order book, which should be more or less between 15% 20%. Of course, it doesn't mean that the problems are over.
We have to still adjust and adapt for these overcapacity, but now the level started to be decent. Then on the left hand side, you can just simply see that why we have been forced to increase our provision for existing broadband customers, the asset values they have still come down in 2011 and 2012. But also there we start to see some kind of signs of stabilization. In the next page, we go to impaired loans, which were also up in this quarter. And also the explanation is the same as we have had in the previous quarters.
It was this development in Denmark, mainly reflecting the impact of new Danish provisioning rules. Whereas you see that the development in other areas was stable and has been stable throughout the year. And then lastly on page 22, we just simply show that what is our provisioning ratios, loan loss provisioning ratios in different portfolios. And as you can see, we have quite highly collateral like portfolios. Shipping provision ratio is 35%, agricultural 30% and real estate is 36%, which by definitions are highly collateralized loan books.
And of course, when we have had this kind of biggest increases in debt loans in these highly collateralized loans, portfolios that is in a way a positive in terms of loan losses because then actually the amount of loan losses is reflecting these highly collateralized levels. Whereas as you can see this part of the portfolio, mostly the corporate portfolio, the lowest line other industries where the provision ratio is 51. But we don't have some so good collateral that has been relatively stable also indicating that the portfolio quality is very good.
With these words, I'll turn back to Christian. Yes. I will give a few comments on the way we build the Future Bank business model. When we say that we change everything in this group, every process and products in new normal, it's not really true because we keep the basis of our strategy and our values relationship strategy. And we have worked with this now for 5 or 6 years and it's really been a fantastic strategy in the good times, middle of the crisis and we actually believe it's even better now in the new normal.
So it is all about building relationship strategy. And that's the only thing we do. We focus on relationship customers, the upper segments in household and the same in corporate And we've got a close relationship. And I'm going to jump straight to page 26 where just saying a little about why this is so important as a strategic note. I know a lot of people are talking about it, but doing it is not exactly the same thing.
That's where it really something happens. So it is about knowing the customer, advising the customer, serving the customer, committing to the customer. And this is creating a lot of benefit for the customers. So we actually create the most loyal customers you can ever imagine. When we measure this, they're super loyal, they're satisfied, they trust in the bank, they get full advice and they just use the bank for everything they know.
And for the bank, this is fantastic because we can focus on the right customer, the customer, the right risk profile and the right needs, the segmentation gets easy. We can identify solutions the right way and we can tailor make solutions in a way that we use as little capital as possible, so we can be much more capital efficient. Of course, we get cost efficient because the customer has all his products with us, so cost reserve is, of course, low. And then we get this huge diversification benefit, which, of course, right now is seen very clearly. We get some losses in some segments where we have no losses in other segments.
So all in all the figures are good. And we get really close connection to the customer. So we see the risks before they even emerge as soon as cash flow starts to dry out. So all in all, a fantastic strategy on which we sell all our activities. Just a few comments on the customer side.
I think it's important to note that during this quarter, we actually developed on the household customer quite significantly our distribution strategy. We rebuilt all the branches, the device branches and service branches. We have taken out a significant cost. We have developed very significantly our mobile applications. And we have now 700,000 mobile active users who go to the bank every 2nd day on the mobile bank.
That's of course a huge advantage. They get advice, they get offerings, they get information and they do it with their fingers instead of their feet. Of course, this is a huge driver. We also do a lot of physical meetings, but that's advisory meetings when we do business and the customer has a need. And on the corporate side, it's worth mentioning that this thing about the strategy that we very much want to help them on to the capital market for their long term needs.
It's clear that we do all the financing for the customers, the short term financing, the working capital, the customer financing, trade financing, all the things we do on a daily basis, we still do of course on the balance sheet. This long term financing we like to do on the capital market, it gives a much better return profile. And we have the advantage here of being the clear leader. We are by far the biggest corporate bank in the Nordic area and we have a substantial situation here as the number one book runner in a number of areas. Also it's worth mentioning as already been highlighted that the new normal does deliver cost efficiency.
We are taking out continuous costs. We have done now that for 7 quarters and we will continue to do it going forward. And this will keep costs flat and we will reduce number of FTEs. This is not only retail, of course, it's all over. It's about being more efficient in all our processes.
So it's not really a cost cutting program. It's much more an efficiency program, which create a very lean bank. And as you see from the key figures, we are creating cost to income ratios, which really compete with 1st in class. And on the RBAs, we are becoming more efficient on our optimization progressions, which are indeed decreasing risk by getting more collateral, better covenants, by doing a number of things that actually put together a portfolio that has less risk. And that combined with improved credit quality means that we've been able to keep our risk weighted assets in check, thereby also pricing up our capital base.
So all in all, I think it's clear after this fantastic presentation that our Q3 numbers are actually very good and we are right on track in delivering a new number plan and building the business model of the future line. Thank
you. Thank you, Christian. And with that, we open up for questions and answers. Operator, please open up the phone line.
Thank you, We will now take our first question from Ronnie Wren of KBW. Your line is open, sir. Please go ahead.
Good afternoon. Thanks for taking the time for the call. A few questions. First on the trading income, the fair value gain bit, I think last quarter this hadn't been pointed out. So I just want to see whether you could give us a bit more history from previous quarters what the fair value gains or losses were.
The second question would be on asset quality. The in particular for shipping and DNB guided towards higher losses next year in their shipping book. Is that an opinion you share from your current point of view? And then lastly, quickly on the Liekainen report in the Nordic peer group, you kind of stand out in terms of the trading share of assets. I just wanted to get your views after you had probably a bit more time to read through the report.
Thank you.
Maybe I can start with the fair value. I'm not 100% sure I understand your question in full. But you can see on slide 11 in the presentation of course the history of fair value. It consists of basically 3 different things. First of all, it includes the well, you can say 4 different things.
First of all, it consists of the customer trading we do or customer flows. And this is risk management product that we provide our customers with and typically hedging of various kinds, interest rates, the dominant part and of course also currency hedging. This amounts to a little bit over €200,000,000 roughly and it has been very stable over the last several quarters actually over the last several years. So it's a very stable part of the net fair value. Then the next part, which is quite small is the inherent, you can say, hedging of these risks that come from the customer flows.
That's a small part in rough terms about maybe about €40,000,000 roughly about €40,000,000 or so in average. Then the 3rd component is life. We have there, which is life and treasury being the 3rd and 4th component and treasury is typically a quite small piece of that. So if you look at what is varying, customer flows fairly stable, so is light. It's reasonably stable over time.
Treasury varying a little bit depending on the trading environment in more general terms. And of course, the hedging activities from customer flows also vary. So that's typically now if I just take this quarter and the structured bonds, we typically do as I said all the issuance at amortized costs. But when we issue structured bonds, we have fluctuations in that portfolio. And it has due to very significant movements in credit spreads this year, it has been very fairly volatile.
And that created some volatility in the Q2 of plus €50,000,000 and it created volatility in the Q3 of minus €50,000,000 Typically that volatility should not be that great. But as you know, the funding spreads have contracted quite significantly during the Q3 and that's where that volatility
comes from.
No, I understand the background of it. I just want to I mean the disclosure is fairly new. This quarter you say high customer demand and negative impact from fair value. The last quarter presentation you only talked about the customer demand and the €50,000,000 positive back then I didn't have at least in my memory. I just want to see whether there was previous quarters where it had any significant impact.
Just to see the underlying numbers.
The difference between the customer results, you can say, is approximately €6,000,000 So it is typically for the seats and a little lower demand in more general terms for expansion products. So but as you can see, it was €6,000,000 out of 2 a bit over €200,000,000 So the difference there is quite small. So we still have a good demand. Okay, cool. Thank you.
If I take the shipping question, so that what we have said in the previous quarters is what we pay also this quarter, so that we expect that this level of elevated loan losses will remain for the next quarters. But we don't foresee any kind of big risk of increased loan loss levels in shipping. So that's one could say that we have been early out we have been having reported this level of losses already now 4 quarters. So that meaning that, of course, we have already covered for the most riskier customers in the past 4 quarters. We still expect that these problems are prevailing and we are not saying that losses are coming down either.
There will be differences between quarters this quarter. It was a little bit down. It can be up and down in the coming quarters. But roughly speaking, this level is what we expect for the future.
Okay. Clear? Yes. And a few comments on ligand. I think we have a report on the table.
We don't know exactly what the law or the legislation will be the directive after the first information. I think Panje has been pretty hesitant whether this would result in redirectives. But if it does and if it comes out the way it looks, even though we don't have any details, then it's not obvious we would be forced to ring fence. But there will be actually a strategic discussion in some of these bigger banks, the 12 banks or so, which are big enough whether they would not choose to ring fence not because you can argue there will be a number of dynamic effects which could suggest that ring fencing could be a strategic advantage. You can also argue the opposite, but that all lies in the details.
We, of course, are one of the big banks in Europe, so we will probably qualify. But this strategic decision is one that is needs to
be taken very carefully. And as
we don't have the details, we cannot at this stage say whether we will be ring fenced or not.
Can I ask one question? I mean from the outside or put it this way, many banks have been saying look a lot of this trading assets is client business. It's not that we have built huge proprietary books. From the outside, it's hard to differentiate. Could you give us a bit of a flavor as to the mix of your trading book?
What is client driven and what is not?
Yes. But we have more or less only client driven. We have more or less no proprietary trading. We have the liquidity buffers and other things in treasury, but that's really minimal in terms of risk. So what we really add is our big derivative broker that is mainly interest rate derivatives FX derivatives, plain vanilla derivatives.
And the only reason why they shoot up on the balance sheet is that we do it gross. So we have both the assets and the liabilities. And typically, we have a business with a customer that's one side of it and then it's hedged through the market. And the transaction with the market is now going to be collateralized most of it through the clearing centers. So it's actually what's remaining on the balance sheet is actually customer exposure.
It's a customer counterparty risk, which you of course take as part of our credit position. So I don't think actually we have any trading assets of any significant nature on our books. We have some points and other things we do as part of our marketing team, but they
are not significant in this respect. Approximately 3% of the risk weighted assets in market risk, that is that's all that there is. And of course, as you alluded to Christian, that's also driven ultimately from the customer business. So it's very, very small.
Excellent. Thank you very much.
Thank you, sir. We will now take our next question from Sophie Petrosen of JPMorgan. Your line is open. Please go ahead.
Yes. Thank you very much for taking my question. Here is Sophie Pettersen from JPMorgan. I just wanted to ask about the Danish asset quality. You have now taken 2 quarters of higher provisions in Denmark and you're stating that the main reason is the stricter rules.
Does this mean that we shouldn't have no more extra provisionings in the quarters to come? Or do you think this will continue or that we will see higher provisions going forward? And then my second question is around your RWAs. Last year at the Capital Markets Day, you were saying that you see around EUR 16,000,000,000 to EUR 20,000,000,000 of RWA reductions from model improvements. And then I think you said earlier today that you expect RWAs to grow roughly 3% year on year.
So if you make the calculation, it looks like you have done roughly half of the EUR 16,000,000,000 to EUR 20,000,000,000 of RWA reductions. Is that correct? Or how much more RWA reductions should we expect? Thank you.
If I start from the impact of this new Danish rule, so that as we have said many times, we think that this kind of underlying risk in Denmark is stable and it's we don't see the risk being very big at that level due to pick up substantially. We still see that this difficult phase in Denmark will continue and perhaps we see this level of losses also going forward. But then when we are coming to this impact on new rules, yes, there was a big one off impact in Q2. There was some kind of, let's say, tailing back in Q3. I expect that impact to decline in the coming quarters because now definitely we have taken a hit on our existing loan book.
Now then what we see in the coming quarters it's just that what is happening in the new customers, which will be in problems. So that of course they are hit by the new rules also. But then that's pretty insignificant.
Sorry? Yes. Yes. When you say new customers, who do you mean by new customers?
When there is a new customer who has problems, then of course, we will impair that customer and of course we will impair that according to the new rules. So then thereby of course on the new rules will be now from our own onwards because now we have only one way to impair customers in Denmark and one way to then assess the needed policies. But there was more this kind of one off impact, what was the impact of the change to these new rules, what he did to our existing credit portfolio. So we don't expect so high impact in the coming quarters.
Okay. So no real impact in the coming quarters?
No.
Yes. The other question you had, first of all, just a clarification. The example you said with 3 percent risk weighted assets was an illustration of example that we used during the conference and we've also used it many times before. So it's not a forecast and it's not actually our forecast. It was just an illustration of the example of what just simply happens to the capital base should reequated assets for example increase by that percentage.
And at the same time, we maintain exactly the same kind of profit level. So it was just an illustration example. So you cannot use that for calculation purposes. It has no bearing. In more general terms, the estimates we did at the Capital Markets Day are largely still valid.
We were basing those numbers on estimates as to the impact of primarily Advanced IRB and also the implementation of IMM Advanced for the CVA portfolio. Both of them are still to be implemented. We have not got clearance yet from the FSA. We expect that to happen within the next couple of quarters either 1 or 2 quarters, but we still of course expect roughly those numbers that we presented. We have and you can see that from also the slide presentation in that we just showed that we have so far achieved during 20112012 approximately a bit over €9,000,000,000 in efficiency gains, out of which a portion of that relates to model implications in international branches, etcetera.
So that gives you roughly the numbers.
So how much more RWA reductions should we expect going forward?
Approximately EUR 19,000,000,000 roughly or EUR 18,000,000,000 in that order of magnitude.
Okay, great. Thank you very much.
Thank you.
Thank you, madam. We will now take our next question from Andreas Hakansson of Exane BNP Paribas. Your line is open. Please go ahead.
Yes, hi, thanks. Just a follow-up from the meeting in Stockholm. Was looking at your loan loss provision charge for this year. And when you say that shipping is going to continue to remain at a high level and Denmark is stable at this level, Given that Sweden, Finland and Norway have been at exceptionally low levels, with the slowdown in the macro economy, do you believe that there's any way that loan losses are going to be flat next year? Or should we expect an increase?
Thank you.
We don't give this type of forecast for the exact level of loan losses. But what we can say is, of course, that naturally we are not immune what is happening in the macro environment. So that if the macro environment is difficult, then we will see some losses in our loan books. That's clear. Of course, one of our strengths is this diversity we have in our loan book.
So that now it has been difficult times in Denmark and in shipping whereas we have also have strong parts. And I'm sure that when the cycle is different then that may change and we can live with the double change. If at some point of time there will be higher losses in other parts of the book, I'm sure that then other market book are performing well. So that's the whole issue of this diversified lending book. So that always there will be strong ones strong books and weaker ones.
On average, we should nevertheless be on a relatively moderate level within our risk appetite. And that is exactly the picture I see that we are able to also execute on the coming quarters. So that I'm not able to give any kind of precise estimation, but I don't foresee that we would have a big risk of materially increased loss levels in the future years, provided that we are not going to any guide of our macro crisis type of scenario, but that's a little bit different story.
And just to follow-up, given that your coverage ratio has been falling quite a bit this year, do you see any scope that you would be willing to take that below 40% next year?
As you see from this one graph, it very much depends that where the problems are. So that if we see increased problems in these highly collateralized portfolios where we do have, for example, coverage ratio below 40, then of course, we will still go down. But then again, if that's a bit stable and then if there would be an increase in those parts of portfolio where the coverage ratio is higher, then of course, we will see higher, let's say, provision ratios. That's one indication you may take from this Q3 loan losses is that you saw that now we started to increase our collective provisions, whereas we have been decreasing those collective provisions in previous quarters. So then that may be one indication that we are not going down anymore so much in the provisioning ratios going forward.
Thanks very much.
Thank you, sir. We will now take our next question from Jeff Dawes of SocGen. Your line is open, sir. Please go ahead.
Great. Thank you very much. Jeff Dawes here from Gen. Perhaps if I can ask 2 questions. First of all, a little bit of a follow-up on the last question.
Obviously, if we look at the corporate outlook, I'd say it's turned down particularly in the last month of the quarter and perhaps the start of Q4. Can you talk a little bit not just about the credit quality trends that we've touched upon, but also the merchant banking and wholesale banking revenue trends that might impact on for the next 6 to 12 months? And the second question going towards the coverage ratio and I think I'll focus on the shipping book here. In terms of credits that have been worked out or more advanced age of work out, has that average 35% coverage ratio proved to be sufficient? Or have there been makeup provisions once you reach the latter stages of workouts?
Thank you.
If I take this corporate both questions, corporate outlook and revenue trends. Of course, we have seen that there is not a big demand on corporate loans now unfortunately, I would say, in the Nordic regions. But that doesn't mean that we are not able to let's say increase our income. We are let's say having very active business relationship with large corporate customers. We are helping them to go to the debt capital markets.
And we are, of course, reprising the loan book. We are selling them good writing services, cash management services, so forth and so on. So there is no this kind of direct link between the corporate outlook and economic growth and our income from the corporate clients. So that's our ambition is still and I'm sure that we are able to increase our income from the corporate clients. Because what usually happens in this type of difficult times is that those corporate clients they are coming more and more to the few house banks which they rely on and also some international players are disappearing from the market, which is also happened this time.
So that gives us more of these business opportunities with these large corporates. So that's one of our strengths. So we are not so concerned about the total income outlook and business outlook when it comes to the corporate segment even if this kind of growth outlook is not very strong.
Right. So fee income should be more stable than the outlook suggests?
Sorry. One last question.
So I said fee income and particularly Corporate Investment Banking fee income should be more stable than suggested by the current outlook?
Yes. And then which outlook are you referring to when you say that?
Do you want to take a look at the Specifically
the Swedish corporate outlook and the Nordic corporate outlook where we're seeing days such as PMIs and earnings trends trend downwards?
Then the shipping coverage ratio, yes, the way it usually goes is that we are early out in observing these kind of risk customers and making preparing those and making provisions. When those customers are performing, then of course, we are using usually we are valuating to assets to market values, not any kind of forced sales values. Then again, when the workout case is the thorough pressing and if we are not able to find any kind of good solution and when we are approaching towards this type of forced sale and then default case, then we are increasing provisions. And then and then thereby also the coverage ratio is increasing. Then when we take a look at, okay, what has happened then in those cases where we have seen real default and when we have then sold forced sold to the shipping fleet, in that phase, we have not seen that there has not been a need of increasing provision, so that we have been able to follow-up this provision level throughout this work out process quite closely.
And we have not we have avoided this kind of tail impact in the loan loss provision. So that our model seems to work well. So that we start early, then we increase provision ratios if it's turning worse and values are going down. And then in the end, we seem to be, say, enough provided.
Okay. Could you perhaps give
us an indication of where that provision ratio ends up for a company in the advanced stages of workouts?
It depends so much on the customer and what is the size of the fleet and all that so that we always take these customer by customer bases and evaluate each case as individual case. So it's impossible to give any guidance this type of let's say average numbers.
Okay. That's fair. Thank you very much.
Thank you, sir. Our next question comes from Nick Davy of UBS. Your line is open. Please go ahead.
Yes. Good afternoon, everyone. Two questions please from my side. The first on funding. If I look at your slide 12, you're issuing about the 4th year in a row now around €30,000,000,000 of long term funding.
That's compared to €15,000,000,000 which is maturing. I'd just like you just to expand a little bit please on your funding strategy and how you're measuring and planning the issuance of senior funding? Because I think as long ago as a year ago, I remember rhetoric saying we think that we have match funded from a maturity behavioral maturity perspective. If I look in your annual report, there's a lot in there about having a surplus of stable liabilities over stable assets. So I'm just interested to see why in this zero growth environment there's continuing prefunding or over issuance.
The second question please on expenses. I realize you're battling FX impacts, but FTE is down 6% on the year. Staff costs flat. Can I just ask you to talk a little bit around what else is going into the staff cost line here, which is keeping things inflated? And really, what sort of macro environment or revenue deterioration environment we would need to see for you to revisit the cost ambitions as some of your peers seem to be doing?
Thank you.
Hi, Nick. Let me try and answer your question. Long term funding, if we start in that end, as you rightly remember, we are very close to match funded on a behavioral standpoint. Of course, that's not the case contractual. So in all for all general purposes, the long term funding volume will be a consequence of basically three things.
First of all, pre funding, of course, and the level of pre funding we wish to make. The second thing is, of course, extension of the book is such and the third thing is growth. So yes, we are continuing to extend our funding maturity profile and of course also strengthening, although net stable funding in its current shape and form is not likely to ever be there, but it may be in some other shape and form, we're continuing to remain strong. But you are right, we are maintaining a very conservative funding strategy and it's also a strong point for us. And of course, what you're referring to in stable assets versus stable funding is one of the parameters we actually manage our liquidity risk with and it should always be that way that we have stable funding more than stable assets.
If that's not the case, of course, we run a risk that is too high. So I think it's likely given the regulatory environment and the general conservatism that we entertain, I think it's likely that we will continue to maintain a reasonable high issuance level. I think that goes without saying. But of course, it's tied into the growth level of the banks. So if we have a flat growth environment and you see no growth of the lending book as an example, then of course the issuance will not be there to that degree.
So of course, we adapt to reality. So then the second thing, the staff costs, of course, what we have done there is we've taken out 6% as you rightly say, but of course, it's unevenly spread in time. So it doesn't actually have for the full year just 6 percent plus cost reduction. This is done gradually over time. And in comparison, we have basically staff cost inflation plus an increase in variable salary and that's the total of the equation.
I'd like to add maybe one thing and that is that we see a slight also mix change of the employees that leave the bank, if I may put it that way. So it is not always the fact that if you have 6% reduction of people, you don't necessarily have exactly 6% reduction of underlying staff costs. It may be a difference in mix and there are a couple of examples that have an impact. But those are the large parameters. Then finally, I think your question and maybe Christian wants to take or add on to that question, but should we have a need to revise cost targets, I think what we have defined and designed with our cost target is very much related to the fact that we continue to strengthen our business, we grow our income and we maintain our very strong business model that and the relationship model that we have.
So you can say we are becoming more efficient mid fly, put it that way. It's not a difficult thing to reduce costs much more than we do, but that would need to be coupled with taking away activities or reducing or lowering income in all sorts of different ways. So we think this is a very challenging, very challenging target to achieve while still maintaining a very high level of activity including taking new customers, increasing volumes etcetera. So we think it's challenging, but very adequate target. I'm not sure
if you want to add
something Christian. Yes. We'll certainly add something because I think it is extremely challenging because we are building the bank. We're building we have a future business model. We're investing in IT.
We're investing in a number of value creating things for customers. We're investing in the whole new regulatory setup, which is certainly not a cheap one. And at the same time, we keep costs flat. So we are not just cutting costs. We are making the bank much, much more efficient.
And we're doing that for now 7 quarters in a row and we're going to continue several quarters. So we'll keep the running cost flat. Then FX and variable salary and as the Q1 also and lender depreciation may pop up and down
and so on. But the
actual running cost we keep flat because this is a good discipline in the bank. We have to free up costs to invest in the value propositions to customers and that goes for business areas and that works pretty well. We have a strong discipline on this. And this will over time create a cost efficiency, which I think will be very, very strong.
Okay, very clear. Thank you.
Thank you, sir. Our next question comes from Claire Keane of RBC. Your line is open. Please go ahead.
Hi, everyone. I have two questions please. My first relates to Basel III. In the 3 documents you put out today, there's just 2 mentions of Basel III and both of those relate to liquidity. Your peers are helpful given us a lot of guidance on the different sensitivities under Basel III.
And I was just wondering if your lack of guidance in the reports and mentions of Basel III is a reflection on how you look at capital within the group? And also if you could provide an update on the RWA inflation that you gave us previously of EUR 14,000,000,000 and your target to reduce that EUR 19,000,000,000 and where you're going on that? And then my second question relates to your profitability. You mentioned in the report you've had one of the most stable return profiles of all the Nordic banks. But when you look at your return on assets, it's one of the lowest.
It's lowest of the Nordic banks currently. And it's quite clear to see that as you build capital your leverage is going to come down. So where specifically are you trying to address an improvement in return on assets? And is your loss of market share in some countries designed to improve the asset base that you have and the profitability on that? Thank you.
Yes. If I may start, your first of all, it's a good point, Claire, that we may not have given that much guidance and that may be ignorant from our side since we have been giving it so much before. So we could have elaborated probably to the same extent we have done before. But in short, we expect the impact from Basel III or CRD IV, if you put it that, CWA, together with IAS 19 to be on 20 basis points. This is predominantly of course, if you take the IAS 19, it is what it is in the pension funds.
And if you take the Basel III component or COD4 component that is largely CVA risk. So I think we are we've been quite clear for some time now on those impacts. And if you also primarily elaborate a little bit, we've also communicated that we expect largely to compensate this impact with both efficiency gains and model implications and the 2 dominant ones are of course advanced IRB for the corporate portfolio and the IMM advanced for the CVA risk. And hence, the 12.2% you see in the CET1 ratio is largely what we also expect on after having implemented IAS 19 and the AVEVAIL-four. Then your other question on stable return on assets and being the lowest.
First of all, let me just point to one thing that you perhaps did not answer and that is that we are in of course, the of course the Nordics and in some other countries. And of course, we can only compete in actually look at the return profile of, for instance, Nordea in Sweden, you will find us to be at par with the number 1. We would be clearly at par or better in Finland. We would be clearly number 1 in Denmark and not far away in Norway. So you can say the average return, if you put it that way, is actually just a function of our diversification, and that is also, of course, bringing stability.
So we really perform well in all the countries we're in. Then if you look at your question, which was total return on assets, it's very much in our case impacted by a very significant derivative. And the gross book, of course, is fairly irrelevant measuring in terms of return on assets. So you have to when you do these calculations, you have to adjust for it. And if you do that, you will see that we match very well our competition in terms of return on assets.
I think it's important to stress that Nordeus is not a Swedish bank. It's a Nordic bank. We have 20% of our business in Sweden. And Sweden is right now as I said during the day it's paradise on Earth in economic terms, also in other terms, but also economic terms because I mean the sweet spot of all sweet spots right now is to be a Swedish mortgage savings bank. Now that may not be the most fantastic strategy in the long term, but right now that's the sweet spot because the margins are high, interest rates are high in Sweden.
So a lot of good things goes for that. And our mortgage and savings bank in Sweden is actually doing great and powered the best. So but the rest is of course not like that and we know the reality out there. So if we look at the total bank which is one of the as you well know 1 of the 5 largest banks in Europe on market cap. So if you compare to European banks also told today by the CNBC reporter that they are one of the top 5
REs in Europe and I think
that is true. So in that sense, you have to benchmark this right and I think in there the return on assets also compares very well.
Thank you. Our final question today comes from Riccardo Rovere of Mediobanca. Your line is open. Please go ahead.
Good afternoon to everybody and thanks for taking the time for my question. I have just one follow-up on NII. The policy rates are going down fairly significantly in all regions where you are operating, not just Sweden. Just wonder whether you have an idea if you can cope with this kind of pressure on the deposit side maybe acting on the repricing on the loan book? Or have we come to a certain level of rates where there is nothing else that you can do when you have just to wait for a possible increase in policy rates in the coming quarters, in the coming months?
Thank you.
I think it's fair to say that we never give forecast as to margins, but we have never given the fact that we continue to strive for repricing on the lending front book, not just as a compensation for deposit income coming down, but generally as a consequence of margin should be higher on the back of funding costs, etcetera. So of course, we will continue to do so and we are likely to be able to be successful in that. And a little depending, of course, on the jurisdiction. But generally, I think we will strive to continue to reprice. And one indication you may or may not find valuable is, of course, you've got to compare the front book versus the back book.
In many parts of the bank, we can clearly see that the front book is not leased in Finland is clearly front book is clearly higher than the back book. So it is our ambition to continue to try and reprice. So it's not about just sitting and waiting for things to happen. It's a very active pricing management that we entertain. And one of the you can say finally maybe one of the good things about really low interest rates is that they probably can't get that much lower.
So you can say you can always question the actual downside. But time will tell and we will continue to strive for fair pricing as we have done in several quarters now.
Okay. Thank you.
Thank you.
Okay. Thank you very much for listening into this presentation and all the good questions. We will now travel to London and we hope to see a lot of you there at the breakfast meeting tomorrow morning. So thank you and goodbye.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now