Good day, welcome to the Nordea Bank 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 Alfvén. Please go ahead, sir.
Thank you, operator. Welcome to this telephone conference where we will present our third quarter numbers. We will start with the presentation by Mr. Christian Clausen, the President and Group CEO, Fredrik Rystedt, Group CFO, and Ari Kaperi, Group CRO, and t hen we open up the floor for questions and answers. Christian, please go ahead.
I will shortly give some highlights, some key messages. The key message is that we deliver on our new normal plan on cost, capital, and income. 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 first three quarters combined is clearly better than previously. Actually, it's a record.
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 seven quarters now, and we'll keep doing that, excluding FX effects. We have a cost-income ratio which is down. We have improved return on equity. We have improved our Core Tier 1 because we had good control over our risk-weighted assets and have become more efficient. Loan losses is 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 these 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 provisions are also down.
As I said, income in Q3 highest ever. Year-to-date profit up 14%. 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 add is delivering very much the big move towards the mobile banking, which we have. It's very important. I will come a bit back to that.
Also efficiency, wholesale banking, we're much developing relationships and adding on a lot of fee income and value-added solutions. We're clearly the leading bookrunner 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. On wealth management, we've used very good results with increased efficiency and a much sharper offering and also getting more capital efficient. I would turn over to Fredrik.
Thank you, Christian. As you can see from slide eight, we've had a good start to the year. The first nine months has been good, with income up by € 10, cost down by two, 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. We have also been affected by accounting issues relating to our structured bond issuance, and I'll come back to that issue. Generally, a strong result in the first quarter.
Let me just give you a couple of highlights on the individual lines and start it with net interest income. Generally, the quarter was fairly low in terms of demand, and especially so on the corporate side. As you can see on slide 9, we've had fairly little impact from volumes in more general terms in NII. From lending, in fact, slightly down and compensated by a volume growth in deposits and primarily on the corporate side. We have compensated for three 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.
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 rates this quarter. Treasury continues to do reasonably well at high levels as we had both in Q2 and also now in Q3. Just go a little deeper into the volumes and margins.
On the following slides, you can see the lending developments for the retail bank, the different Nordic countries, and CIB Shipping. As you can see, we have more or less in total a flat development in the four retail banks, a decline in CIB, and a slight decline also in Shipping. It's worth actually noting that we have increased a lot and done a lot of issuance.
We're helping our customers a lot of issuance of €obonds and syndicated loans. 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. Generally a good service to the customers.
If you look at the margin side, you can see the household margins have been largely flat, a little varying over the different countries, and the corporate margins generally slightly up. Looking at deposits, a very similar picture, a really strong performance in CIB.
As we have seen before, a flight-to-quality element is clearly in that picture. You can see a very significant increase of deposits in CIB at 11%, as you can see on that slide. Slide nine. 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 billion now in assets under management, and that's a result of good performance, and it's also a result of continued strong inflows. Slight seasonal decline in commissions on payment cards and custody. I touched upon the net fair value before in structured bonds.
We have approximately €6 billion outstanding in structured bonds and contrary to all the outstanding liabilities of the group that we normally do with amortized cost, the structured bond issuance is done at mark to market. Over the maturity profile of these bonds, we will create volatility in the P&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 € -50 in the first quarter, or in the second quarter, we had € +50, the net swing is € 100 million. 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. Continued good performance in net fair value and customer business is holding up.
One of the strong points of Nordea is, of course, the funding access and funding conditions. We have issued € 26 billion up to date for 2025 in the first three 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 billion or € 11 billion more than the redemption we have for 2012. This continues to be good. The funding spread and the funding conditions in more general terms as well as the access continues to be really good. You can see that on Slide 12, that we are playing favorably or in comparison to also major countries, very good condition. Strong capital generation continues.
We have had a continuous growth rate of 9% over the last several years since 2006. We have nearly doubled the amount of capital in the last five and a half years. That continues to be very strong. In addition, we have also maintained a very strict control of the risk-weighted assets, as you can see on slide 14. This quarter, on the back of a little lower growth, a little lower market risk, we have actually decreased risk-weighted assets by € 2 billion. We continue all the efforts within the new normal relating to capital efficiency. Of course, that's also something that has been beneficial to that rate. All in all, if you sum that up, our Core Tier 1 ratio, just in line with our planning, is continuing to strengthening and reaching 12.2% at the end of the quarter.
With these words, I'd like to leave over to Ari.
Thank you. The credit loss picture is quite familiar to you so that we still have elevated loan loss levels in shipping and in Denmark, where in other parts of the loan portfolio, the losses are at moderate level. 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 was 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 with the move in collective provisions, it 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, that was up from the previous quarter. In the following page, I will elaborate a little bit more 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. When we go to page 18, our message has been in previous quarters, and that's still the same in this quarter, that we see signs of stabilization in Denmark. 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. Now they have been relatively flat with some kind of quarterly volatility.
Number of sales, which is an important driver, has been stable, the number of bankruptcies, which is of course explaining more than what is happening at the corporate side, that has come down slightly now with some kind of volatility. What is important graph in this page is this bottom right-hand side where we decompose this loan loss level in Denmark within net terms was up. As you can see that what happened in Denmark was that the individually assessed loan loss provisions, the blue bar, that's what was actually quite much down from the previous quarter. That has been at a stable level now for one and a half 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 of the impact of the new rules. We saw also in Q3, this tail of this new impact. If we mention some numbers, in Q2, the impact of the new rules was roughly € 80 million, whereas this quarter the impact was some €45 million, € 50 million. The way we see the impact in the next quarters, that will be definitely declining impact, still we have had some tail on this new implementation impact in Q3. 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 we increased collective provisions also into shipping portfolio, partly the increased provisions we made for existing old problem customers when their asset values were down. The net impaired loans in shipping in this quarter, they were somewhat down because the exposures we have to existing impaired loans, I think we were able to take those somewhat down. On the next page, we show some market factors from shipping. On the right-hand side there you see that now we start to be at this long-term stable level of shipping order books, which should be more or less between 15% and 20%. Of course, it doesn't mean that the problems are over.
We have to still adjust and adapt for this overcapacity, but now the levels start to be decent. On the left-hand side, you can just simply see that why we have been forced to increase our provision for existing problem customers' asset values. They have still come down in 2011 and 2012. Also there we start to see some signs of stabilization. In the next page, we go to impaired loans, which were also up in this quarter. 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. Lastly, on page 22, we just simply show that what is our provisioning ratios, loan provisioning ratios in different portfolios.
As you can see, we have a quite highly collateralized portfolios. Shipping provisioning ratio is 35, agriculture is 30, and real estate is 36, which by definition are highly collateralized loan books. Of course, when we have had this biggest increases in impaired loans in these highly collateralized 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 you can see, this part of the portfolio, most of the corporate portfolio, that the lowest line, other industries where the provision ratio is 51, where 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 share back to Christian.
I will give a few comments on the way we build the future bank business model. When we say that we change everything in the group, every process and product to new normal is not really true because we keep the basis of our strategy and our values, the relationship strategy. We have worked with this now for five or six 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. It is all about building relationship strategy. That's the only thing we do. We focus on relationship customers, the upper segments in household, and the same in corporate. We build close relationship. I will 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. It is about knowing the customer, advising the customer, serving the customer, committing to the customer. This is creating a lot of benefits for the customer. We actually create the most loyal customers you can ever imagine. When we measure this, they are super loyal, they are satisfied, they trust in the bank, they get full advice, and they just use the bank for everything. For the bank, this is fantastic because we can focus on the right customer, the customer with the right risk profile and the right need. 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 to serve is of course low, and then we get this huge diversification benefit. Of course, right now is seen very clearly. We get some losses in some segments where we have no losses in other segments. All in all, the figures are good. 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. 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, advice 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 second 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.
On the corporate side, it's worth mentioning that the thing about the strategy that we very much want to help them onto 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. 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 1 book runner in a number of areas. It's worth mentioning, as already been highlighted, that the new normal does deliver cost efficiency.
We are taking out continuous costs. We've done now that for seven quarters, and we will continue to do it going forward. 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. It's not really a cost-cutting program. It's much more an efficiency program, which create a very lean bank. As you see from the key figures, we're creating cost-income ratios which really compete with best in class. On the RWAs, we are becoming more efficient on our optimization programs, 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.
That combined with improved credit quality means that we've been able to keep our risk-weighted assets in check, and thereby also driving up our capital base. 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 normal plan and building the business model of the future bank. Thank you.
Thank you, Christian. With that, we open up for questions and answers. Operator, please open up the phone line.
Thank you, sir. If you would like to ask a question at this time, please press the star key followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by * 2. Again, please press * 1 to ask a question. We'll pause for just a moment to allow everybody to signal. Thank you. We will now take our first question from Ronit Ghose of Citi. 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 wanted 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. In particular for shipping, DNB guided towards higher losses next year in their shipping book. Is that an opinion you share from your current point of view? Then lastly, quickly on the Liikanen report. In the Nordic peer group, you 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.
I can start with the fair value. I'm not 100% sure I understand your question in full, you can see on slide 11 in the presentation, of course, the history of fair value. It consists of basically three different things. Or you could say four different things. First of all, it consists of the customer trading we do or customer flows, and this is risk management products that we provide our customers with, and typically hedging of various kinds. Interest rates is the dominant part. Of course also currency hedging. This amounts to a little bit over € 200 million roughly, and it has been very stable over the last several quarters, actually over the last several years. It's a very stable part of the net fair value.
Yeah. 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, roughly about € 40 million or so in average. The third component is life we have there. Life and treasury being the third and fourth component. The treasury is typically a quite small piece of that. If you look at what is varying, customer flow is fairly stable. Is life. It's reasonably stable over time. Treasury varying a little bit depending on the trading environment in more general terms. Of course, the hedging activities from customer flow is also varying. That's typically it. Now, if I just take this quarter and the structured bond, we typically do, as I said, all the issuance at amortized cost.
When we issue structured bonds, we have fluctuations in that portfolio, and due to very significant movements in credit spreads this year, it has been very volatile. That created some volatility in the second quarter of plus € 50 million, and it created volatility in the third quarter of minus € 50. Typically, that volatility should not be that great, as you know the funding spreads have contracted quite significantly during the third quarter, that's where that volatility comes from.
No, I understand the background of it. The disclosure is fairly new. This quarter you say a high customer demand and negative impact from fair value. The last quarter presentation, you only talk about the customer demand and the € 50 million 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 million. It is typically for the season, a little lower demand in more general terms for risk management products. As you can see, it was €6 million out of a bit over € 200 million. The difference there is quite small. We still had a good demand.
Okay, cool. Thank you.
If I take the shipping question, what we have said in the previous quarters is what we say also this quarter, we expect that this level of elevated loan losses will remain for the next quarters. We don't foresee any kind of big risk of increased loan loss levels in shipping. Perhaps one could say that early out we have been having reported this level of losses already now four quarters. Meaning that of course we have already covered for the most riskier customers in the past four quarters. We will 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, roughly speaking, this level is what we expect for the future.
Okay, clear.
Yes, a few comments on Liikanen. 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 Barnier has been pretty hesitant whether this will actually result in directives. 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. There will be a clear strategic discussion in some of these bigger banks, the 12 banks or so, which are big enough, whether they would opt to ring-fence or 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 €ope, we would probably qualify. This strategic decision is one that needs to be taken very carefully. As we don't have the details, we cannot at this stage say whether we will be ring-fenced or not.
Yeah. Can I ask one question? I mean, from the outside, or put it this way, many banks have been saying, look, a lot of these 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?
Yeah, 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 buffers, but that's very minimal in terms of risk. What we really add is our big derivative book, and that is mainly interest rate derivatives, FX derivatives. It is plain vanilla derivatives. The only reason why they shoot up on the balance sheet is that we do it gross. We have both the asset and the liability, and typically we have a business with a customer, that's one side of it, and then it heads through the market. The transaction with the market is now going to be collateralized, most of it, through the clearing centers. What's remaining on the balance sheet is actually a customer exposure.
It's a customer counterparty risk, which we of course take as part of our credit decision. I don't think actually we have any trading assets of any significant nature on our books. We have some bonds and other things we do as a part of our market, even they are not significant in this respect.
Approximately 3% of the risk-weighted assets in market risk. That's all that there is. Of course, as you alluded to, Christian, that's also driven ultimately from the customer business. It's very, very small.
Excellent. Thank you very much.
Thank you, sir. We will now take our next question from Sofie Peterzens of JP Morgan. Your line is open. Please go ahead.
Yes, thank you very much for taking my question. Here is Sofie Peterzens from JP Morgan. I just wanted to ask about the Danish asset quality. You have now taken two quarters of higher provisions in Denmark, you're stating the main reason is the stricter rules. Does this mean that we should 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? My second question is around your RWAs. Last year at the Capital Markets Day, you were saying that you see around € 16 billion-€20 billion of RWA reductions from model improvements. I think you said earlier today that you expect RWAs to grow roughly 3% year-on-year.
If you make the calculation, it looks like you have done roughly half of the € 16 billion-€20 billion of RWA reduction. Is that correct? How much more RWA reduction should we expect? Thank you.
If I start from the impact of these new Danish rules. As we have said many times, we think that this underlying risk in Denmark is stable, we don't see the risk being very big at that level to pick up substantially. We still see that this difficult phase in Denmark will continue, perhaps we see this level of losses also going forward. When we are coming to this impact on new rules, if there was a big one-off impact in Q2, there was some kind of, let's say, tail impact in Q3. I expect that impact to decline in the coming quarters, because now definitely we have taken the hit on our existing loan book. What we see in the coming quarters, it is just that what is happening in the new customers, which will be in problems.
Of course, they are hit by the new rules also. That's pretty insignificant.
Sorry.
Yes.
When you say new customers, who do you mean by new customers?
When there is a new customer who has problems, of course we will impair that customer, and of course we will impair that according to the new rules. Thereby, of course, the impact on the new rules will be for onwards. Now we have only one way to impair customers in Denmark and one way to assess the needed loan losses. That was more this one-off impact. What was the impact of the change to these new rules, what hit to our existing credit portfolio?
Okay, thank you.
We don't expect so high impact in the coming quarters.
Okay. No real impact in the coming quarters.
No.
The other question you had, first of all, just a clarification. The example you said with 3% risk-weighted assets was an illustrational example that we used during the conference, and we've also used it many times before. It's not a forecast, and it's not actually our forecast. It was just an illustrational example of what just simply happens to the capital base should risk-weighted assets, for example, increase by that percentage and at the same time we maintain exactly the same kind of profit level. It was just an illustrational example, so you cannot use that for calculation purposes. It has no bearing. In more general terms, the estimate 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 one or two quarters. We still, of course, expect roughly those numbers that we presented. We have, and you can see that from also the slide presentation that we just showed, that we have so far achieved during 2011 and 2012, a bit over €9 billion in efficiency gains, out of which a portion of that relates to model implications in international branches, et cetera. That gives you roughly the numbers.
How much more RWA reduction should we expect going forward?
Approximately €19 billion, roughly, or €18 billion 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 to follow up from the meeting in Stockholm. I 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 macroeconomy, 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. What we can say is, of course, that naturally, we are not immune to what is happening in the macro environment. If the macro environment is this 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 books, so that now it has been difficult times in Denmark and in shipping, whereas we also have strong parts. I'm sure that when the cycle is different, then that may change, and we can live with that type of change. If at some point of time there will be higher losses in other parts of the book, I'm sure that then other parts of the book are performing well.
That's the whole issue of these kind of diversified lending books, that always there will be strong books and weaker ones. On average, we should nevertheless be on a relatively moderate level within our risk appetite. That is exactly the picture I see that we are able to also execute on the coming quarters, that I'm not able to give any kind of precise estimation, but I don't foresee that then we would have a big risk of materially increased loss levels in the future years, provided that we are not going to any kind of a macro crisis type of scenario, but that's really a different story.
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 where the problems are. 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. Again, if that starts to be stable, if there will 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. That may be one indication that we are not going down anymore so much in the provisioning ratios going forward.
Okay. Thanks very much.
Thank you, sir. We will now take our next question from Geoff Dawes of Société Générale. Your line is open, sir. Please go ahead.
Great. Thank you very much, Geoff Dawes here from Société Générale. Perhaps if I can ask two 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 the fourth quarter. 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 and that might impact on for the next six to 12 months? 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 at more advanced stage of work out, has that average 35% coverage ratio proved to be sufficient or have there been make up provisions once you reach the latter stages of work outs? Thank you.
If I take 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. 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, we are of course, repricing the loan book. We are selling them advisory services, cash management services, so forth and so on. There is no this kind of direct link between the corporate outlook and economic growth and our income from the corporate clients. That our ambition is still, and I'm sure that we are able to, let's say, increase our income from the corporate clients.
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. Also some international players are disappearing from the market, which has also happened this time. That gives us more of these kind of business opportunities with these large corporates. That's one of our strengths. That we are not so concerned about the top line income outlook and business outlook when it comes to the corporate segment, even if this kind of growth outlook is not very strong.
Right. Fee income should be more stable than the outlook suggests.
Sorry, what was the question?
I said fee income, and particularly Corporate Investment Banking fee income should be more stable than suggested by the current outlook.
Yes. Which outlook are you referring to when you say that?
Just s pecifically the Swedish corporate outlook and the Nordic corporate outlook, where we're seeing data such as PMIs and earnings trends trend downwards.
Yeah. The shipping coverage ratio Yes. The way it usually goes is that we are early out in observing these kind of risk customers and impairing those and making provisions. When those customers are performing, then, of course, we are using usually we are valuating assets to market values, not any kind of forced sales values. Again, when the workout case is progressing, 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 default case, then we are increasing provisions. Thereby also the coverage ratio is increasing. 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 forced sold the shipping fleet.
In that phase there has not been a need of increasing provisions, so that we have been able to follow up this provision level throughout this workout process quite closely, and we have avoided this kind of tail impact in the loans 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. Then in the end, we seem to be 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 workout?
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 basis and evaluate.
Right
each case as individual cases. It's impossible to give any kind of 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 Davey 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 for about the fourth year in a row now around €30 billion of long-term funding. That's compared to €15 billion, 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're match funded from a 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. I'm just interested to see why in this zero growth environment there's continuing pre-funding or over issuance. The second question, please, on expenses.
I realize you're battling FX impacts, 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? 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 questions. 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 for contractual. For all general purposes, the long-term funding volume will be a consequence of basically 3 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 such, and it's growing. 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.
You are right, we are maintaining a very conservative funding strategy, and it's also a strong point for us. 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. 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. Of course, it's tied into the growth level of the bank.
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. Of course, we adapt to reality. The second thing, the staff cost, 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% flat cost reduction. It's done gradually over time. In comparison, we have basically staff cost inflation plus an increase in variable salary, and that's
That's the total of the equation. I'd like to add maybe 1 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. 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. Those are the large parameters.
Finally, I think your question, and maybe Christian wants to take or add on to that question, 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 and the relationship model that we have. You can say we are becoming more efficient mid-flight, 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. We think this is a very challenging target to achieve while still maintaining a very high level of activity, including taking new customers, increasing volumes, et cetera.
We think it's challenging but very adequate target. I'm not sure if you want to add something, Christian.
Yeah, I will certainly add something because I think that it is extremely challenging because we are building the bank, we are building the future business model, we are investing in IT, we are investing in a number of value creating things for customers. We are investing in the whole new regulatory setup which is certainly not a cheap one, at the same time we keep costs flat. We are not just cutting costs, we are making the bank much more efficient. We've been doing that for now seven quarters in a row, and we're going to continue several quarters. We keep the running costs flat. Effects and variable salary and Q1 lender appreciation may pop up and down and so on. The actual running costs 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, that goes for all business areas, that works pretty well. We have a strong discipline on this. This will over time create a cost efficiency, which I think will be very strong.
Okay, very clear. Thank you.
Thank you, sir. Our next question comes from Claire Kane of RBC. Your line is open. Please go ahead.
Hi, everyone. I have two questions, please. My first relates to Basel III. In the three documents you put out today, there's just two mentions of Basel III, and both of those relate to liquidity. Your peers are helpfully giving us a lot of guidance on the different sensitivities under Basel III. 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.
Also if you could provide an update on the RWA inflation that you gave us previously of €14 billion and your target to reduce that of €19 billion and where you are going on that. 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.
When you look at your return on assets, it's one of the lowest. It's the lowest of the Nordic banks currently, and it is quite clear to see that as you build capital, your leverage is going to come down. Where specifically are you trying to address an improvement in return on assets? 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.
If I may start. 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. We could have elaborated probably to the same extent we have done before. In short, we expect the impact from Basel III or CRD IV, if you put it that way, together with IAS 19 to be 120 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 CRD IV component, that is largely CVA risk. I think we've been quite clear for some time now on those impacts.
If you also, if I may 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 two dominant ones are, of course, advanced IRB for the corporate portfolio and the advanced IMM for the CVA risk. Hence the 12.2 you see in the CET1 ratio is largely what we also expect after having implemented IAS 19 and CRD IV.
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 comparison to pretty much all the other Nordic banks. We are also a very diversified bank, we are spread all across, of course, the Nordics and in some other countries.
Of course, we can only compete in our respective market with- Look at the return profile of, for instance, Nordea in Sweden, you will find us to be at par with the number one. We would be clearly at par or better in Finland. We would be clearly number one in Denmark and not far away in Norway. 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. We really perform well in all the countries we are in. If you look at your question, which was total return on assets, it's very much in our case impacted by very significant derivatives book and the gross book, of course, is fairly irrelevant measuring in terms of return on assets.
When you do the calculation, you have to adjust for it. 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 Nordea is not a Swedish bank, it's a Nordic bank. We have 20% of our business in Sweden. Sweden is right now, as I said, during the day, it's paradise on earth in economic terms, also in other terms, but also in economic terms, because the sweet spot of all sweet spots right now is to be a Swedish mortgage savings bank. 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. A lot of good things goes for that. I think our mortgage and savings bank in Sweden is actually doing great on par with the best. The rest is, of course, not like that, and we know the reality out there.
If we look at the total bank, which is one of the, as you well know, one of the five largest banks in €ope on market cap. If we compare to €opean banks, I was told today by the CNBC reporter that they are one of the top five ROEs in €ope, I think that is true. In that sense, you have to benchmark this right. I think in there, the return on assets also compares extremely well.
Thanks very much.
Great. We have room for one more question.
Thank you. Our final question today comes from Riccardo Rovere of Mediobanca. Your line is open. Please go ahead.
Good afternoon to everybody. Thanks for taking the time for my question. I have just one follow-up on NII. The policy rates are going down very significantly in all the regions where you are operating, not just Sweden. I 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. Have we come to a certain level of rates where there is nothing else that you can do, and 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 forecasts as to margins. We have never hidden the fact that we continue to strive for repricing on the lending front book, not just as a compensation for deposit income coming down, generally as a consequence of margins should be higher on the back of funding costs, et cetera. Of course, we will continue to do so, and we are likely to be able to be successful in that, a little depending, of course, on the jurisdiction. Generally, I think we will strive to continue to reprice. 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 clearly see that the front book, not least in Finland, front book is clearly higher than the back book. It is our ambition to continue to try and reprice. It's not about just sitting and waiting for things to happen. It's a very active pricing management that we entertain. 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. You can always question the actual downside. 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.
Thank you very much for listening in to 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. Thank you and goodbye.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.