Good day, and welcome to the Second Quarter Reports 2012 International Telephone Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rodney Alston. Please go ahead, sir.
Thank you, and welcome to this conference call. With us we have CEO and Group President, Mr. Christian Clausen CFO, Mr. Fredrik Rieseft and CRO, Mr. Ari Kapri.
And I would hand over to Mr. Carlson. And after the presentation, we'll also have
a Q and A. Please. Thank you and welcome to this telephone meeting. I will give a short introduction then hand over to Fredrik and come back a bit later with some strategy issues. But first of all, the key messages, which I'm sure you already heard today, we have a strong income development and a solid cost control and also there was solid credit quality, an improvement in ROE, a low cost income ratio and improvement in our core Tier 1 ratio.
But most importantly, we keep executing our new normal plan and it is indeed improving efficiency and growing income and it's all over the bank we're doing it. In retail, we are mainly redesigning our distribution model, which we had touched upon on previous occasions and very much improving the capital efficiency. In the wholesale banking, we are deepening the relationships and ensuring that we have the right business selection and pricing in order to mitigate the effects of all the new regulation. And Wealth Management is very much about increasing efficiency and sharpening the offerings. I will come back to the effects of all of these initiatives, which we are conducting.
But not at all, it's fair to say that they have clearly contributed for building a more efficient bank to delivering these results. Greg, will you continue? Yes. Thank you, Christian. We have had a
good quarter with good results both in terms of income and also in terms of the expense level. Operating profit in the quarter was up by 6% as you can see from slide 5 and also for the full year a good income generation at 6% up and costs under control. So generally a strong quarter. Let me take you through some of the different lines. The net interest income continues to increase as it has done and this is despite the much lower interest rate affecting our deposit income.
If you turn to page 7, you can see that the growth in the business, which has been primarily on the corporate side but also to some moderate extent on the household side, has contributed with approximately €11,000,000 in the quarter. The main driver for increased NII of course is the lending margin and that has increased in most areas and in most geographies where the Norwegian market has been from a margin perspective the country most improving followed by Denmark, Sweden and after that Finland. Needless to say, of course, the lower interest rate environment that was seen during the quarter has had a negative impact of €27,000,000 But the net impact from margins as you can see is positive. Also on slide 7, you can see the spread cost that has increased. This has nothing to do with the fact that the funding cost the funding level has not increased.
It's been stable throughout the quarter. This is merely a volume issue and we have continued to issue long term funding throughout this quarter and now we have issued for the 1st 6 months an amount equal to the full year redemption.
You can
see on the slide 8 that the blended margin has been fairly stable for a number of quarters and it improved a little bit during Q2. But of course, the negative impact on deposit margins is mitigating the improvements on the lending margin. Volumes are increasing. As I said before, we have increased up by 5% for the first half year and up 1.5% in local currencies for the quarter. And we can see now in comparison to Q1, but also compared to last year, we have an improved amount from Nordic corporates and especially among those in the bigger segments, up by 6%.
Household growth remains moderate with only minor growth in the quarter, but looking at it in 1 year perspective up by 5%. Also deposit volumes continued to increase, so 2% in local currencies in the quarter and up by 6%, so a good development in more general terms. We continue to be benefiting from a flight to quality. So every time it is a problematic environment, we benefit and are able to attract good deposit volumes. Net commission income on slide 11.
We had a good development during the quarter driven primarily by lending fees, good cards and custody fees and in particular custody fees. Asset management fees as expected were stable, but we continued with a strong inflow in the quarter and reached very close to €200,000,000,000 of assets under management. Net fair value continued at good levels. We had a good demand also from the customer base, so continuous good development throughout the last several quarters in fair value. As I mentioned previously, we have a set of target to remain with flat cost.
And as you can see from slide 13, we had a slight uptick in expenses during the Q2. And this has to do with the fact that currency and variable pay is slightly increasing. So for the 1st 6 months in comparison to 2011, the 1st 6 months, the expense level is in fact down by 0.4 percent adjusting for variable salaries and adjusting for currency fluctuations. I mentioned before that we have continued to have a
good access to funding.
We have done several really good transactions in the first half year and particularly notably in the second quarter we did our first issuance is of the Samurai bond with lots of interest both as related to volume and also attractive terms. So we continue to receive favorable terms and also having a broad platform for our trading and for our funding. And of course, part of the reason is the fact that we have a maintained AA rating as one of the very few banks in Europe to have that still. The recommendation from the Central Bank in Sweden is that we also publish the LCR already from the start of the Q3 or in the Q2 report and we have also done that. You can see that we are LCR compliant for all currencies and the total group LCR level is 144%.
We have continued to increase the size of the liquidity buffer reaching now €68,000,000,000 So I think given the general situation on the financial markets, we have a very, very strong and prudent position. Finally, just a few comments on our business model assumption where we generate the results and the income. And if you look at Slide 16, you can see that we are as part of our business model being a relationship bank, we have the absolute overwhelming majority of our income from customer driven business and only a very small portion relates to hedging activities for those flows that we have in our market business. So approximately 96% is customer driven and that has been the case for several years as you can see from slide 16. And with those words I'd be into you, Ari.
Okay. Thank you. On page 17, we've got the set of quality section, so that the loan losses they were at the same level as in Q1 and roughly at the same we have the same risk feature than we had in Q4 also. So that very low loan losses in Norway, Sweden and Finland and also in other non Nordic countries. But we have two areas of higher tension and that is Denmark and shipping which has been at the elevated level.
In the following page, you see a little bit more information from various portfolios. Page 18. As you can see, the pattern is more or less the same, has been the same for now some quarters. So that very moderate low losses in Finland, Norway and Sweden, little bit variation between quarters depending on the individual corporate customers and then higher levels in Denmark. But as you can see also the Danish figures have been stable.
Following page, we split the Danish loan loss figures into 2 segments household and corporate. And as you can see, the household losses, they were they have been a little bit up in the past three quarters, whereas the corporate loan losses, which was the source of highest loan losses in Denmark in the beginning of the crisis, they
have stabilized.
That was more or less the case also in Q2, so there's no big changes there. Moving to shipping, which is the other area of higher tension on Page 20. Still we booked at this same level roughly between €60,000,000 €70,000,000 of our quarterly loan losses in Q2. Still the source for these loan losses is coming from these weak shipping sub segments, I. E.
Tankers and dry bulk. Also container market is very weak, but our exposure to the container market is also very low. So that our losses are coming from these 2 sub segments. You see also in the right hand graph that the impaired loans in shipping, they are still up. This is what has happened now in the past three quarters.
So that every quarter there is 1 or 2 or 3 new shipping customers where we have made an impairment and have booked flow losses discontinued also in Q2. And this is also indicating that there are still these segments are still weak and we expect that this will continue for the previous quarters. It's difficult to see that the losses would be so much up even from shipping, but at least it's also difficult to see that they would be dramatically down now in the coming quarters. Then talking about the impaired loans on page 21, you see the total picture. And then you see that our impaired loans in total they were quite much up in the Q2 quarter.
In terms of euros it was €700,000,000 This €700,000,000 is composed by this shipping which is roughly €120,000,000 order increase. Then Denmark is the main part is €450,000,000 Another specific issue in Denmark, which is triggering this increased amount of impaired loans and this is the new rules introduced by Danish FSA how to impair loans and how to book for the loan losses. That impact of all the change regulation in Denmark that the magnitude of that was roughly 2 thirds of these new import loans in Denmark I. E. 2 thirds from this €450,000,000 You see our total allowances on the right hand side that we have now increased individual allowances and loan losses taken down to collective loan losses.
The background of this is exactly these new rules in Denmark. So that the impact of these new loan loss provision rules in Denmark was then roughly €80,000,000 in our book. But we had been covering for that type of risk earlier because we had built up these additional buffers in our collective provisions in Denmark and now we then offset this impact from the change regulation by releasing respective amount of collective reserves. We have built these collective reserves exactly for the reason that we have seen that the Danish situation is difficult and we didn't see this kind of individual customers going into default, but we saw this kind of increased risk and thereby we made this kind of additional collective provisions. Now when we see and we are forced to book more individual loan losses then it's very logical that we are releasing part of this collective provision for it.
This change doesn't mean that or this what we did doesn't mean that we would expect much, much lower loan losses in the coming quarters in Denmark. There will always be new individual customers going into problems, other ones that we have now booked for longer season pace. So that still the situation in Denmark is continuing to be difficult. But this is of course taking down the likelihood that the individual losses would go up dramatically in Denmark. Then impaired loans on page 22, I already mentioned this that the main part of this increase in impaired loans came from Denmark whereas in other countries the situation was stable.
So all in all, the second quarter didn't change our credit risk picture. So that it was as expected and that is also roughly in the way we expect this to continue. Moving from credit quality to profitability, so that's page 23. Of course, when you have growth in income, stable cost and stable risk I. E.
Risk weighted assets, then your return on equity will increase and this was a good quarter 12.5% ROE, one of the best or highest quarters in this period. And this is, of course, all the direction with our ambition to stay at the par with the strongest banks in Europe. Of course, it must be seen because we have not seen yet all the reports of the European banks, but this is a strong result. The same issue is also visualized in page 20 4, so that our profit generation is strong, so that we have been able to more or less double our Core Tier 1 capital in 5.5 years. And this is very important to get to have this kind of flexibility in our capital base in front of this new regulation, so that whatever this minimum requirement in the end will be, this is the way to adjust for those.
Moving to risk weighted assets on page 25. You can see that we have been able to manage our risk weighted assets well. They have been stable throughout this period. In the second quarter, they were down because of the improved credit quality. We also were down in the market risk.
Then on contrary, FX issues drove through risk weighted assets up. But all in all, we were more or less stable a little bit down. And then you can see that this is the level D we have been now in this period of time of roughly 2 years. The peak in Q4 last year was because of this part of 2.5 implementation, which impacted the DKK4 billion of risk weighted assets, so that we have been able to digest already that part of the new regulation. And then it means that on Page 26 as you can see our COTI-one ratio is improving in a stable manner so that it has been now up by 180 basis points in 2 years.
And what is important to recognize is that we have been able to keep the respective assets stable or actually leave it lower and at the same time with strong profits, which is partly coming also from the fact that we have been able to continue to support our customers in terms of lending so that we have not deleveraged our balance sheet. We have not reduced our business We have been continuing our growth agenda, but with good capital management, we have been able to keep risk weighted assets stable. And then moving to updated estimates related to new regulation. We gave this type of indication in our Capital Markets Day in last autumn in London. We have updated the precursors.
The message is still more or less the same. So that yes, there will be negative impact because of new regulation mainly coming from this CDA risk, which is exposures taking down the CDA ratio by roughly 1 exposures taking down the Cote-one ratio by roughly 100 basis points. But then again on the other side, we have this kind of new rollouts for our internal models mainly model advanced model for our Nordic corporate exposures as well as some additional risk weighted asset and business gains and those are offsetting this impact of new regulation, so that we are roughly talking about a neutral impact after these factors. There is some uncertainty related to this estimation, especially with the CVA risk charge because the regulation is not final, But this is now our best estimation what the impact will be. And then I'm moving to Kristin.
Yes. I'll give you
a few comments on new normal plan and strategy. First of all, my favorite slide on page 29, which is our market cap compared to our peer group, which we monitored since 2007. And you can clearly see how we have planned the imposition. So in relative terms, I think we have been given recognition for our efforts in creating a stronger bank and are now number 3 in the peer group. Of course, it's based on our relationship banking strategy, which is the key of Nordea.
So we are building relationship with our customers, so we can advise them, we can be close to them, we can know their risks and we can do all their business. So it is a win win. The customer gets value advice and feel very pleased about the service. They rate us very high and we get all the business and good risk management. This is a successful strategy.
It has been, but it will even more in the new normal. In the new normal, it is about finding the right solutions, which are capital, liquidity and cost efficient. And that can only be done if you're very close to your customer and really have a chance to tailor made a lot of solutions. So all our resources are being directed to this core relationship banking and this also gives us a well diversified and balanced model. We have both lending and deposits.
We have all the transactions in all the balance sheet business. And we run the bank fully integrated very, very focused and based on the Nordic structure. I will not go through the highlights of the quarter. You have probably already heard about it, but more dive a bit more into the new normal plan. So we have a large number of initiatives actually working and becoming more efficient in whatever we do.
It's very much in capital. There are a lot of things we can do from getting more collateral to changing products to changing processes and to changing models. There are a lot of things and they're all important. Capital is should work. Expense is resource now and we have to post a lot of it.
So therefore this is important. And Ari already went through the RBA development, but of course we it clear that this effort has had a huge impact on our RBA development, which is flat or even down. Also the costs we already accounted for. You see our FTE is down and we will continue having unchanged cost for a prolonged period of time I. E.
Taking out efficiency gains of at least 3% to 4% for the year, which is quite an achievement I think remembering that we have a high business momentum and we are not deleveraging. We are actually adjusting to the new normal. But one of the most important part is actually funding and liquidity efficiency. And this is important because there's a lot of efficiency to be gained here because previously we didn't do that for two reasons. First of all, liquidity was free, It didn't cost anything.
And secondly, we didn't really have to post any liquidity buffers. Now we have to post liquidity reserves for more or less everything we do or even post long term funding reserves. And therefore, the way we price and the way we put liquidity into the equation and every single customer and every single transaction is important. And we are now rolling out our liquidity premium project. It's already up there.
And as we go forward in the coming quarters, we will be able to price all transactions with the right to charge and liquidity, which will be very important. And so it's not only a capital gain. This is at least as it's impossible to get the liquidity equation right and ensure that we select the business we want to do that is priced right also here. And we also educate our people and of course the customers in finding solutions which command less liquidity and funding reserves. And the result of all these efforts you can see on the next slide all efficiency measures are going in the right direction.
In each of the business areas, we are doing exactly this. It has slightly different focus in retail. It has a lot to do with our distribution strategy. We have now come 80% through rebuilding our network. So we had advisory branches and service branches.
That works extremely well, increases efficiency and we've been able to take out a large number of FTEs. And the customers get more satisfied because when they go into a bank with advisory needs, they will need an educated adviser. If they go into the bank to have a service need, then they will meet an educated service person, which is of course very important. This will continue in the coming years as people change behavior, our customers change behavior and they start to go to the bank with their fingers instead of with their feet. That will change considerably the cost of running our especially our household strategy.
And the numbers from retail as you can see are developing very nicely. On wholesale, it's very much about business selection. It is about solving the customer needs in a different way with less capital than liquidity and ensuring that we only do the business that is priced right. This requires that we deepen the relationships even more and we are today giving out the number that now 60% of the large corporate customers in the Nordic area post Nordea as a leading bank, which is of course a key to actually achieving this efficiency in the customer interface. But also in the wholesale area, we of course also working very much on our value chains to ensure that we even more efficient turn out the solutions to the customers.
And on Wealth Management, it's very much about efficiency in the frontline in private banking, about an efficient fund universe, reengineering funds, closing funds, which makes this more efficient. And in Life and Pension, of course, keep migrating towards Capital Life Products. And this is quite successful. As you can see from the numbers, now 75% of gross written premiums are in Capital Life products or unit linked, which means it's a big increase even compared to 2011. So this development is important.
And it's important to remember that life and pension our life and pension operation when we're talking about capital light products is profitable on the ROE on any ROE measure. So it's only the traditional which is not. So by migrating we increase the profitability a lot. So the conclusion strong income, solid cost control, improved capital and improved ROE and the execution of the new normal plan is continuing exactly according to plan and delivering the expected
results. Thank you. And with that, operator, we would like to open up for questions.
Thank you, We will take our first question from Nick Davy of UBS. Go ahead, sir.
Yes. Good afternoon everyone. Thanks very much for taking the time. Two questions please from my side. First, if I could bring you back please to the slide 27 on the risk weighted asset efficiency programs that are underway.
Could you please just give us a bit more sense a bit more detail around this 1.1 percentage points of Core Tier 1 you're hoping to generate on the RWA side? How much of that is let's say within your control based on looking at your internal model and internal capital efficiency? And how much of this is based on the advanced IRB approval from the regulator? And any update please on the time horizon of these changes? And then the second question please on expenses.
You've highlighted how at a group level expenses are are well under control in constant FX terms. I just wondered if you could comment a little bit around the split between retail and wholesale. Retail tends to be down 6% half on half wholesale costs up 9% half versus the equivalent half last year. Is this a trend that you're comfortable with? Or would you be looking to keep a closer control on the wholesale cost?
Thank you.
If I take the first one, this rollout and RWA efficiency is €19,000,000,000 which will give us a number of the target of these actions. More than half of it is coming from expected last model approval. We are not very precise in giving this type estimations because they are estimations and in the end we are subject to approvals. And we can't control that so well. But that's now our assessment that a bit more than half of this SEK 19,000,000,000 is coming from that model approval.
And the remaining part is then this kind of identified actions we have been doing together with the business areas and various other internal stakeholders. It's very much still cleaning the house, so to say, and then taking in more collateral sourcing in more information, be more precise in terms of our models and parameters, getting more external data to back up our own parameters and then be more precise in various type of collateral pools and issues like that. So that there are, I would say, if I remember correctly, 75 different type of actions in these categories, smaller and bigger ones. And when we are talking about the timetable of these gains, of course, this approval we can't influence so much. We are now progressing well with our dialogue with Swedish FSA and Nordic FSA so that we start to be in this kind of content dialogue.
We are contemplating our application. We are verifying some issues. We have started this kind of more official dialogue, which of course is a good indication that we start to be at the end of this very long process. But whether this approval comes Q3, Q4, Q1, it's simply impossible to say at this point. But at least now we are in the start to be in the inside of the pipeline.
And then these internal efficiency gains, they are coming this time period we are now talking about is roughly 2 next year. So that part of it is coming already this year end. And then part of it is coming in 2013, a minor part in 2014.
Yes, Nick. Then you were asking about the expenses. Actually the we are pleased with the development in both wholesale and retail. It is pretty much exactly with along with our plans. So if you look at the retail side of down minus 6, it has to do with a fairly significant reduction if you look in the report, you'll find that most of that increase or all of it is actually in the other part of business area.
So this is mainly related to variable salaries. So the underlying cost growth in both of these areas are very well contained and also in line with our plans.
Okay. Very clear.
Thank you, sir. We will now take our next question from Claire Cain of RBC. Please go ahead madam.
Hi there. Can I first have a follow-up question on Slide 27? Did I hear correctly that on the CVAs that is a gross 200 basis points impact and then there'd be a positive 100 basis offset for that 1 percentage point overall reduction Just to clarify there. And then my second question is on asset quality. Your gross loan losses this quarter were the highest since Q2, 2009 and clearly benefited from the reversals of your collective provisions.
So you now have half your impaired loan book in Denmark. Can you talk us through what we should how we should think about loan losses there? How much do you have left of collective provisions in Denmark? And how have the rule changes how will they increase the amount of provisioning going forward on a new impaired loan in Denmark, please? Thank you.
So that it's 100. And then coming to your second question about this level of high cross loan losses. Yes, that's right. They were high. They increased especially if it's going to be individually assessed new loan losses and the impact was very much coming from these new Danish rules.
It was €80,000,000 impact from that. So if you take away this €80,000,000 then we are still yes, we are still at the high end, but not at the highest the quarters. We have still remaining collective provisions in Denmark roughly at the level of €100,000,000 a little bit more than €100,000,000 And still we have that collective reserve includes some kind of safety cushion. So that is a little bit higher amount than our models are giving us as the needy collective provisions in Denmark. So that still I would say that we are a little bit on the safe side in the collective reserves in Denmark.
But now this what happened in the new Danish rules that was very strict new principles how to book for the loan losses and just to give you some kind of example so that for example if you have a real estate client, commercial real estate client with a negative equity then actually that triggers already the impairment and then you have to impair this difference in terms of loan losses regardless of the cash flows of that type of customers. So that then it's a very strict way of impairing customers and looking for the loan losses because in normal case in other countries and under practice we have used these kind of normal impairment rules so that when we identify a customer with a clear risk where we have a clear risk of loan loss, then we make this kind of very transparent impairment calculation where we calculate for the collateral value and then when we calculate for the future cash flows. And then if we have a difference then compared to our exposure then we took a loan loss. But these cash flows cash flow impact is more or less taken away in Denmark with these new rules.
So it means that there are lots of customers who are simply very normally paying back their own or servicing their debts. But nevertheless, if there is a negative equity in that type of asset backed financing that has to be impaired and before the loan loss. Of course, this means for the future, as I said that now because we have gone through our whole lending book in Denmark in light of these new rules, then now we have definitely identified lots of new impaired customers and then put lots of new loan losses for these impaired customers. So that it's very likely that this trend is not it's not going to be repeated quarter after quarter. But still we will have new loan loss customers and in care customers also in Denmark because of course there will always be new ones.
So that this is more or less the situation we have. And what does this mean for the level of our loan losses going further, I would say that we are expecting more or less the same pattern to continue for the coming quarters so that we will still have elevated level of losses in shipping and in Denmark and we will still have low and stable losses in other parts of our portfolio. Because still the fact is that the performing part of our portfolio, especially corporate portfolio is still improving so that we have more up rate customers than down rate customers so that this healthy portfolio is improving so that we are dealing with this kind of tail problem in Denmark and this kind of very difficult market situation in shipping.
Thank you. That's extremely helpful. Could I just have one follow-up then? Given it's based on the provision is based on the real estate or market values, what's your outlook for the Danish real estate prices from here?
The real estate and house market is still weak in Denmark, so that it's difficult to believe in quite a fast pickup. But then again, it's just due to the first half, it has been a little bit down. It has been this type of in the past year, it has been down. It's been stable. It has been then a little bit down.
Again, now it's stabilizing according to our views. So that perhaps difficult to say if we have seen the bottom, but that leakage not go up go down very much from these levels. Because now we are starting to have these kind of strong fundamentals, so that disposable income or affordability in the Danish household is strong compared to this level of house prices and that goes also for the commercial real estate so that the rental cash flows they are servicing wealth to the values where we are today. So that's difficult to say, have firm opinion, but the downside risk is not so big anymore according to my understanding.
Excellent. Thank you very much.
Thank you. Our next question is from Omar Keenean of Nomura. Please go ahead, sir.
Hi, good afternoon. Thanks very much for taking the questions. Just two questions if I can. Firstly, there's been a good job done in keeping the group margin stable despite deposit margin pressure. In Denmark, how much repricing do you think we can get in from here given that the outlook is for further deposit margin
pressure? And then just secondly,
just thinking about the Swedish regulator, it seems like on the one hand he's allowing risk weight efficiencies and approving models. But on the other hand he's increasing the core Tier 1 level requirement. So it seems to be just taking with one hand and giving with the other. And now he's delayed the mortgage risk rates for a while. What do you think his strategy and goals are?
What do you think he's trying to do? Thanks very much.
Yes. The first question was on the Danish margins. And of course, we rarely give any forecast as to the margin. But of course, we strive to continue to improve margins and margins should go up on the back of the regulatory implications from more capital and more corresponding costs. If you look back a year or 2 on the margin development, it has off the back of reference rates or repo rates, there's been a significant uptick, but so has funding costs.
So in real terms, funding the margins have, of course, improved. But of course you got to remember that we come from a more or less 10 or 15 year contraction of margin. So hopefully we will be able to continue to improve the margins, but it's really very, very difficult to give any sort of forecast. It is part of, of course, our strategy to ensure a fair pay for the business that we do. So it's difficult to give more comments on that.
Then relating to the capital requirements and the regulator in Sweden, I think there are 2 different things. The Swedish regulator is among the toughest, if not the toughest in terms of requiring high capital levels, specifically on the core Tier 1 ratio and the suggested levels for core Tier 1 ratio in 2013 2015 are very high. And of course that remains to be seen whether that will be ever implemented, but it is very high. On the other hand, I think the model changes that are now being granted are very much in line with the Basel III methodology. So it's not very easy if you put it that way for the regulators to sort of prevent those model implications or implementations to actually take place.
So I think the overall sense from the regulators that we should be implementing sound and good practices as relates to capital calculation in the Basel III Basel II and Basel III Remedy work. And then having done so maintain a high and stable core Tier 1 ratio. So I don't think it's inconsistent. When you mentioned also the risk rates on household mortgages that's been a very long discussion. It is not necessarily very easy to find a solution.
I think the duration of the process is reflecting that issue that it will it's taking some time to figure out a good method. But for sure that will come into the process at some stage.
I think it's fair to say that this you said give with one hand. They don't give anything I can assure you. They are super diligent on how they do this. So the reason why for example as Ari told that our advanced process have now gone on for 2 years and is still dragging out is because they are very, very eager to do the analysis right. So we have to prove every single point And therefore, they don't give anything.
They don't allow any model changes that do not reflect real risk, I can assure you. So I don't think they intend to give out anything. But on the other hand, they also observant that implementing these new models maybe it's not so much about capital relief. It's actually more about rat behavior, because in the margins you now in the vast margin they have parameters which gives you a huge incentive to get to work in a risk aware way. You can actually because it's an advanced model, you can actually behave right in terms of risk.
And that is a huge benefit because you often use advanced model for the more advanced product and the more advanced customers. So obviously to give the bank the incentive to do the right things in terms of portfolio and how we put together and structure the deals is very important. And that we will of course do because having an advanced model gives us possibility to add to structure deals in a way that a center of deal contains less risk for us in either before an event or after the event. So I don't think they give away anything and I agree with Fredrick said very much that they are tougher than the rest to use Blue Spring Spring code that's for sure.
That's great. Thanks. That's very clear.
Thank you. We will now take our next Just
after the €106,000,000 release of the collective Just after the €106,000,000 release of collective provisions, you say that €80,000,000 is to offset the Danish FSA changes. I just wondered the rest of the other €26,000,000, does that come in a different division? And where do we see that? Thank you.
Yes. The remaining part comes from our collective provisions or this kind of management judgment provisions we have made in the Baltics portfolio. So that's because now the situation in Baltics is stabilized and we have not seen for 2 or 3 quarters more or less any new customers coming impaired and where we haven't needed to book loan losses and we still have quite that substantial collective provisions remaining for the Baltic portfolio. That's the other explanation.
That's perfect. Thank you.
Thank you, sir. Our next question is from Sophie Petrosanis of JPMorgan. Please go ahead madam.
Yeah. Thanks very much for taking my question. I just had 2 quick questions. My first question is around the corporate pipeline. How does it look for the second half of this year?
And how much growth do we expect on the corporate lending side? And my second question is around the Slide 27. In case there would be a delay in the improvement of the RWA efficiencies, I've heard that the Finnish and Norwegian regulators are, for example, quite slow. How would you reach the 12% GAAP Equity Tier 1 minuteimum set by January 2015? Would you consider maybe lowering dividend or a rights issue?
Or what kind of measures are you planning should RWA efficiency measures be delayed? Thank you.
Yes. The corporate lending growth, you've seen growth now in the Q2, but we generally expect currently, as we also write in or as Christian also writes in his comments, we expect generally demand to be fairly low on the corporate side. At least we continue to expect that for the remaining part of the year and for some time. Of course, it's our hope that markets eventually will pick up. We see some growth in the Nordic region as we go forward, but we expect general demand to be fairly moderate as we go forward.
If I just may make a really quick comment on the bridge and the IES or the Basel III bridge there. Of course, we don't expect the delay to last until 2015. We're talking about quarters here and not years in terms of delay relating to the advanced IRB approval. So it's not an issue.
So you wouldn't consider potentially lowering your dividend? You're sticking to your 40% dividend target?
No. We have provided here a bridge. And of course, we all have also shown to you that we have spent many, many years have generated a lot of capital every year. So reaching the required capital level is not an issue. And as I said, the advanced IRB approval, it may be late this year or even perhaps early in the next year, but you're referring to a potential requirement as of 1 January 2015, which is basically 3 years away.
So of course, we will have an advanced IRB approval long prior to that day. Then of course, as you've seen, we continue to generate lots of capital. So reaching the requirement is not an
issue. Thank you very
much. Thank you, Madam. Our next question is from Riccardo Roverv of Mediobanca. Please go ahead, sir.
Good afternoon to everybody. I have three questions. The first one is on net stable funding ratio. As far as I understand, you are not close to 100%. So my question is, is this set of numbers, especially NII already impacted by the efforts of getting a better net stable funding ratio over time?
This is my first question. The second question is on policy rates. Without entering into details country by country, do you think the time lag effect of policy rates going having gone down over the past few months already visible in these set of numbers? Or do you think this is going to be much more in the next quarters? And finally, on asset quality, the sovereign debt crisis started a year ago more or less or even more than a year ago.
After 12 months or more than 12 months, the asset quality of Nordea looks still pretty solid, pretty okay. Is there any reason why after 12 or 15 months, the asset quality should suddenly start deteriorating? And then if I may, a very final curiosity on risk weighted assets. The loan book is up €10,000,000,000 quarter on quarter, while the credit risk risk weighted assets are totally flat. There is no difference.
So given that you calculate credit risk under standardized and foundations, which are should not be too sensitive, I really don't understand how €10,000,000,000 growth in the loan book is not reflected in the credit risk risk weighted assets? Thank
you. Yeah. Maybe I should start with the first two and then I guess you can come in, Ari. Your question was NSFR. First, let me just say that a few things.
First of all, it's confirmed that we're talking about 2018 here and the rules the final rules remained unclear as to the parameter setting and even perhaps the fundamental way it will be implemented. We are still below 100% but we have continuously strengthened our long term funding and the maturity profile of the group over the last several years as you've seen and we've also maintained a high funding ratio this year. So we don't know the rules as of yet and what they will look like, but we are going in the right direction. So this is perhaps a little premature to see what we need to do. But of course, we will be able to cope with NSFR in a good manner should that come on stream in 2018.
Your second question related to the policy rates and the lowering of various interest rates. And in more general terms, it is a very short lag effect. We have typically a fairly fast impact from lower interest rates and particularly so on the transaction accounts and the other savings accounts. There is some lag effect relating to the liquidity buffer, but generally it's not very big. We've now had a couple of policy changes or interest rate declines at the early part of July and they will impact of course also the Q3.
So the trend you have seen from previous quarters will likely continue in the Q3. But there is no major lag effect from the past so to speak.
As it's qualities in the next 12 months, I see that our asset quality should be relatively stable in the next 12 months. So that this pattern we have seen with few portfolios with higher risk as we have discussed earlier in this meeting that perhaps continues. But then this kind of bulk of majority of our loan portfolio is very solid and strong and actually it has even improved when just simply following up what is happening in our ratings. So that strong Nordic companies they are getting even stronger. That has been the case throughout the crisis more or less and that is still expected.
Of course, there is always provisions. If there is a very, very severe recession now triggered in Europe Then of course, we are not immune what is happening in the macro environment. But if more or less the macro situation is looking at the same as it right now, this kind of low growth more or less non growth that would not have a major impact on our asset quality or credit quality. Then that's related to your next question is that how we have been able to do grow in our loan book, but still keeping our risk weighted assets stable. Part of that is due to these risk weighted asset efficiency measures we have gone through already so that we have taken a lot of actions just to simply be more efficient in our, let's say, calculations and models and data gathering and sourcing.
That's one part of the explanation. The other part is that's more coming from this kind of customer business, so that we have of course done much more business. The growth is coming from the strongly rated customers, so that our exposures to the solid and strong customers that has grown. And then again in weaker customers, of course, we have been exiting and reducing our exposures, so that there is also dynamics within our portfolio. So that's the other part of the explanation.
And then, thereby, also creating solutions to grow customers with very low amount of capital consuming product. Okay, okay. Thank you. Operator, we have room for one more question.
Thank you. Our final question today comes from Christopher Roskis of Barclays. Please go ahead, sir.
Yes, good afternoon. This is Christopher from Barcap. Thanks for taking the question. Just on liquidity and the liquidity buffer as you're showing on slide 19, it is in the context of some of your peers that reported earlier this week who have said that they've actually started to build out the liquidity buffer further and another one actually said that they were they've stopped building it out. Can you just give us some color around your intentions if this growth that this slide shows we can expect that to continue?
Or I think you mentioned earlier on the call that you were quite content with your current liquidity position. Thank you.
Yes. I can I don't expect it to grow much more? We have increased a little bit in the quarter. But as you can see, we are quite high in terms of LPR compliance. And then I think it's worth mentioning also that we are now measuring according to the existing rules as they look today.
But I think much would suggest that the LCR regulation is likely to be somewhat loosened up during the fall or at least could be that. So I think we have an extremely strong liquidity position at this time and I don't expect the liquidity buffer to increase at this stage. We have maintained a strong position for quite some time and we are LCR compliant in every currency. So we are ahead of that timetable both from the local regulator and from the Basel III in general. So I think we have a very adequate position at this stage.
Thank you. Okay. This concludes this telephone conference. Thanks very much for attending and we would also like to welcome you to the morning meeting tomorrow morning at 1 Angel