Good day and welcome to the First Quarter 2012 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.
Good day and welcome to this result presentation. We will start with a presentation followed by a Q&A. Today we have the Group President and Group CEO. We also have me, Mr. Christian Clausen, Group CFO, Mr. Fredrik Rystedt, and Group Chief Risk Officer, Mr. Ari Kaperi. I will leave it over to Mr. Christian Clausen, please.
Yes, welcome everyone. I will give an opening remark and note that we have two main messages today: that we have a very strong business momentum, which continues, which is encouraging because it shows that we also have a very high earnings power, and we have got a lot of good progress in our change agenda where we're building the future bank business model. On the earnings power, we had the highest ever Q1 income and profit, some revenue growth, and a lot of new customers, very stable cost development, and then an ROE of 11.7% and a strengthened quarter one rate of 11.6%. 11.7% on 11.6% is not that bad a rating. On the future bank business model, we are doing a major effort.
We have approximately 100 projects, which is changing products, processes, advice tools, more or less everything, and we are improving in order to be more efficient on capital, liquidity, funding, and cost. The target is, of course, to produce a strong bank with a good earnings power also after the new regulation has not been, and of course, also to mitigate the effects from our customers on the new regulation. Our business model is based on a relationship strategy, and it's very clear from the next slide. That is a very strong relationship. You can see income is up 35% in the last five years, and the number of relationship customers is up 42%. This is a very strong relationship and just underlines that building a stronger relationship, doing even more business with the customers, attracting new customers, is a very stable and low-risk way of growing the bank.
Now, Fredrik Rystedt will dive more into the numbers.
Thank you, Christian. I will start from slide six. As you can see, we had a nearly flat development of income with a maintained high level of net interest income, same for net fees and commissions, and also a good result on our fair value. Both in terms of comparison to last year and also the fourth quarter, costs were close to being flat, and adjusting for effects at flat or below. Loan losses were slightly lower at 26 basis points in comparison to the fourth quarter. As you can see, risk-adjusted profits up and net profit up on a full-year basis and slightly down in comparison to the fourth quarter. If I start with on slide seven with the net interest income, it has been stable.
Of course, the main parameters there in the first quarter have been lowering of interest rates and therefore falling deposit margins and to a large degree compensated by lending margins. Volume growth has been fairly low, and we have a slightly higher funding cost than we had in the previous quarter. Looking at slide eight, you can see the financial impact of this. The limited growth we've seen both on the household and the corporate side, you can see also contributes with a positive note of EUR 9 million. You can also see the very significant impact from lower interest rates in deposits. There are a couple of different parameters there. The first one is relating to just interest rates going down.
The second thing is that at these levels, these very low interest rate levels, our ability to lower interest rates on savings accounts is, of course, also limited, contributing to a fairly high number for the quarter of EUR 69 million. Competition remains fierce, at least in a couple of our markets. As you can see, funding costs have increased by EUR 14 million. The other line there on slide eight relates to mainly the day-count effects of EUR 15 million. If you look at the totality, as you can see, we are quite pleased to see on slide nine that we have maintained a blended margin. All the deposit income and all the lending income at more or less the same level as we had in Q1 2011, thereby compensating for much lower interest rates.
Lending volumes, as I said, on slide 10, up approximately 0.5% and equally low, you can say, growth levels in both house and corporate. The year-on-year, of course, we had a reasonable growth level in 2011, thereby contributing to approximately 6%. Net commission income at high level, we have a good trend in savings commissions, and we got a good performance in general. If you look at assets under management, picked up with approximately EUR 10 billion to the highest level ever, and the inflow of EUR 1.2 billion contributed from most parts of our asset management. A little lower on the back of lower general lending levels, we have lower lending and card commissions. Just to also remind you, we have a cost for the new deposit guarantee fund system in Denmark this quarter of approximately EUR 6 million.
Net fair value, again, maintained at a stable level in the customer areas, slightly up. We had a good customer demand also in this quarter, and the trading environment was good. The reported revenues are lower in life, but we also had, as some of you will remember, a one-time reversal in Q4. If you compare or take that away, the income development also in life, very stable. As you can see, our expense line is stable, and we have, as we have expected, a very strict control of expenses in general. Flat cost development, and we had some one-off effects also in Q4. The actual underlying cost level from Q4 to Q1 is slightly decreasing. You can see on slide 14, we maintain a high pace in terms of capital generation. We increased by approximately 8% in the quarter.
The total capital generation over the last several years since 2006 has been over 9%. This gives us exactly the flexibility we want to achieve, whatever capital levels that may be required from us as we go forward. We have continued to work with capital efficiency in the quarter, and risk-weighted assets are reduced, as you can see on slide 15, by 2%. Part of that is a benefit from an IRB approval relating to our international branches, contributing to a reduction in risk-weighted assets of EUR 3.1 billion. The credit quality is stable, so not really having an impact on risk-weighted assets this quarter, and derivatives exposure has gone down and therefore also contributed positively.
As a consequence of the risk-weighted assets development and, of course, the equity generation, we have continued to strengthen our balance sheet, and we have now reached a quarter one of 11.6%, which is a full bottle to figure. Also, the funding has worked fine. In the quarter, we have so far issued EUR 11.5 billion, so we have kept a very high pace in the first quarter of both senior unsecured and covered bonds. We have maintained strong access to all funding instruments throughout the quarter. Slide 18 is just a, I just want to quickly outline the fact that we have now introduced in our reporting a distribution of our full funding costs in the business area. The purpose of the liquidity premium system we are now running is to, of course, align the internal pricing with the true costs that we have for funding and liquidity.
In a longer perspective, this will ensure that we have the correct customer pricing for each product and to each customer, and we understand the profitability. The principles behind this system is a calculation at each contract or transaction level, and a key parameter in this is, of course, the maturity. Now we price the maturity of funds going into each product. We have reached a status where the model is more or less developed. We are at this moment working with several pilots in the group, and we have distributed the full liquidity premium costs to the business areas. You will find that in the line business area other in the report. Very limited or no funding cost left in Group Treasury, all distributed now to business areas, but not yet to countries and not yet to units. We will do that as we progress in 2013.
Just to give you a little more money to it, approximately EUR 90 million of liquidity premium of full funding costs above LIBOR in retail, approximately EUR 55 million in wholesale. The liquidity buffer remains of high quality. We are LCR compliant for the group as a whole in the quarter, and we have slightly changed the composition to a more high-grade liquidity buffer. As you can see on slide 20, we have a return on equity of 11.7%. It's worth noting that if you look back on 2007, where we were at significantly higher levels, we were doing that at approximately a CET1 ratio of 6.8 compared to the current level of 11.6. If you sort of translate that, we come close to 20% with comparable equity levels that we have at this point of time.
I think that concludes my comments, and I'll leave it over to you, Ari, to talk about credit.
Yes, thanks, Fredrik. Q1 loan losses were according to our expectations, which is, of course, always good. The level was 26 basis points, excluding Danish currency provision. It was 25, which is according to our average expected level over the business cycles. Still, we have a few areas, Denmark and shipping, where the problems are not over yet. It's also important to see that the development in those areas was not up. Actually, they were stable or down. In other areas of the great portfolio, the losses remained at a very low level, and in most of the areas, they came down. All in all, the credit quality is very solid. As Christian already mentioned, the rate of migration was small, was stable.
On the next page, you may wonder why our impaired loans are, however, up. There was no drama in the development. In absolute terms, the impaired loans are up by roughly EUR 500 million. There are two explanations. EUR 300 million comes from shipping, where we impaired just a handful of new customers with a very low loan loss provision amount. As you know, when we make even a small loan loss provision, that triggers the impairment of the whole customer points. EUR 200 million are coming from Denmark. Also there, most of the increase is coming from a few limited number of medium-sized corporate customers. In other areas, the development was stable. The fact of these small loan losses in shipping, which impaired the relatively high customer exposures, is also explaining this overall decrease in our provisioning ratio at the group level. Next page, you see these country splits.
As I said, more or less no losses in three out of four Nordic countries. In Denmark, the situation is very stable. On the next page, you see these net impaired loans. As I said, the increase was visible only in Denmark because of these few medium-sized corporate customers, as well as some agricultural customers. You can also see on this page that actually now we have harmonized the definition of impaired loans in all countries, and we have restated the information as from the beginning of Q1 last year. It has not changed the development in the countries, but it has influenced the level of impaired loans in various countries. In Finland, it was down, whereas in Denmark and Sweden, it was up. Now they are comparable. Page 25. We are showing this split in Denmark between household and corporate losses.
As you can see, the good news is that household losses in Denmark were down, which is, of course, positive information. As I mentioned already, there were a few medium-sized corporate customers with new loan losses, which gives this volatility in the corporate losses. Finally, the following page, you see the story of shipping. Also in shipping, the losses were down, but of course, they are still at a relatively high level. The EUR 50 million is coming from more or less three components. It is a few small new loan losses, which I mentioned, that is roughly EUR 20 million out of the EUR 60 million, with some old problem customers where we have taken down the collateral values further. It is some collective provisions we built in in the first quarter. You see in shipping this quite big increase in impaired loans, but that is coming from two to three customers.
That ends the credit quality section. I'm back to Christian.
Thank you. I will give a few comments to our work on implementing the future business model. Of course, it's all about ensuring that we can get more efficient. The important part is the way we service our customers. It has a lot to do with product innovation and focus on our advisory concept, our relation banking strategy, and to mitigate the effects of customers from new regulation. The driver is very much on the cost efficiency and capital efficiency. We run a lot of products, and I like to give a bit more flavor to what we are doing. An essential part of the strategy is, of course, our relationship strategy. That is very much carried out by changing our distribution strategy, simply following the customer's behavior.
We work to build more advisory branches or convert existing branches into advisory branches where we have no service, but only advice, and then have the customers to service themselves much more on the services and the transactions on the mobile and internet solutions. We see on the next slide, which we also develop our presence in the corporate area very much in terms of using the capital market for our long-term funding for the corporate customers. With the new regulation, it is, of course, very expensive to do long-term risky lending on the balance sheet. Therefore, this is, of course, something which can very much be done on the capital markets. We can show clearly that we lead the league tables, the third league table of lead manager on bond issues, where we also are leading, which is very important.
This is a strong way to ensure that we can help the customers when they need to go to the capital market. That is the place they should go for their long-term lending. Of course, we will provide the short-term and the bridge financing and all sorts of things, but the long-term lending is part of the capital market going forward. The customer behavior supports our distribution journey. It's very obvious that the relationship strategy goes hand in hand with new customer behavior. The customers do less manual transactions. They use the net bank much more. Most importantly, they start to use the mobile banking a lot. We have now doubled the number of mobile banking users, which on a daily basis use their mobile to do banking transactions and all sorts of things.
This is very important because with this behavioral change, we can change our branch network in a way that has come a long way. We are taking down the number of branches with cash, and we're increasing the advisory part of our staff significantly. That we do by changing the network. We have considerably changed it only in two years. We are half of the network now doing advisory business only. We have no transactions in the branch. We have some 200 service branches, which only do service. Typically, we have one or two service branches in the major cities where we can service the customers. The rest of the branches are mainly advisory branches where the customers only get advice, and then they do their transactions on their nets. We still have a third of the branches as community branches, which do both.
This will be refined even more going forward. We are, at the same time, taking down the number of branches considerably. We expect by 2013 to be down with some 200 branches. This is a considerable efficiency drive. The interesting thing about this is the customer satisfaction goes up. The customers like to go into advisory branches to get advice, and the service branches to get service much more dedicated. Our employee satisfaction also goes up because the employees know exactly what they are supposed to do and to be trained to do that. We are accordingly taking out the cost, and we are reducing the number of fees we have had plans. We have taken down 16.4% since the middle of last year, and we had the plan to reduce by 6% by the end of 2012.
We are continuing also in Poland to build the relationship banking approach, and therefore, we have taken out some branches which only did the mortgage selling and concentrated in full relationship branches and taken down the staff as well, also to make that operation more efficient. At the same time, we're taking out cost in a large number of areas. It is very much about the distribution network, as I mentioned. Code work is cost to serve to lower that. We're optimizing a lot of the value chains where we're streamlining them so it's easier to deliver an actual service or product to a customer and with less cost. We are also refining the product processes. We are building new products which are typically light on capital consumption and funding, but we also do it in a more efficient way.
We are optimizing some unit costs, not least premises and other areas where we are concentrating people, moving outside business centers, things like that. We are putting some of the manual processes into our operation center in Poland, which is very efficient and cheap. We're addressing some of the issues on our IC area, which is also important. All in all, this produces a lot of efficiency, and a lot of metrics show this increase in complexity, volumes per fee, complement per fee, and so on. On the capital side, it's very much about being more efficient in the way we use our capital and thereby to reduce risk-weighted assets in a lot of processes and projects. In the quarter, we can see that the credit quality actually went up.
It went actually up a bit more than the slide shows on household and corporates, but we had a negative migration in institutional and counterparty business because a lot of the financial institutions were downgraded in the quarter, as you know. Underlying, we have an improvement on the household and corporate side, which is bigger. The growth is slightly positive, but the derivative books go down, so the growth comes out with a negative risk-weighted assets number. The risk-weighted assets optimization we're doing is we're moving the international branches to a foundation internal ratings-based, as was also planned, which are taking down the RBA s.
On top of that, this is an area where we run quite a lot of projects, and three important rollouts in ProFest advanced internal trading based in the corporate portfolio, the foundation for Baltics, and the international internal math models for counterparty risk, which you all know is very important now in Q1 when Boston Fremont is incomplete on counterparty risk. This is an important area where we also see a lot of relief coming from our model. On top of that, a lot of things are happening. We are reclassifying some of the SME segments to reduce risk-weighted assets consumption. We are improving the collateral and the collateral model in various units, including Luxembourg. We started already in March quitting most of our derivatives business on the central counterparty gearing, and we are focusing on capital-light products.
As I said, we are strengthening our capability of using the capital market for providing corporate credit. The conclusion is the same as the beginning. Two main messages. Very high earnings power despite a difficult quarter with low interest rates and low growth. We have managed to increase our revenues and reduce the highest Q1 profit we have ever seen. At the same time, as we are progressing well on the change agenda, I think it's encouraging to see that we can do both at the same time, keeping a focus on the customers and the momentum, and at the same time changing all these processes at a fairly high speed.
Operating with this, we would like to open up the call for a questions and answer session, please.
Sure. Thank you very much. Ladies and gentlemen, if you would like to ask a question at this time, please press the star or asterisk 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 pressing star two. Again, please press star one to ask a question at this time. Be reported for a moment to assemble the queue. We will come to our first question, which will be from Omar Keenan from Nomura. Please go ahead.
Hello. Good afternoon. Thanks for taking the questions. Just three short questions, if I can. Firstly, on the Norway mortgage margins, can you talk about what you've seen in terms of the very positive developments there? It seems to have accounted for a large chunk of your lending margin increase. Secondly, on the brokerage fees, which were quite a bit stronger, and you showed those slides on where you got to on the league tables. Can you comment on that result a little bit more? Lastly, on the shipping, what proportion of Nordea shipping lending was done in 2007 and 2008 in terms of the loan book today? Thank you very much.
Maybe I should start with the mortgage margins. It was a good quarter in terms of mortgage margins. I think the Norwegian market has been the lowest, I think, for it's fair to say, historically, at least in terms of mortgage margins. We have strived to increase that, and we have succeeded to a large degree in the quarter. There is a limited lag effect also contributing to the good margin. Having said that, of course, the mortgage lending in Norway, in totality, to the group as a whole, of course, is quite small. It's not, as you put it, the main contributor. There are many other areas contributing. The positive margin development is largely coming from other sources, but clearly, Norway contributed positively. In terms of the brokerage fees, this is a fairly volatile result. It depends on the closure of transactions, etc.
Also there, as Christian alluded to before, we had a good run in pretty much all parts of the brokerage. We had an increase in most parts over several years. This was an exceptionally good quarter for us, but generally, the trend is quite clear. Shipping, Ari.
It's impossible to say exactly what is your share of the portfolio we built in 2007, 2008 in our current shipping portfolio. We have, for a very long time, had that type of strategy in shipping that we are not, let's say, growing our lending portfolio. We have that type of strategy that we are supporting our shipping customers to, let's say, get financing from the market, from the banks, from the capital markets. We arrange loans, and then we keep only a limited part in our balance sheet. Yes, there was a certain growth in those years in our shipping lending, but it was not anything excessive, so it was very controlled. When I take a look on those customers who are today in problems, I can't make any kind of conclusion that they are exactly those customers which we took in in 2007, 2008.
There is not that type of correlation existing.
Thank you. Would it be possible just to, I guess, give a ballpark figure of what the vintage of 2007 to 2008 lending is in the shipping book?
I don't want to get now any figure because I can, of course, give you a little bit more information over the phone if that is then very important to you. On top of my head, I would not say anything at this point.
Okay, thank you very much.
We will take now our next question from Matti Ahokas from Handelsbanken . Please go ahead.
Yes. Good afternoon, Matti here from Handelsbanken. Two questions, if I may. Firstly, as Fredrik pointed out, that now the lower rates are actually having an impact, a negative impact on the margins of the savings account as well. Was this a surprise, and should we interpret this as the sensitivity towards lower interest rates within the group has actually increased? The second question is regarding, there was a quote today by Michael Rasmussen in the Danish newswires that he believes that the impairments in Denmark, and talking about loan loss provisions specifically, have peaked and now are trending down. Should we see this as guidance? I'd like to hear your other thoughts about this statement. Thanks a lot.
Let me start with the sensitivity. I think it's fair to say that it's approximately EUR 550 million as it has been before. There is no real change. Having said that, however, it's not fully symmetric on the upside and downside. The reason is, of course, as I alluded to, that we cannot lower the interest rate more than zero, basically, on savings accounts. When you have very, very low interest rates, we have this sort of one-time, or not one-time, but this kind of effect. Yes, in that sense, it's a little higher on the downside than it is on the upside at this prevailing level. The other reason, which is contributing with approximately EUR 10 million or so, is fierce competition, you can say, in general. I would still, we would still, just to give you an indication, have the same kind of interest rate sensitivity as we've had before.
The impair in Denmark, or let's say credit risk in Denmark, whether or not it has peaked, I think that how we guided in the last quarter Q4 was that we see that in Denmark, we see for the time being for the next quarters, is the relative level of loan losses. We also said that it's difficult to see any reason to believe that the loan losses would go up from those levels we saw in Q4. What we saw in Q1 was very much according to that type of, let's say, assumption. I tend to believe that the same as Michael has said, so that perhaps still it's very unlikely that there would be a rapid increase in terms of loan losses. Whether or not that is visible exactly in the level of impaired loans remains to be seen because there's a volatility in impaired loans.
It's just a one-day measure in the end of the quarter, what is the level. I definitely agree with Michael's assessment in terms of credit risk situation in Denmark.
Okay, thanks. Very helpful.
We will take now our next question from Geoff Dawes from Société Générale. Please go ahead.
Hi. Good afternoon. Geoff Dawes here from Société Générale . Thank you very much for the call. I've got two relatively quick questions. The first is in Denmark and the shipping book. From your comments that you just made, it sounds like you feel more comfortable with that book now than you did at the end of last quarter. Can you just confirm whether that is true and also whether you feel the same way about the shipping portfolio? The second question is on the cost line. Should we consider flat costs to be the best case here? I mean, from what you say about competition and from what we can see about the rates environment, it's going to be a struggle to get revenues to go higher. If that's the case, can you do any more on the cost line to ensure you get some positive revenue draws for the year?
Thank you.
From Denmark and shipping, yes, I think that we are still sticking to this guide that we gave in Q4 that relates also to shipping. Yes, the level of losses will be higher than average during the second half. Yes, we do see some positive signals also in the shipping market. The overcapacity side of the order books is little by little coming down. Freight rates are still low in many of the segments. There is no kind of improvement in that area. At least there seems to be some light in the tunnel, especially towards the end of this year and perhaps even more in 2013. There, I would say that it's unlikely to see a high increase in any of the risk indicators in shipping. We must remember that the problems are not over yet.
There are still some weakish customers, and we expect to see at least over the short future this level to be maintained more or less.
Yeah. On the cost line, I'd like to say that this was part of our New Normal plan as a strategy for the coming years, that we started up by taking out a number of people, 2,000 people, 6% of the staff, and reducing costs. The idea is that we will continue to reduce costs, but we also have an investment program ongoing in the New Normal, as I described. We have 100 projects ongoing, which will increase our capital efficiency, our funding efficiency. We are rebuilding products and processes and all these things. We think it's a much better way to profitability to actually do all these changes, build the new future business model. At the same time, as we continuously take out costs, we don't take costs out by cutting costs. We take out by making processes more efficient.
After we have reduced the staff for this amount, we have mentioned 6% until end of 2012, we will continue to reduce. That will be in sort of a normal process. We have more than 1,000 people per year going for retirement, and some hundreds of those will most likely be reduced as staff reduction. Part of this efficiency drive, and a very important part of our efficiency drive, is the capital efficiency, as I mentioned. This is a very important part to profitability. I think it's highly likely we'll increase, or the plan is we'll increase RV from both sources. Revenues, of course, I cannot comment anything more than you know that it relies a lot on the economic environment and interest rate level. In general, as you can see, we are repricing the lending book, and I think that that movement will continue.
Yes, of course, you can always do more on cost, but it's a much better strategy to create shareholder value by running the big change agenda and building the new business model.
Okay. That's very clear. Maybe if I can just come back to that shipping question and ask it in a different way. You've seen revenues come down quarter on quarter, which has taken you quite close to break even. Are there any scenarios in that book that you envision a loss for that division over the year?
I don't foresee that we would have a risk of starting to make great figures in shipping. Of course, quarter is a relatively short time period, but nevertheless, the underlying business is sound and profitable. Actually, the reason for decreasing income in Q1 was not so much coming from the net interest income. It was coming from some somewhat lower net fees and commissions because there was not so much activity in the market and not so many new deals coming into the market. That is also going to be changed as soon as the market is a little bit harder and better. It's difficult to see that we would start to record losses in our shipping franchise. We have not done it, and it's difficult to see that we would start to do it.
There is still a good trend of increasing credit margins because it's so obvious that the credit risk in that business has gone up. We, as other banks, are pricing that risk or pricing that up. The credit margins are still increasing.
That's really clear. Thank you very much for your time.
We will now take our next question from Claire Cain from RBC. Please go ahead.
Good afternoon. I have a quick question on your funding strategy. I noticed in the quarter that you did a lot of net issuance of long-term debt, but reduced considerably your CP and CD funding, I think about almost 30% on the quarter. I was just wondering, is that part of your strategy to be NSFR compliant, or do you just feel you don't need that funding, or there's less of a demand for that funding of yours? Secondly, on capital, can you give us an update on your Basel III Q1 pro forma? What reliance you have on further mitigation, what IRB approvals are still outstanding, and what your target is longer term? I noticed your 15% ROE target is based on 11% Q1, and I believe the minimum's now been set at 12%. If you do think that 12% will come in. Thank you.
Yeah. Let me start with the short-term funding. What we did in the fourth quarter, in the turbulent times, we actually increased the short-term funding quite considerably up to a maximum of roughly EUR 65 billion at that time. We put a lot of deposits with the Fed and ECB over the year end. We had a very, very strong funding situation, just as liquidity surplus, and we have taken that down in the quarter. That's the sole explanation. You can say the redemption has been there on the long. We have issued a little bit more than the redemption in the long-term funding. The reason for the decline in the short-term funding has to do with the simply reduction of Fed and ECB funds. The NSFR was not at all the reason.
LCR, we are compliant on a group level, not for all currencies, but on a group level, and we are still compliant on that figure. Talking about the Basel III pro forma, we have alluded to it also previously that we will have an impact full of approximately 100 basis points. We have also stated that the activities that Christian was alluding to before in terms of the IMM, IMM Advanced IRB, the foundation IRB in both the Baltics and in the international branches, that would basically take out each other. That's still our assumption. We are still having the same estimate, and we have thereby no real further information relating to the outcome of the advanced IRB approval. We have, however, in the quarter, as you've seen now, taken the benefits of the foundation IRB in the international branches.
Again, the estimates that we made last October in the capital markets, they are still valid. As to the timing of the advanced IRB, we have estimated that it should be within this year. This is, of course, not up to us. We have submitted our application for advanced IRB about a year ago, and it's still in progress. We cannot give you a firm end timetable at this stage, but it should be within this year or possibly first quarter of next. Long-term targets, I think you suggested again, I think it's fair to say that we don't, of course, really know the final targets yet. There are still lots of ongoing discussions within the European community, and how this will end up is, of course, not fully known to us.
We have seen the statement by the Swedish FSA and the central banking government of the 12% that you referred to. We will basically comply with whatever rules that will apply for us. I'd just like you to think of or draw your attention to the slide I showed previously in terms of the capital generation. We are generating and we're continuing to generate a lot of capital. We, of course, therefore have the flexibility to reach whatever capital requirements that may be put on our bank.
Thank you. That's very clear. Ladies and gentlemen, we will take now our next question from Fridjof Berends from Arctic Securities. Please go ahead.
Yes. Thank you. As you refer to that slide you referred to also when it came to reduction of risk-weighted assets in the quarter, if you look forward with an expected loan growth potential around 4% - 5% and so on, how would you see your risk-weighted assets grow in that respect? Do you have any more room for maneuvering with the IRB approvals and so on?
The question was that once again, can you repeat it?
Yeah, the question was whether the approvals would give us more room to maneuver. I think you can say that, of course, it would. As Fredrik just alluded to, there are some uncertainties at the full effect when they're fully implemented, and we have all the improvements in place. We have these three major rollouts and a number of other projects going. We will have some RVA flexibility, and we also expect a certain loan growth. Right now, it's very subdued, and it will probably stay pretty low this year. We have pretty good flexibility in all the ongoing projects and the fact that we produce all the capital, generate all the capital Fredrik mentioned. I don't think we are very worried about that.
Our main drive is to be more efficient, to do the same business with less RVAs by creating more collateral, more safety, less risk by making sure that we have the right modeling of the risk, making sure that we clean up all the waste around in the corners where we have some commitments which are not used and so on and so forth. To run this business on a lower RVA, that's our clear target. Also, there are increasing risks. Exactly the numbers are difficult because the FSAs will have views on how we implement the models and how they count and so on. The pipeline is pretty long. All in all, it's not a major concern. Our big drive is to create more efficiency in the way we spend RVAs.
Okay. If I just may follow up, are there any new areas where we will introduce IRB over the next quarter that will potentially have the same or similar impact on RWA, or are you now fully approved on all portfolios?
I think we alluded to it before. There are several model issues, both the IMM, which will hopefully be approved this year. Of course, that will hopefully have a positive mitigating impact on the CVA risk of Basel III, have the advanced ARB, and we also have the Baltics, which is a much smaller issue. In total, all of these were estimated to produce approximately the same impact as Basel III. The timing, as I alluded to before, is sometime during this year, hopefully for all of those. Maybe we will have a postponement of the advance the next year. Our estimate is during this year. Maybe you will take some additional guidance from the communication we made at the Capital Market Day, where we estimated that our risk-weighted asset, including all of these changes, Basel III models and efficiency, would be a moderate growth.
That was the guidance we gave.
Okay, thank you.
Gentlemen, we will come to our next question from Nick Davey from UBS. Please go ahead.
Yes. Good afternoon, everyone. Thanks very much for taking the time. Nick Davey here from UBS. Two questions, please. The first on Poland, where you're looking to close around a third of the branch network. I just wondered if you could perhaps talk a little bit more around the topic, really. It wasn't that long ago that we were looking to open about a branch a week. If I look at your Polish operations, I suppose pro forma for an 11% allocated capital or quarter one within the division, it looks like it's running at about a 10% ROE. Is it simply that you think it's difficult for that Polish business to contribute positively to the group's aim of reaching a 15% ROE? Is it the case that following these measures, you think that should be a boost to the division's ROE?
Is there any sense that if you don't get to the required ROE or return hurdle rate, that you might reconsider your position in the region altogether? Could you perhaps just flesh out some thoughts there? The second question, please, on the internal transfer pricing model changes, Fredrik. I think you talked a little bit about this, but if I could just take you back onto that point, please, just exactly which products you've piloted these changes on, exactly what sort of feedback you're getting, or perhaps more pertinently, looking forward into 2012, by when would you hope to have achieved or seen some sort of returns on passing on higher costs of funding and liquidity to your divisions? When would you hope to see some sort of returns with regards to wider lending margins? Thank you.
Yeah. Nick, I will try to elaborate on both of those questions. First, as it relates to Poland, it is, of course, as you rightly suggested, not long ago since we had a different scenario from Poland. Of course, it's also not long ago since the whole group was subject to it in the regulatory environment, and a lot of other things were subject to a different environment. This is a part, you can say, of our new normal efforts to strive for a higher return on equity. What we're now doing is that the portion of the Polish business that is more driven by pure mortgages with very little ancillary business, we're just basically scaling that down. The business model, as we go forward, will be much built on a more holistic bank offering with advice, etc., as we do in the rest of the Nordic region.
Yes, it is an issue of contributing to the group ROE, and some of that business that we are now not doing, you can say, is unlikely to take up to the appropriate return on equity level that we want. It's not a matter of reconsidering our presence in this region. We believe in both the Baltics and the Polish businesses. It's just a matter of how we want to do business relationship banking with a full offering to the household and the corporate customers. We believe in that, and we are going to do exactly the same thing in Poland. Yes, it is a change of direction, but it's within the new normal efforts that we have been making. As to the liquidity premia, this has been a project that we've been working on for quite some time, about two and a half years.
It is a conceptually fairly difficult issue. There is a funding cost on top of LIBOR, STABOR, the reference rate of approximately EUR 600 million total. We know we do millions of transactions and lots and lots of thousands of products. In some way or another, this EUR 600 million is attributable to all of these transactions and these products. There is no absolute truth in any sort of book relating to how this should be done. What we have been doing in the last several years is developing our model of the truth. We have also developed frontline systems such as custom profitability systems and economic profit calculators and/or pricing systems, you can say. We will enable the customer interfacing units and the branches, and of course, eventually, the CSUs and the business areas, etc., and all the units to see the full funding cost for all products and all transactions.
There is no limit to which product; all products are in, all units are in. That is the content of the model. It is a cost transparency model. By this, we will be able to see the profitability of customers, of course, also products or units or business areas. We are in the process now of piloting this in the four Nordic countries. Those pilots may lead to recalibration of the models. I think that much more likely, what is much more important is that we assess very clearly the behavioral impact when you use this system. In some regions, for instance, you may have a very big dominance of businesses which have very little ancillary businesses and where price increases need to take place and profitability is low. You cannot change overnight. You need to have a strategic view on transitions like that.
We are piloting, looking at the impacts, and we will implement it no later than January 1st, 2013, in the Nordic region. We have distributed the full funding cost to the business areas. As of 1st of January 2013, we will take it also for your benefit further down the line of the units and the countries that you see.
Okay. Thanks very much for the very, very detailed answer. Could I just ask one quick follow-up on the Polish side? I just want to be clear I understand then on the profitability of the various products in Poland. I understand then you're stepping away more from the plain vanilla mortgage lending. Is that not some of the higher ROE business that you're engaged in in the region?
I think there are different kinds of mortgage efficiency. Some parts of it, and traditionally, the foreign currency lending has been very high ROE, and the local, just a sloppy lending, has been lower ROE. We're not stepping away, Nick. That's not a fair description. I think it's fair to say, just as it is the case in all the Nordic countries and elsewhere, also in the Baltics, by the way, it's not enough just to do mortgages with the customers. We are a house bank or a full relationship bank. To those customers where we deem that mortgages are the only product and there is very little prospect of doing more business, we'll typically not do that. Those branches that are engaged solely in mortgage lending are also the branches that we're closing. You're right.
It's not a bad business necessarily, but it has to be coupled with the rest of the offering that we want to give.
Okay, that's very clear. Thanks again.
Thanks, Nick.
We will come to our next question from Heer Roenberg from Danske Markets. Please go ahead.
Yes. Thank you. Good afternoon. Two questions, both related to net interest income. The first on Finland, where you in your report wrote that earnings on lending showed a strong improvement, mitigating the pressure on deposits. Can you talk a bit about what sort of lending is it that you are seeing margins coming up? Is it mortgages? Is it corporate lending? The second question is related to Norway. Been touched upon a couple of times. I guess that one of the key drivers of your rise in NII in Norway is that you didn't follow the central bank when it cut mid-December. The central bank did cut again mid-March. I have not noticed whether you've taken any actions on your mortgage pricing after the mid-March price rise. Can you tell a little bit about that? That's the two questions.
Yeah. Here in Finland, first of all, you can see an impact on the net interest income in Finland, of course, from the decrease in the interest rate. Clearly, that has had an impact. One of the reasons, of course, is that we have a significant volume of transaction accounts or deposits in more general terms on the Finnish market. We have largely compensated. I think it's fair to say that we have compensated both on the corporate and the household side. Finland has increased in margins over a consecutive period. Traditionally, at least, Finland is very, very price-sensitive. Therefore, we have been able typically to increase margins less in Finland than we have elsewhere. This was a good quarter and to some degree, at least, compensating for the decline in the deposit income.
As it relates to Norway, we have had very low, and I alluded to it before, we've had very low margins on the Norwegian market. We have been striving to increase margins also in Norway before. We have tried to do this also in this quarter. Maybe an obvious question, Central Bank, as you referred to, is actually not driving entirely our funding costs. There is a distribution or there is a difference in our funding costs. We found ourselves in a combination for mortgages, for instance, of senior unsecured and capital bonds. The repo rate of the Norwegian central bank is only indirectly having an impact of that. We are not following automatically the Finnish or, sorry, the Norwegian central bank when they decline. What is important for us is our funding cost and not the repo rate.
Have you done anything on your mortgage pricing after in from mid-March going until today?
On our mortgage pricing? No, no, no.
Okay. On Finland, just the one clarification. This improved lending margin, it has nothing to do with that. I guess your mortgage book is also largely linked to the 12-month Euribor. One could imagine that you have some mismatch between your funding and your lending pricing if you still have the mortgage book priced on old 12-month Euribor weight and your funding is shorter term.
No, it's actually not so. I think, no, I don't think that is the reason. No.
Okay. Perfect. Thank you.
Gentlemen, we will have one more question. Would you like to take this question? Our final questions, though, will come from Christopher Rees from Barclays Bank PLC. Please go ahead.
Thanks very much, this is Christopher Rosquist from Barclays. Just two quick questions on funding, if I may. First, you mentioned at the beginning of the presentation that slightly increasing funding costs have reduced NII. Can you just give a little bit more color in that? If that's something that's specific to Nordea, or is it something wider across the market? If it is specific to Nordea, is that something that you expect to be able to drive downwards. The second question is, if I can follow up on the presentation this morning on funding in Denmark, where I understood that you were quite confident about your ability to roll over mortgage bonds. I understand that the central bank has been quite concerned with short-term bonds funding long-term mortgages. Could you clarify a little bit why that wouldn't apply to Nordea. Thank you.
Yes. I will try and do that. First of all, the funding cost I alluded to, EUR 14 million. That's partly due to the higher, of course, funding volumes and long-term funding volumes than we had previously. That's part of the story. The other part is just that the spread level prevailing is higher than the past. It really is not a specific Nordea issue. It's very much a market-related issue. I think I also stated that we continue to find ourselves at very attractive rates with the, of course, maintained AA rating. We continue to benefit from that strong decision. If you relate to the Danish question, and you were right, there was this question this morning about is there a concern. First of all, I think it's important just to stress the fact that we are actually not the borrowers in the mortgage market.
The system is such that the individual customers that borrow, they are the actual issuers of the bond. Contrary to, for instance, in Sweden or Norway, we are the issuers of the bond. In Denmark, it is the actual customers issuing the bond. What has happened over the last four years, roughly, is that most of the long-term or most of a lot of mortgage funding has transformed into short-term funding to a rate now of approximately 50% short. The actual funding is also short. It's not a matter of having a long-term funding financed with short-term funding. That's not the case. It is actually a short-term loan funded with a short-term mortgage funded with a short-term loan. We're not really sitting on that risk. The issue is that if you cannot refinance, if investors don't anymore want to have the mortgage bonds, would that create a problem?
Actually, not really for the bank because what would happen is that the price levels of the mortgages would immediately go up. That in itself would constitute a cash flow problem for individual households. In itself, that would be a problem for the bank in terms of potential loan losses and all sorts of other things. Therefore, we have to put up capital instead. The system is very clearly different to the one prevailing in the other three Nordic countries. It's not a matter of us not being concerned. It's just that the liquidity risk is not actually sitting with the bank. It's sitting with customers, and we put up capital. I think our view is clearly that a system where the funding is or the loan and the funding is done long-term is preferable to the short-term funding that has now gained such popularity.
Thank you. Just to clarify, you're not part of, as I understand it, some of the institutes have been spreading out the refinancing over the years in contrast to the January rollover.
Yeah, again, it's the customers' funding, right? The auction process is the customers. We would clearly support the notion or the direction to extend funding and not have it at one year. We don't think that's a prudent way of behaving. We should have longer-term, longer funding for the customers than what is currently the case.
Thank you very much.
There's no further question. I would now like to hand back to the host of the call for additional or closing remarks.
Okay. Thank you very much for joining our conference on the Q1 results. Thank you also for your questions. We will be now going to London. Hopefully, we'll see some of you there. If not, we look forward to seeing you in between and, of course, also on the next Q2 conference. Thank you very much for joining.
Ladies.