Afterwards, we will take Q&A. I will only do the introduction to start with, which are the key messages. I would like to say that we are pleased to note that our focused relationship strategy once again delivers, combined with our new normal plan. Not only do we deliver increased customer activity, lending is up, transactions are up, and the number of customers has increased, we are also delivering on the new normal plan with increased efficiency in cost, capital, liquidity, and funding. That combination has proven to be sound in the sense that we have built income, we have contained cost, and we have built capital, and we increased core Tier 1. In that way, we are, of course, mitigating a lot of the regulatory effects for our customers. There is more to do, but we have already taken important steps. These were the key messages.
I will now hand over to Fredrik Rystedt, our CFO.
Thank you, Christian. I will continue in the presentation with slide five. As you can see, we are following in 2011 and Q4 our trend of continued good momentum in our income line. We have increased our income since 2007 by 37% and continuously strengthened our customer relationship. The relationship customers on the household side has increased by 30% in that period. We are now, at the end of 2011, a clear number one Nordic corporate bank in the last survey by Prospero ranking. If we look at the financial results in our income statement, we had a record high income level both for the year as a whole and for the quarter. We kept our cost flat in the quarter versus last year.
As we have said previously in the year, the growth rate on the cost level has continuously declined throughout this year. Risk-adjusted profits increased by 4% year on year to EUR 2.7 billion. The net interest income for the quarter was also a record high. It increased by 3%. We had a volume increase by 2%. The lending spreads were up in both the corporate and the household sector. As could be expected, when interest rates fall, deposit spreads are slightly down. The treasury interest or net interest level is approximately unchanged. You can see the impact from all of these things on the next slide. Clearly, we've had a good volume increase on the lending side, producing good contribution to profits, also on deposits, and particularly so on the household deposits. The lending spreads contributed quite significantly in the quarter, while deposits, as I mentioned earlier, declined.
Turning to net to the fees and commission income, we had a fairly stable development in Q4, but at a good and high level. The assets under management increased by 5% to a large portion by performance in the assets under management, but we also saw a flow income or flow in the quarter. Lending commissions were up by 4%. The biggest shift versus the third quarter is relating to the fair value line. You can see that on slide 10. Fair value improved by EUR 395 million. That was largely due to a very, very difficult Q3 and also a strong Q4. What is stable and remains stable is the customer demand and the customer part of our items at fair value. As you can see, it increased slightly in the quarter at a good level. The market unallocated part was EUR 221 million. That was a result of trading conditions.
We had a reasonably good quarter also in treasury. We recognized some fees from the live business that we couldn't recognize in the third quarter. The expenses are a very significant part of our new normal plan. We have executed on a lot of different activities during the fourth quarter, resulting in a flat cost development pretty much for all quarters, and also versus the fourth quarter of last year. The underlying expenses are up by 3% Q1Q, but this is quite normal. This is typically what we see as a seasonal effect in Q4. The underlying staff expenses are down by 3%. That's a result of the fact that the efforts are down by approximately 780 people compared to last quarter. The result of a good income and also a good cost control is a CI rate shown as just below 50%. With those words, I turn to Ari.
Thanks, Fredrik. Moving to credit quality, page 12. As you can see, in the fourth quarter, we booked somewhat higher than expected level over the cycle. Loan losses are EUR 263 million. The losses are coming from these kind of well-known highest tension areas, mainly from Denmark and in shipping. Actually, the market development during the second half has been deteriorating somewhat further. That means that we have taken down the value of collaterals of those risk customers we have in our books. There has not been so much new problem customers in these areas, so this increase is coming mainly from old customers and reduced collateral values. We know well these areas, and also, we are addressing these issues with our resources. All in all, still, the credit quality is solid in our books.
That is also shown in the positive rating migration, which is happening in all the countries and all the business lines except in shipping. You can see the longer trend on page 13, where you can see that now these both halves in 2011, they were more or less at the level of expected losses over the cycle. In that way, 2011 was quite close to the average year all in all. Impaired loans, page 14, you see that actually, there was not a very big increase in impaired loans. It was only 5%, also indicating that actually, there were not so many new customers coming into the problems. It was more or less old identified customers. The impaired loans ratio actually was even a little bit down because there was a growth in the lending books.
If we take a little bit more detailed look on the various markets and where the problems are coming, page 15 is showing impaired loans divided by country. Here, we exclude the shipping. I'm coming back a little bit later. You can see that actually, in Finland, in Norway, in Sweden, the level of impaired loans has been very stable. Actually, in some markets, they even slightly down. In Denmark, there has been a slight increase in Q4, whereas in Q3, the development was stable. The biggest increase in Denmark in impaired loans happened in 2010, actually. The next page is showing that the same information in terms of loan losses. There also, you can see that in Finland, in Norway, in Sweden, yes, they were a little bit, let's say, up from the previous quarter, but still at a very moderate level.
The loan loss level in Denmark, that was also up from the previous quarter. As you can see, it was more or less at the same level as it has been now for the past quarters. Some more information from Denmark on page 17. This EUR 118 million losses in the fourth quarter is divided between corporates and household portfolios, as you can see. Now, the source of the majority of the loan losses has not been in Denmark, the corporate segment. There's a ME segment, which has been the problem in the previous quarters, much more household customers, which was also the case in Q3. We have made a thorough review on our household portfolio in Q3 and also in Q4. I said that now the collateral values are coming down in Denmark to a certain extent, and we have increased the loan loss provisions.
Perhaps it's worth mentioning, to give some kind of context to this, what is the volume of these customers in problems on the household side? We have in Denmark 175,000 mortgage customers, and 740 of them have delayed payments more than three months. The absolute volume of these problematic household customers is relatively limited. Moving to shipping in the next page, you see that the loan losses are decreased. As you can see from the impaired loans, you can say that also the impaired loans were up in the fourth quarter. If you take a look at the absolute growth in terms of impaired loans, we see the figure roughly EUR 70 million. Actually, that comes more or less from one or two individual customers. That is also indicating that, in a way, even one customer in this type of quite low figures we have had can have an impact.
Finally, on the shipping book on page 19, we give a little more information how we see now the various segments. Of course, it's very important to remember that out of our total lending, it's only 4% which is in shipping. We have to put these special attention areas also in the context. Even with this level of loan losses, shipping is making profits. We have been able to increase great margins, reflecting the increased risk in this area. Most of our problems and losses in Q4 came from the tanker market. 80% of our losses in Q4 in shipping was from the tankers, where the global demand is low, as we know, where there is an oversupply in the market still in terms of new ships coming in the marketplace. Those two factors are taking down the strike rates.
Even though we have very dedicated, skilled work-out resources, now in this type of market environment, when there is a quite limited appetite for shipping assets among investors and also quite limited appetite among banks to allocate the lending to shipping corporates, it's more difficult to find this kind of successful risk. Still, the majority of our shipping book is recorded to be allocated to this type of low risk area, so that even in this type of market environment, we do have shipping segments which are performing relatively strong. Christian, back to you.
Thank you very much. I will continue on capital. As you can see from slide 20, we are indeed building capital year by year. Actually, we have grown the capital by 9.2% since 2006, adjusted for dividends. What you can say is we are more or less building a 1% core Tier 1 per year, which is confirming our profit capability in the bank. We can also see that the rating migration has been positive, as Ari Kaperi alluded to, and see that even in Q4, we have still positive rating migration, meaning that our credit portfolio in general, except the areas mentioned, is doing well. The capital position is improving, not least because we managed to keep the risk-weighted assets unchanged. I will come back to that a little later.
We have absorbed growth, and we have absorbed part of 2.5 and still keep the RWA unchanged, which I think is a good achievement, which means that the core Tier 1 capital ratio was built to 11.2%. As you can see, that's nearly 1 percentage point in one year, confirming this capability. Funding has been strong. We have in all months, all through the year, had access to all funding markets, including the U.S. dollar market. We have not, in any sense, been impacted by the turmoil, except from the fact that the credit spreads, of course, have gone up somewhat. We are still one of the banks with the absolute lowest funding cost. All in all, we deliver an ROE of 12.3%, which is a good number, remember, in the background in the marketplace and the economy.
We keep the ROE target, which we formulated during the autumn, of 15% under normalized condition at 11% core Tier 1. The dividends are in line with the policy at 40%, which is proposed to the AGM. Two words on the updates on the new normal strategy we presented in the autumn at our capital market day. It is the relationship strategy and the new normal plan. It is very much about a disciplined ROE focus. It is about cost and capital efficiency. We have in each business area a clear focus on this, making plans on how to deliver this, which give consequences for each segment where we actually work to change the business model to improve the ROE. There's a cost element, of course, to it. We have a cost plan.
There is very much a capital element and very much a re-engineering element in terms of getting capital, funding, and liquidity together in the right way to the right segments. That also trickles down to each customer. Actually, on each individual customer, we're looking through exactly how and what products to deliver in order to minimize the burdens of new regulation. The new normal plan has delivered. I have to say, I'm a little proud that we actually delivered in recent quarters on these very difficult conditions. The FTs are down, as we have decided. By Q2, it's down by 1,100 people. We are well ahead of the plan to reduce by 2,000 by 2012. Of course, costs are coming down, including other cost elements, also IT. We are confident with our target to keep costs unchanged for a prolonged period of time.
Productivity is going up more or less no matter how you measure it. The income per employee, business volume, number of customers, 50, and cost to serve. The capital efficiency is worth mentioning more in more detail. The RVAs is kept unchanged. The growth is around EUR 7 billion. We have a rating migration around EUR 7 billion. Then we're in the bottom EUR 2.5 billion of nearly EUR 4 billion. We have RVA efficiency gains at EUR 5 billion, which is very much the easy wins to start with, where we have reviewed the product segmentation and ensuring that we have the right clusters to produce the right quality in data. Collateral agreements have been reviewed, registration, data sourcing, and also the development of capital light products, which will continue.
All in all, absorbing the bottom EUR 4.5 billion and still having the same RVAs at the start of the year, I think, is part of our plan, but also a good achievement. In this context, it's more or less clear that this RE circle we have on the next one, what that means. There is a general public debate around how much banks should make, not least in the Nordic area. The argument is, of course, that if we want to run a bank, which mission is to create great customer experiences, we have to be able to secure that they can finance their plans.
It means that we have to have the ability to lend, which means that we have to be able to build capital and attract funding at low cost, which requires that we deliver an RE above cost of equity, which then, of course, feeds into the circle with great customer experiences and more momentum. The other way around, of course, won't work. Too low return will not build capital and funding costs and destroy the customer satisfaction. Now, this cost of equity is, of course, a good discussion how big it is. Still, when I meet investors, there are very few below 11 and then some even higher. Of course, there is a return on requirement on European banking. It's clear that today, a lot of European banks are not delivering an ROE above cost of capital.
That is, of course, a reason for the whole development towards business model review and changing business models. We are rebuilding our business model. We are reviewing it, as I said, segment by segment, product by product. What we're doing is, in reality, enhancing ROE year by year. We will, from operational efficiency, increase ROE year by year in the coming years. The 15% target is, of course, set up under normalized conditions, which is some growth and some interest rate level a bit higher where it is today. The key message is we are delivering on our plans exactly as we wanted to. We have still kept our business momentum. We are lending money. We're doing a lot of transactions and helping our customers and serving the economy. We are mitigating the effect of the new normal for our customers. Thank you.
I think we can now go to questions. Operator.
Thank you. 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 your 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 the question. We will pause for a moment to assemble the queue. We will take our first question from Nick Davey from UBS.
Yes. Good afternoon, everybody. Nick Davey from UBS. Thanks very much for taking the time for the call. I've got three quick questions, if I can. The first is on liquidity in your disclosure, which you provide in the fact book surrounding your liquidity portfolio. There's been some significant moves in the quarter. It looks like you're holding a lot more cash now in U.S. dollars and in euro as well. Could you please just talk us through a little bit around your preparations for the Riksbank's request for an LCR by currency, whether this is something which is on your minds for 2012, whether you think this will be an important theme, whether you're there already as far as a 100% LCR requirement in each of your major currencies? The second question is on Denmark. I noticed that you're growing your corporate book at around 12% year -on -year.
You have somewhat of a cautious rhetoric around macro there, although most of it's in the household segment. Could you please just talk about what you're seeing on the front book with regards to Danish corporate activity, what sort of segments you're able to grow in, and how confident you feel on the asset quality of the new business which is available? The third question would be on interest rate derivatives, where there's been quite a sizable move in the quarter and also in the year. It seems like your interest rate derivative position has doubled to about EUR 150 billion. Could you please talk us through, I guess, the motivations behind this? Does this change at all your interest rate sensitivity, which I believe your last guided level was around a EUR -500 million for 100 basis points of rate cuts?
Could you please just talk us through interest rate sensitivity and that expansion in the derivatives book? Thank you.
Yeah. Maybe I could start with question one and three. We'll come back to Denmark last, if that's okay, Nick. If I just start with the liquidity, you're absolutely right that it was actually not only U.S. dollars and Fed. It was also ECB that we had a lot of funds over the year-end. Of course, part of the story there was that we were able to attract a lot of short-term funding. We actually did that over year-end in just anticipation of, or you can say, precaution or prudence. We placed that on Fed and ECB. It was just a precautionary method. That, of course, pushes that liquidity buffer gross, so to speak, up to a very high level over the year. That's not a natural state. You were referring to the LCR implementation there, I think, which is somewhat of a different story.
The short answer to your question is we're not compliant with LCR in its full shape and form. Of course, there's always a possibility that the definition will change there somewhat. As we have alluded to also on the capital markets day, we have a composition issue or not issue, but a different composition. Too little level one assets and too much level two assets in the portfolio. We've also actually provided a number of what it would cost us to become fully compliant. It's actually quite a small figure, as you may or may recall from the capital markets day, of about EUR 45 million. It was more year-end and precautionary issues driving that year-end effect that you saw there. If I just take question three, interest rate derivatives, it has grown considerably during the year. If you look at it, maybe two comments on that.
First of all, it's very much correlated with the interest rate development. A decline on the interest rate side has caused both sides of the balance sheet, of course, to increase quite considerably. It is actually very correlated. It's not fully correlated because there's one other factor that has also caused an impact. That's the credit spread in the marketplace that's also increased it again on both sides of the balance sheet. If you look at the balance sheet growth for Nordea Bank and you compare it to our Nordic peers, what you will find is that the balance sheet has, in fact, grown not that much in non-derivatives. The expansion on the balance sheet has actually been quite small in the non-derivative side.
If you look at it just derivative-wise up until the last or the first nine months, because that's the only thing we can actually compare with, you can see that we're pretty much in line. We're actually on place three or something in terms of derivatives. This is just something that is happening to every bank. It basically is correlated with the interest rate and spreads. Danish?
Yes. I think that you could describe this Danish corporate segment that there is some kind of polarization ongoing so that those corporate customers who have been weak, mainly in the SME segment, some real estate companies, they are not recovering. They are, let's say, becoming weaker and weaker. There are lots of these kind of strong corporate customers in Denmark who have strong financial positions. Actually, even the outlook is relatively good and strong. Naturally, the growth is coming from these kind of high-quality customers. We are doing a lot and a lot more business with our existing good customers, highly rated customers. We are also taking in selectively new customers, which are highly rated. We have cleared this type of principle that what is the quality of our new customers when we take in. I'm also happy to say that we have a good success also in Denmark.
That means also that, in a way, if you take a look on the average PD probability at default, also in the Danish corporate book, actually, that's quite much improving because of these issues that our business is focused more and more to the highly rated customers and less and less to the low rated customers. There are still good opportunities also to grow in a controlled way in Denmark. At least I'm not concerned about the quality of this growth.
Thanks very much. That's three very clear answers. If I could just push my luck and ask for one follow-up question, please, Fredrik, on the LCR point. I remember the guidance you gave about group LCR. Is there any change in your thinking about any sort of impacts to the P&L by the proposal to bring in an LCR by currency? I mean, if I look at your balance sheet by currency in your fact book, I mean, your dollar loans, for example, have grown in the quarter. It doesn't feel to me, at least, like you'd be bridging a gap on the LCR in dollars. Do you think this is an important theme for 2012 or not?
I'd like to come back to that, Nick, because in all fairness, as I said, it was actually not related. If you look at our dollar funding, which has been an issue, dollar funding in general has been an issue for lots of banks. First of all, it's important to know that we have had very good access to the dollar market and continue to have that also throughout 2011. It has been a very, very strong thing for us in general. It's also interesting because the main theme, you can say, is actually the balance between U.S. dollar pure lending and the funding we're able to attract. We have much more U.S. dollar deposits and long-term funding than we actually lend in dollars. In that sense, measuring from a more balanced approach, we're actually in very good shape. I think the LCR issue is less of an issue.
I will come back to you later during the year and talk a little bit about the LCR definition because it's a little odd here. I don't have any good information for you at this point.
Okay, that's very helpful. Thank you.
We will now take our next question from Matti Ahokas from Handelsbanken.
Yes. Good afternoon. It's Matthew Ahokas here from Handelsbanken. Three questions from me as well, please. The first two on shipping and the third on life insurance. Obviously, on the shipping side, you've mentioned as one of the reasons that you're increasing the provisions is that the collateral values have declined in the fourth quarter. Now, when I look at the industry data, it looks like the asset values, the vessel asset values have actually increased now in the first quarter. Will this mean that you will actually have to write back some of the provisions you made on this basis, or how does the mechanism work? The second thing on the shipping is the collective provisions. What was the change in the collective allowances within the shipping sector in the fourth quarter? What's the accumulated stock of the collective provisions in shipping as of the fourth quarter?
The third one, a really quick one on the discount on the life insurance business in Denmark. Did you do any changes on the discount rate methodology of discounting technical provisions in Denmark in the fourth quarter? If so, what impact did this have on the profitability? Thanks.
If I start from these two shipping-related questions, collateral values, of course, if you're lucky, you can get something back. Of course, as I explained to the market, it's now, in reality, very difficult for these transactions. There is some appetite within the industry to, let's say, accelerate this consolidation. There is a quite low appetite for financials and investors to go in. In a way, the liquidity of these types of, especially the holder ships, they are quite poor, to be honest. I'm not expecting so much on getting recoveries back from these provisions we have made.
When it comes to collective provisions in shipping, actually, we have to remember that the size of our shipping book in terms of customers is quite limited so that we don't have so many clients, which means that what we do is more kind of customer-specific provisions because we are close to customers and act there whenever there's a need. We do have some quite smallish collective provision in shipping, and it was not so much changed during the Q4. The main approach is this type of specific customer-specific provisions because we know the customers and we know when to act them and when to make provisions.
Sorry. I meant to continue on that note. What measurement do you look at when you look at the collateral values? Is it some kind of public stuff, or is it the case-by-case vessel valuation? How does that work when you say that you don't believe that the transactions will actually take place?
We are always asking this type of updated valuation from these kind of reliable external parties, usually from more than one. Especially when we are talking about bigger customers with bigger fleets, I think that we have quite updated and correct values. This type of market values is a different issue. If you have these kind of smaller shipping companies in a defaulted situation with one ship or two ships, of course, it's, in a way, a little bit different issue. What is the market value of the ship, especially if it's sold?
I'll answer the third question. It was on life insurance and the discount rate in Denmark. As I alluded to shortly in the presentation, if you recall from the third quarter, we actually reversed the shareholder fees we had from Denmark relating to three of the four interest rate groups that we have in the Danish life portfolio. There has been a change now in the discount rate as issued by the FSA, and that has enabled us to take shareholder fee for two of those three interest rate groups. The impact on the fourth quarter was EUR +29 million . Yes, the answer is that in line with the whole industry, the FSA issued new discount rates.
Very good. Thanks a lot.
We will now take our next question for Omar Keening from Nomura.
Hi. Good afternoon. Just two questions, please. Firstly, just on now that we know the outcome on regulation in Sweden, can you talk more about how Norway and Denmark are developing and how you see that affecting your ROE targets if you don't get a harmonization in regulation between the Nordics? Just a second question, back on Denmark again, and just focusing on the household sector. What would you see as your outlook for asset quality over 2012 if you see continued pressure in terms of unemployment? Would you expect gross impaired loan formation to increase, which you said wasn't a feature of the fourth quarter increase in loan loss provisions? Thank you.
Maybe I should take the regulation part. That was a brave statement. You think we know regulation? I think that is an early call. I think that the French and the German finance minister may disagree a little. I think we absolutely don't know the regulation. I think this is a moving target, and it will stay moving for the foreseeable future. We know the Americans are very much stuck on 7 + CFE. We know now that Central Europe is working on 9, maybe even less, and certainly on export bonds and also on NSR. I think that Sweden has made the statement. We know, and it is a political statement. They certainly believe that 12 is a good number. I have full respect for that, but I also have the strong feeling that we will seek a calibration towards a common number.
Actually, you may remember that G20 at Korea decided that we should have an absolute one number globally because they wanted to avoid more systemic risk. They asked the Financial Stability Board to make sure that actually happens. I'm sure that we will get a global calibration, maybe not very soon, but we will get it someday. To think that one country will go 30% higher than big neighboring countries on capital is, to me, simply not realistic. I don't think we know the regulation. I think with the most recent move from Germany and France, I'm quite certain that the discussion will be more along the lines of how much can the financial sector take and still keep financing the economy. We have to remember that in Europe, it's only the financial sector that can do it.
The governments are not in a position to finance anything except their own deficit. Therefore, we are in a situation where this is a moving target. I also don't think LCR is a moving target based on recent discussions with the top officials. I certainly think NSR is highly difficult to forecast. The most likely scenario is we will have a level playing field. It will be postponed somewhat by the main effects of bottle tree. I still think we stand extremely well on 11.2%. We will not change our targets every quarter when regulators say something. I think now we'll stick to this target. I think it's pretty well defined, and it's not difficult to see what will happen if we have to go to 12% or 12.5% or 13% to recalculate that target. It's not difficult.
The dynamics around the other regulation, NSR, is also important, which will actually also change the R and not only the E. I think all in all, we don't know what will happen. This will be a moving target for the foreseeable future. We will keep to our new normal plan. We will make more efficient on capital and funding and liquidity. If it turns out to be a lower ratio, we will, of course, deploy the capital or buy back shares. If it turns out to be a higher ratio, then we'll just build the capital, as you know, with the capability we have to build nearly a percent per year. I think we are absolutely fine. A question on asset quality, Fredrik. Oh, perhaps I could start.
In a way, there are, of course, positive indicators as well as many negative indicators when it comes to household outlook in Denmark. The negative indications are we see the somewhat increased unemployment rates. We see some drop in the housing prices. We see the increased amount of forced sales in the house market. From that context, it's difficult to see that there would be a very quick, this type of positive trend. We have to remember that still there is this kind of very, very much positive issues in the Danish economy because the GDP is still forecasted to be on the plus side. The public finances are stable and strong. Thereby, we believe that some latter part of 2012, perhaps we may see some kind of signs of recovery.
All in all, perhaps the next quarters will still be relatively, let's say, weak in terms of Danish household outlook. How does this scenario impact on our loan losses? It's a little bit more difficult to say. As I said, we have now scrutinized our household lending book in the, let's say, past two quarters. We have to remember that. We have seen an increased number of this kind of specific loan loss provisions from certain over-leveraged household customers. We have to remember that we have also quite substantial amounts of collective provisions for the household book in Denmark. When we see that this negative trend may turn around in Denmark, of course, you start to see some kind of reverse outsource from the collective reserves where we have been quite prudent so far that we have not used so much of our collective reserves.
This is more or less we can't give a more precise outlook in terms of credit losses. It is very difficult to see that there would be a total collapse in the Danish household.
Okay, thanks very much.
We will now take our next question from Ronny Rehn from KBW.
Good afternoon. It's Ronny from KBW. A few questions as well from my side. First, in Denmark, do you expect any charges coming from the change or potential change in the deposit insurance scheme? If so, how much? The second question on the LTRO. Are you intending to take up some in the second round? If so, how much? Lastly, on the cost outlook, you confirm your target that you look for a flat run rate. I just want to confirm that this is excluding the restructuring costs from the third quarter. Thank you.
Yeah. Samart.
Please, the deposit insurance scheme.
I actually don't have that knowledge. Yeah.
It is being changed. We can say it's being changed, but I don't think any of us have the number right on our lips. It has been changed from an insurance scheme to a paid-in scheme. Will there be some payments in the coming years? It's not huge, but we have to come back on the number, which we don't recall right now.
Yeah. Actually, we don't think we actually don't know that yet. We will come back when we know more on that issue. If we take the second question on the LTRO, the short answer, we haven't decided. There are things that are of course positive in the sense that pricing is attractive in that program. There are a couple of negatives. First of all, of course, Nordea Bank is a bank that is attracting significant and good funding from a lot of other sources. We have at least historically refrained from central bank funding. That has been our general sense. We don't actually need it. The third issue is, of course, we're still not 100% familiar with what kind of collateral will be allowed by the Central Bank of Finland, for instance. We haven't actually taken a decision.
The only reason why we would want to do that is, of course, just for financial reasons. It could be factored financially. We haven't yet decided. The third question was the cost outlook. I can just confirm that it's excluding the restructuring.
Basically, we're looking at, I mean, say EUR 5.1 billion for 2012 as a target.
Yes, approximately flat level compared to this year, excluding restructuring, yep.
Okay. Fantastic. Just one last question, if I may. In terms of the risk rates, I mean, you've done a great job bringing down your risk-grade assets, offsetting regulatory impacts. We're also helped still by a positive migration in the book. Have you run any sensitivities that you can share, how this migration might change for the current book with a deteriorating kind of GDP outlook? What are these sort of sensitivities?
Thank you, [Michael].
Yeah. I don't have this kind of specific information now to give that. Of course, we are running definitely this kind of assessed on various seeds, this type of actual risk of negative rating migration. Actually, what would be, we have not found this kind of meaningful outlook for the whole portfolio. We have been more selective and thereby, in a way, that's not information I could now hand over to you that what would be, for example, of course, I could say that if there is one down rating for the whole book, what would be the impact on risk-related assets. That's not so meaningful.
If you could share that, that would certainly be interesting, probably, to most people on the phone.
Yeah. If you just look back in time, maybe, of course, we've had a possible migration for 2011 and the negative 2010/2009. There is nothing that would suggest a significant deterioration. It's more of the flattish. We don't actually give forecast. It will depend on the macroeconomic development. You have the historic numbers. In the very severe year of 2008 and 2009, you saw the impact was clearly less than 10% in a very, very severe scenario. You actually have the sensitivity pretty much already on the history.
Thank you.
You will see much more in the Pillar 3 report.
Thank you very much.
We will now take our next question from Chintan Joshi from Nomura.
Hi. Good afternoon. Sorry I've joined late. I might have missed if you've already answered something. Christian, I wanted to take you up on your answer regarding recalibrating the ROE to meet the new regulation. Would I be wrong in thinking that if, say, Sweden did have higher capital requirements, then you would just price your products to meet your ROE target? Is that not viable in the current environment? Rather than change your ROE target, you change your pricing. That's the first question. The second question is on Norway margin outlook. How should we think about margins developing there, going ahead, particularly on the household side? The third question is on your coverage ratio at the group level. It's been run down gradually now since 2009. Relative to your peers, it does look like a trend in rundown.
I'm just wondering if we have come to an inflection point where you'll need to build up the coverage ratio from here on. Thank you.
The recalibration I talked about was to get a common level of both the one-way chosen Europe. I said if we have a situation where it will be higher than 11, then we probably will have to recalculate the target. We will not do that every quarter when regulators say something. You're right. There's a lot of pricing dynamics in this. There's a lot of regulation dynamics. As I mentioned, specifically the NSR is one that I think is being under question now in a way that we have to see how it's built out. Of course, our funding cost comes into this as well. The dynamics mean that it's more difficult to recalculate our target than just doing it by sort of a rule of thumb. There are a lot of dynamics in this. We will not change the target every time.
I think the one we have done in the autumn is quite clear, and we'll now stand until we think that the regulation gets clear enough to redo it.
If the core Tier 1 requirements were to be set at 12% or higher, would you still need to bring your ROE down, or could I assume that you will still aim to target a mid-teens ROE?
That depends on the ROE or the core Tier 1 ratio in the other countries. If we start to work on different core Tier 1 ratios, then this calculation will come out different in different banks. That, of course, doesn't make the pricing dynamics obvious. This is a more complicated issue. It requires we actually know where this ends up in the countries where our main competitors are situated. This is not very easy. It's also so that we have competitors in other countries where we are working with lower core Tier 1 requirements specifically. That has also made it more problematic to make that calculation. I think we simply have to say that we don't know yet where the core Tier 1 ratios will end up in Europe in the coming years.
Yeah. Shall we take maybe Norway? Your question was relating to the margin development in Norway. As you can see, we had a pickup in margins on the household sector, as your question related to in the Q4 quarter. Of course, we believe that margins should continue to increase. Whether that will actually happen is a matter of competition and, of course, also funding costs, etc. You can also say that margins are still relatively low in Norway. Again, it's difficult to forecast. Of course, we are striving to continue to increase the spread, the interest rate spread.
If I just extrapolate the current trends, NIBOR is falling, mortgage rates aren't being cut, and the FRA curve is telling us that NIBOR should continue to fall further. It all points towards a nice, healthy development. Am I reading that correctly?
Yeah. I think just because NIBOR is falling doesn't necessarily indicate a higher margin. As you know, of course, the margin is on top of DIBOR or NIBOR or whatever it may be. It wouldn't necessarily, I don't think it's possible to extrapolate. It's 14 basis points in the quarter. I think it's actually quite difficult to extrapolate that kind of development as we go forward. I wouldn't do that. Of course, we're always striving to ensure that we get a fair pricing. Funding costs in general have increased, and of course, the capital requirements are increasing, etc. That is the case for all banks and all competitors in Norway. Fair pricing would indicate continued margin increases, and that's what we're striving for. To actually extrapolate that, I would not do.
If I then move to your third question related to this loan loss coverage ratio or allowance coverage ratio, what usually happens when the downturn starts is that, at least how we behave, is that we start to build up these kind of collective provisions when we see that there will be problems in certain portfolios before we see these specific customers where we start to impair loss. When the downturn continues, we see more specifically that, okay, what are the customers and what is the more precise need for provisioning? Thereby, we are reducing collective provisions and moving those to individual provisions. This is more or less the normal behavior, which is fully okay, at least from my opinion. One of these more specific issues is that if you take a look at our shipping coverage ratios, they are quite low.
They are around 33% or something like that, which is now in a way the shipping portion of our allowance is that that has increased with a relatively low coverage ratio. That is also very natural because shipping lending is from the outset fully collateralized. Thereby, the need of this type of higher coverage ratios is perhaps lower than in other parts of the portfolio. When this changes back to this type of higher coverage ratios, it's difficult to say. This is usually what happens in this type of economic cycle.
Thank you very much.
We will now take our next question from Sophie Peterson from JPMorgan.
Yeah. Hi. Thanks very much for taking my question. I also had three questions. My first question was around the asset quality in Finland. When I look at your NPLs quarter on quarter, they were up over 30%. When I look at the loan loss provisions, they're almost stable. They only increased from 11 basis points to 13 basis points. Can you just explain what I'm missing? My second question is around the Baltic loan loss provisions. They increased or they almost quadrupled in the quarter. I was just wondering how I should think about the asset quality in the Baltics. Do you expect the asset quality in the Baltic countries to deteriorate further? Thirdly, in terms of shipping, with the lower collateral values, are you asking for additional collateral from your shipping clients? You mentioned that you have quite or you don't have that many shipping clients.
What's your largest exposure, the single group in the shipping industry? Thank you.
Okay. I think that I should start. Actually, we got the same question related to the Finnish impaired increase a little bit earlier. You have to dig into that more precisely because, according to my information, actually, there is hardly any increase in the Finnish impaired loans, not at the gross level, not at the net level. We have to clarify this. I guess that you are comparing to the Q3 fact book and now Q4 fact. I don't recognize this increase myself. We certainly have to come back to this issue.
Yeah, it's from the fact.
In Finland, actually, the asset quality is strong and it has not deteriorated. That is, in a way, the reality. If I move to the Baltics, yes, you're right. Loan losses increased in the Baltics. Please remember that in absolute terms, the loan losses were EUR 12 million in the fourth quarter in the Baltics. Actually, it's a very small absolute amount, and that can vary a lot between quarters. I would not say that this is an indication that now we see the next phase of deteriorated asset quality in the Baltics. This increase in the Baltics, nevertheless, we are talking about the small amounts that came from some household customers in Latvia and Lithuania, and then a few of these types of old corporate problem cases where also we had to increase a little bit our loan loss provisions because the value of collaterals was down.
Your third question related to shipping and can we take additional collaterals from these customers in problems? That may be a little bit difficult because usually, when we grant a loan, we take all the collaterals there are. This is asset-based lending we have for the shipping companies, so usually, there is hardly any additional collaterals available. Of course, this type of action always is when we identify a customer with a potential risk customer early enough. Actually, of course, we are trying to get in all of what we can and improve our risk position with all means available. Usually, perhaps this is not the source of additional security taken in more collaterals. Your last question was, was it so that what are our biggest shipping clients? Or can you repeat that?
Yeah, I was wondering what your kind of largest exposures to a single customer is in terms of equity.
Yeah. We don't because we have such a, in a way, limited number of customers. It's perhaps not prudent to give this type of information. As I said, we have a relatively limited number of customers, especially those customers with a little bit more meaningful volumes. That, of course, perhaps that's an indication.
Do you have any large exposures that are more than 10% of your equity, the single name?
No.
Got it.
No.
Okay, thank you.
We will now take our next question from Fridtjof Berents from Arctic Securities.
Yes. Thank you. I was just tempted to pick up first the debate about the moving target regulatory rise to Mr. Clausen. For me, it's not a big question if it's 10% in France, 13% in Sweden, and so on. I would expect you get some cheaper funding for that over time. My biggest worry is that we really have no clue how they treat the same exposures in different banks in their IRB models. I just wonder how you see that from an industry's perspective, that it's very difficult to have really a good idea about how the risk-related assets are measured on a similar basis between banks within exposures that are similar.
My second question is, if you follow the debate in Norway regarding capitalization, it's obviously there's quite hard pressure on the banks currently, meaning also that we are in a period now where there's possibilities for picking up or taking more high margins, I would guess. In that respect, how do you see that from your perspective, discipline here or attempted to take market share in that perspective? Okay. Thank you.
Yeah. I can answer the questions. Just briefly, first of all, of course, it's our absolute opinion that risk should be valued in terms of risk-related assets in the same way, regardless of what kind of bank we're dealing with. If you look at Nordea Bank, at least now, I think actually now and historically, we've had, in comparing to at least some banks for the same loan loss history, we've had higher risk rates, maybe partly because of, of course, the fact that we are exposed to quite a few different FSAs. In that sense, that may have impacted that negatively. We fully share what you're saying there, that there should be an equal treatment of risk rates regardless of where you are. I think it's also the ambition to some extent by different FSAs to achieve that. Hopefully, there will be a normalization over some period to come.
The other question on the capitalization, you're right. I think there is, as is the case in Sweden, a harsh discussion and debate in Norway as we speak. Of course, we would strive, as I alluded to before, for fair pricing, taking regulatory changes into consideration. Having said that, it hasn't actually happened in Norway yet. It's actually quite difficult to anticipate any sort of immediate change based on capital requirements like that until it actually takes place. Just generally speaking, of course, as we have claimed or said many times, our ambition is to achieve a satisfactory return on equity and not necessarily hunt for more.
Okay. I could just follow up there. If you're in the FSA in the U.K. gave the different banks a portfolio that the banks needed to run through their models and giving the risk-related assets on this different portfolio, if such a portfolio was given to you by the Swedish or Nordic FSA, would you be interested in also having such a portfolio or numbers given out so we could, as analysts, see the different numbers that the models were giving so we had a better feeling for which model were harsher than another model and so on?
I think it's a very theoretical question. I'm not sure if you want to add, Ari, but I think it's a very theoretical question. As I said, principally, it's our perception, right or wrong, without actually having the ability to fully verify it. Of course, it's our perception that we have high risk rates in comparison. There are many reasons for it. There are model parameters and other things. As I said, maybe we deal with the FSAs. I think what you're proposing is very interesting. I think in practice, it's pretty much a difficult exercise. To some extent, I think it needs to be done within local FSAs. They have more of that ability to actually do that and to adjust for differences that may be hard to compare.
Thank you.
If there's one final question.
There are no further questions in the queue.
Okay. By this, we conclude the fourth quarter presentation. Thanks very much for attending. I hope to see most of you in London tomorrow. Please save the date, 13th of February, where we'll have a presentation of our shipping portfolio in Stockholm by our Head of Shipping, Mr. Hans Christian Kjelsrud. Thanks very much.
That will conclude today's conference call, ladies and gentlemen. Thank you for your participation. You may now disconnect.