Okay, and welcome to the third quarter report 2011 international telephone conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rodney Alfvén, Head of Investor Relations. Please go ahead, sir.
Yes, and welcome to this presentation. With me, I have Mr. Fredrik Rystedt, our CFO, Mr. Ari Kaperi, our CRO, and also Andreas Larsson, our Senior IR Officer. We will be joined at a later stage by Mr. Christian Clausen, President and Group CEO. I would like to hand over first to Mr. Fredrik. If you just please go ahead.
Thank you, Rodney. I will start with some initial remarks on our financial results, and then Ari will talk about the risk picture and credit situation, and Christian will finally talk about the future and the strategy and the financial targets of the bank. Just to start the presentation, some key messages. We have a result which is down in the quarter, but the underlying customer business and the underlying result is, in fact, robust, and it's a positive development. We have customer-driven revenues, it's up from the second quarter. Increases in the lending volume, both on the household and the corporate side. Underlying costs are down by 3%, which is more than the usual quarterly development. However, having said that, we have had a fairly significant impact on the financial turmoil in the Q3 result as could be expected. Of course, increased volatility, increased spreads play a significant role.
We have weak equity markets, and of course, also lower interest rates, and that affects the holdings we have in the bank. We have also a specific issue, which was similar to that of 2009, where we have the accrued fee income we have put to the reservation account in the Danish Life operations. Thereby, we have reversed the fee income that we have received from the Danish Life operation in the first half of this year. Looking forward, we feel we are well prepared to reach an ROE of 15%. We have now replaced the three previous financial targets with just one target of reaching 15% ROE under normalized circumstances. We'll come back to that. This is in line with our previous communication that we should be in the top league of the European banks. The way to do this is not through a change of strategy.
On the contrary, we think that our strategy, relationship strategy, is very adequate. We are merely focusing slightly more than we have done in the past. These are the main points. Let me thereby go to the next slide four and show you the result in more figures. You can see from that table that net interest income is up both on a Q1/Q basis, but also year to date. Fees and commissions are significantly up on a year-to-date basis, but on the back of lower activity on the advisory business among the corporate, and also, of course, lower asset management. Fees and commissions is down in the quarter. Where you see the main impact is, of course, on the fair value results. Let me come back to that.
Total expenses is up, as I said, in the quarter, but you can also see in the table that, excluding the restructuring charge, we are down by 3%. Let me just touch upon the financial turmoil and how that has actually impacted us. You can see on slide five that there are a few areas where we have been impacted. The first one relates to the challenging market conditions. This is our unallocated markets result, which is significantly EUR 115 million lower than what it was in the second quarter. This is partly due to a fair value adjustment, which is automatic as a consequence of the interest rate decline when the position simply, by default, expanded in size. The other one is an expansion of CDS spreads.
Both of these things are more or less automatic and have not had any impact on or had any influence on the actual trading made. It's important to note that that part, of course, will come back to the result if interest rates go back up. Of course, also when the contract matures, then that will actually also come back. We have had an impact on the equity interest rate positions. A fairly significant part of that is actually equity. To be exact, it's approximately $58 million. Out of that, a significant portion relates to Pandora, as you have seen from the report. The other part of the equity is minor equity positions that we have just revalued as a consequence of the decline of the stock market. Finally, the impacts from lower life fees, you can see on that bar chart of EUR 52 million.
That is basically, we've had approximately EUR $15 million per quarter. In Q2, we had a positive of EUR 15 million. Now we have reversed both Q1 and Q2 fees from the Danish holding, and that has resulted in that swing between the different quarters. If you accept or exclude all of these factors that have been directly impacted by the turmoil, then you, as you can see, the underlying business is continuing to grow in a stable manner. Just going to some quick comments. Net interest income, as I already alluded to, has been positive in the quarter. We have a modest increase in both lending volumes on the corporate and on the household side and mortgages. We can see that for both those classes, we have improved lending margins, and generally, deposit margins are also improving.
The backside of the coin to the interest rate positions we've had in treasury, we also have a positive contribution to the treasury on the NII side. You can clearly see the impact of this on the next slide, slide eight, where you can see that the volume has contributed on the lending side with, as you can see, the EUR 13 million volume-driven NII, generally EUR $15 million, and the margin contributing with EUR25 million. Group Corporate Center, including Treasury, has had a positive contribution of EUR 29 million. Group Functions, the rest of it -EUR 16 million, thereby giving that difference in the NII. I alluded to before that we have had a decline in the quarter of net fees and commissions and the reason for that. Here, of course, one of the reasons is the asset management that has declined. This is not a result of outflows.
In fact, the outflows have been very marginal during the quarter, as you've seen from the report. Rather, it's a revaluation of primarily the equity holdings or the equity funds, and that brings less performance fees and other similar fees. Those are the main drivers. If we look at the items of fair value, I've already alluded to most of those issues. As you can see, which is very important on slide 10, the underlying customer business is continuing to generate good results. This is not a matter of lower activity or lower margins on the customer trade flow that we have. In fact, that has been performing well. This is just a result of the hedging activities underlying those customer activities, as I alluded to, and the negative valuation effects that we had in the market side of the business.
The rest of it, as I alluded to, holdings, equity holdings primarily in Treasury and the life business. That sums up the items of fair value. Cost is, of course, an important feature for us in the new model plan, which we'll come back to. We 've already started to execute on those plans. If you exclude that restructuring charge, you can see that expenses are, in fact, down by 3%. We normally had a decline in the third quarter between 1.5% or, in some cases, even 2%. This is clearly lower than 2%. We had a good performance in the quarter. We have set a restructuring charge. If you look at the next page, on page 12, you can see that the total amount is EUR 171 million. This relates to reduction, primarily the reduction of the employees in the Nordic countries.
This is aimed at reaching the cost efficiency that we anticipate in the new model plan. About 80% of that EUR 171 million relates to those top cost reductions, and the rest mainly to premises that will be made redundant in combination with branch closures and other similar restructuring activities. The main part is related to staff costs. With those words, I'll leave over to you, Ari.
Thanks, Fredrik. The asset quality, credit quality was strong, as you can see from the size of our loan losses on page 13. There were EUR 112 million. That is 14 basis points from lending. If we include this Danish guarantee scheme impact, that's 16 basis points, meaning that in this quarter, we had reversals from the deposit scheme, more than we had to pay from the new, let's say, banks. There was some increase in Denmark, still at a very moderate level in shipping, which is a little bit higher than under normal market circumstances. In other portfolios, there was an improvement. You can see on the following page the more exact split to various portfolios so that you can see that the level of losses in Sweden, Norway, and Finland was very low.
Also, in Baltics and Poland, there was some increase in terms of basis points, but in absolute terms, the loan losses are very low. It's only EUR 6 million. Also, in wholesale banking, these 9 basis points include also the shipping, which is part of the wholesale banking. If we just take the large corporates out from wholesale banking, then we had even positive loan losses, i.e., more reversals than new losses. In shipping, we are still at the level of 78 basis points. Actually, now in Q3, the loan loss in shipping came practically from one old Nordic problem customer where we started to be in the final steps in the workout case. In other loan losses in shipping, we're very moderate. That's because our strength in the shipping portfolio is a very diversified lending to various subsegments.
For example, 25% of our shipping portfolio is for oil and offshore segment, which is very solid even today. The diverse segment today in shipping is tankers, especially crude tankers. Our lending to the crude tanker segment is representing only roughly 10% of our total loans in shipping. There was an increase in Denmark. The increase came from a relatively low level in Q2. This level is still relatively moderate. The increase came mostly from the household segment. 2/3 of the loan losses in the third quarter in Denmark were coming from this household segment. Still, in the corporate segment in Denmark, the situation is the same as in the previous quarter. There are SME customers in problems where we see some level of new loan losses, whereas the larger corporate customers are still very strong.
Following page, you see the positive rating migration, which is, of course, a very strong signal that the credit portfolio is of good quality and still improving. The positive rating migration was 1% in terms of positive impact to risk-related assets. What is important to note is that this positive rating migration was visible in all credit portfolios, actually also in Denmark and also in shipping, so that the overall quality is still improving also in those portfolios. You can see that there were more up ratings than down ratings. Following page 16, impaired loans, no big issues, relatively stable. In the bottom graph, you can see that our total allowances, i.e., total reserve for the loan losses, they were also quite stable. We are still coming down in our collective provisions because of this positive rating migration, whereas individual loan losses were more or less at the same level.
Page 17, you can see that still we 're growing on our lending book. It's a moderate growth, but growth anyway. On the corporate side, we are relatively stable, a little bit up more or less in all markets, whereas in mortgages, we still see some growth, 2% quarter -on -quarter. Moving to our capital position on page 18, you can see that still our risk-related assets, they are relatively stable. There was some growth in those EUR 3 billion that is coming from this mentioned volume growth that is partly mitigated by this positive rating migration. With this development of risk-related assets and profits, our Core Tier 1 ratio was stable at the high level of 11%. On page 19, you see this kind of breakdown on the risk-related asset growth, this EUR 3 billion growth.
You can see that in the middle of the graph, you see the impact of the volume growth. It was EUR 5.1 billion in the Nordic portfolios, which are in internal rating-based models, and then EUR 2.2 billion in those portfolios we are still in standardized, i.e., in Poland and Baltics and Russia and international branches. Half of this growth, this EUR 5.1 billion growth, comes from this growth in the market value of derivatives, which Fredrik already mentioned in his summary. The rest comes from this kind of volume growth in the ordinary lending. Partly this growth was mitigated by this credit quality improvement, EUR 1.9 billion, as well as a very low level in our market risk levels, as well as we have been continuously finding ways to improve our risk-related asset efficiency. This quarter benefited close to EUR 1 billion. With these words, I hand back to Fredrik.
Thank you, Ari. I would just say very brief, you have a few brief comments on the business areas. As you have seen, we have now put together the business areas in full value chain. This is the first quarter where we are reporting in accordance with our new organizational structure. As you can see from slide 21, the retail banking results, lending volumes are up. The underlying business is solid, as I have already alluded to. The transformation of the branch network continues. Overall, a good performance by retail banking in the quarter. Wholesale banking is also experiencing a solid customer trend. Of course, the result was impacted by the factors related to market turmoil, as I have already alluded to. As is the case with the retail banking, the loan loss situation is stable. We turn to the next wealth management result.
The influence is visible here in practically two ways. The asset management has been reduced by 7% as a consequence of asset revaluation. Also, the previously described life adjustment or reversal of fee income. Worth perhaps noting is that the performance is good, and 65% of the investment composite is outperforming the benchmark last 36 months. With those very short comments, I will leave over to Christian.
Yes, thank you. I will touch upon the strategy and the future. First of all, a few words about the financial crisis. I mean, we all know, all those listening here, that of course, the big answer to the big question, how can we avoid new bubbles to make the banking sector fail and create economic recessions? By that fact, there is, of course, a new regulation with more capital, more liquidity, and more funding. In reality, what has been created is a new economic environment where the banks are supposed to be the buffer zone of the economy. If bubbles hit the economy, the banks can absorb the losses from the bubble and avoid that the rest of the economy goes into recession. Let's put it very simply. It has been a massive value destruction, which has happened in the past four years.
The slide shows the reality that European banks and the Euro Stoxx Index have lost 75% of their value if we include the capital raised in those years. Now, they have done significantly better, but still, the value destruction is obvious. Obviously, it is necessary to do something about this. We support the new measures. Of course, they need to be calibrated so we don't overdo it. There are still parameters which need to be set right. There is a huge discussion about level playing field because it seems like individual countries seem to have individual views on where to go. On the next slide, it's clear that some business models were tested and failed, and business models have to be reviewed and worked upon. We can see that Nordea has done well.
On the comparable peer group, we are now the fifth largest bank in terms of market cap. The journey continues. Our new normal plan is, in reality, a continuation of our strategy. We are much more focused with the aim of restoring our ROE and making it possible to continue to service our customers. That's the very short version. The relationship strategy has been a strategy we've pursued now for four to five years. We continue on that one. We have done it through the crisis. We have kept helping our customers. We have kept shoring up our balance sheet and ensuring that we could actually do this. The new normal does not differ from this. It is, again, restoring our ROE and security of service to our customers. At the same time, our ROE has gone down, obviously, for 2020 - 2011.
At the same time, however, our quarter one has gone up from 7%- 11%. The difference is maybe not that big in real profitability, but of course, the capital has increased significantly. That is something we're going to mitigate and restore our ROE. The relationship strategy is a win-win strategy. The next slide I've actually been showing for some years because it is the logic of why it is a sustainable business model that delivers extraordinary results with low risk and with high potential. It is because we satisfy some real customer needs. The full range of advice, products, innovations direct towards customers and not through anything else. These segments, the relationship segments, are very profitable. They have a high potential for growth. That's actually where the underlying growth really is. They are more satisfied than lawyers, so they do not leave.
They stay with us if we treat them right. We have this possibility of increasing the efficiency in service. These customers use the internet and mobile bank more than others. We have the chance to meet them face -to -face and talk all products, therefore making the meeting efficient. They deliver the full wallet. It's both capital and funding. We get this balance and sustainability in our business model. It's a mirror of the economy. We get the funding, and we have the lending. Thereby, we create the resilience. It's very low risk. We have proven during this crisis that the loan losses on these segments are very low. We know them well. They are automatic credit scores, some of them, and it means that whenever problems arise, we are quickly reacting. We get in contact with the customer, and we can help them and avoid difficulties.
The new normal is actually excusing a more focused relationship strategy where we focus on being more cost- efficient, more capital -efficient, more funding -and liquidity- efficient, creating new products and new behaviors, and thereby creating a sustainable business model which has the long-term potential, is in the sweet spot in the market where the potential and profitability and efficiency is good. We aim at creating great top-league ROE. The top-league ROE we are defining now as our target, 15% in a normalized macroeconomic environment. It is a high number, and of course, it requires some normalization of the macroeconomy to get there. We will deliver actions which will enhance our cost efficiency, delivering ROE enhancements. We will deliver capital efficiency, delivering ROE enhancements, and some will need to come from the normalization in the economy. The next slide I will not cover.
That will be the key slide on our Capital Markets Day, how we actually do this, how we truly, very disciplined, ROE-focused and client-focused in business units, reallocation of resources between segments, and creating new products all the way down to the customers, how we actually generate new behaviors that will make it possible to solve the problem, the needs of the customer with less capital and less liquidity and less and less long funding. That is something we're working on, and we are already doing it. I think we can come a long way this way. This will be the core of the Capital Market Day. The thing about the ROE focus has been questioned in some areas, why high ROE? Obviously, the logic is that if we do not return somewhat over the cost of capital, we cannot remain a strong bank and attracting low funding costs.
The low funding costs will be the key going forward because the cost of funding and liquidity has gone up dramatically in recent years. This is the key to be a competitive bank, to service our customers, to get momentum, and do ROE. There is only one way to do this. The average will probably not be 15%. The average will probably more likely be around 10% or something. There will be a group of banks, maybe a small group, that will go towards the 15%, and they will, of course, have a superior competitive position. It is our clear position to be there. We already have one of the strongest capital bases. We are very strong in funding and liquidity. Our profitability is also today strong. Not many banks have between 10% and 11% ROE in this environment.
We will elaborate on all that on the capital market day, and you see the smiling faces on the slide. They will greet you and tell an exciting story about a new normal plan. We'll still have some tickets available on the first row at a very reasonable price. I can only encourage you to come to our capital market day next week, and I look forward to seeing you there. That was the presentation I would do. Now we are ready for questions. Rodney?
Yes, please. Operating. Open up for Q&A.
Thank you very much, gentlemen. Ladies and gentlemen, to ask a question, please press star one on your telephone keypad. 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. Once again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. Thank you. We take our first question from Shinton Yoshi with Nomura. Please go ahead. Mr. Yoshi, sir, your line is open to ask a question.
Hi, sorry, I was on mute. Can you hear me now?
Yes.
Firstly, let me put in a bid for that first row seat, Christian.
Okay, you're on.
I have three questions for you. Firstly, could you elaborate a little bit more on the Swedish mortgage margin trends? If I could ask you what your front- book margins are versus the book margins, and perhaps what percentage of your book has been repriced to the front- book levels, if you could give that detail. Second question is, would be interested in your thoughts around the risk rates in Sweden. Do you see this kind of coming and pretty much on the cards, or is there still large uncertainty around how risk ratings will be treated in Sweden? Also, if you could share your thoughts on how the increased risk ratings should be implemented. Do you think there'll be a floor, or do you think there'll be a factor multiplication or something of that sort? Finally, I guess this is for you, Christian.
The banks in Europe are pretty cheap by historical standards, perhaps for good reason. How do you think about acquiring assets in this environment, especially given that Nordic banks are amongst the few banks that do actually have some capital?
Yeah. First, I will start with the Swedish mortgage market. I didn't actually fully hear your question, but I think it was how big part of the mortgage market has been repriced. I think the fair statement is actually a fairly big part is actually up to date in terms of pricing. The reason that I'm saying that is that a significant portion is on relatively short interest rate payment terms, so typically three months. Therefore, it is a fairly large portion that is up to date in terms of margins. Now, a couple of general comments. First of all, it is a very, very competitive market for various reasons. Of course, the main reason for that is it's a product that also attracts a more customer relationship kind of status. That's why it is a fairly competitive market.
In recent time, the obvious need to reprice mortgages has clearly evolved in the market. We believe that there is that potential going forward. We've actually seen some tendencies in the quarter. Our estimation or our belief is that margins should continue to go up and that margins on the back of higher funding costs in general for the banks will continue to do so. I will then maybe start with the risk rates. Should I do that in the Swedish market? First of all, nothing is decided on the risk rates. I think that's important to remember. The loan loss levels in Sweden have been very low for a very long period of time, also in the dramatic years of 1991 - 1993.
Of course, with no loan losses as we currently have and have had for a very long time, the risk rates will, over time, if interest rates or if loan losses stay at zero, they will basically converge down to practically nothing or 2 %- 3%. That is, of course, something that is real because loan losses are low. There has been discussion, as you alluded to, as to how you would implement some sort of floor. I think it would be in the shape and form of floors because you cannot actually do the math to make risk rates higher. It's very, very difficult to simulate other types of scenarios. I would estimate the floor, and I wouldn't estimate it to be terribly much higher than where we are at the current time. In fact, we don't actually know that.
That hopefully answers your second and third question, and then Christian on the fourth.
Yeah. To end your question, actually, Nordea has gone up to a price book around one right now. That is not too bad. You can say that I think it's necessary even for Nordea to execute the new normal plan before we consider any acquisitions. This is an extremely volatile environment, and we don't know exactly whether this is going to end in a worse situation or some improved situation. It depends a lot on the G20 meeting and other meetings in coming weeks. You can say that the new normal plan, which actually mitigates the effect of capital funding and liquidity and gives the very clear direction that Nordea will reach the 15% or somewhere close there, is something we need to deliver in coming months, quarters, maybe even a year, to convince you and the market that we will go there.
As soon as we see there, I'm sure we will see our stock price going up. A price book of maybe one and a half or two is even what could easily be the result. We have done the adjustment to the new normal or have come a long way through it, I would say. It is obvious that still a lot of banks, I believe, will be struggling with funding costs and weaker ratings. This thing about acquiring assets is much more relevant because right now, any calculation you do at acquiring assets, even those which are up for sale and we get offered, we still have the upside we can calculate, but the downside is very big if the turmoil gets worse and we sort of dilute our capital position. That risk is too big to take right now. We need more clarity in the market.
I also think we like to see a higher price book in our own share. I think we can deliver that faster than many other banks in Europe. I'm not worried that this will go away.
Thank you.
Thank you. Our next question comes from Nick Davey with UBS. Please go ahead, sir.
Yes. Good afternoon, everyone. Nick Davey from UBS. Thanks for taking the time for the call. Two quick questions from my side, please. The first on balance sheets and currency mix. You give us hopefully a slide in your fact book, slide 114, on your split of assets and liabilities by currency. Clearly, there's plenty of focus, at least from the domestic regulator and I guess more recently from the market on dollar funding. Could you please just talk around the slide on the dollar side? I mean, clearly, you've got around a 300% loan-to-deposit ratio in U.S. dollars. You clearly have very strong access to the commercial paper markets. It's improved or increased in the quarter.
Could you just help us think about perhaps how the regulator views this currency split, whether you feel any pressure or you would yourselves aim to close this funding gap at all in the U.S. market or perhaps decrease some of the currency mismatches in the balance sheet? The second question is on a theme which Mr. Clausen, you've talked about already, the trade-off between ROE and capital. I think the question is really, when you think about your ROE going up significantly in the next two years, as you say, or heading towards this 15% ROE target, what sort of capital planning do you put into that process? Because as you've alluded to, the rest of Europe's capital needs are changing by the day, really, but they're heading up towards the 9% level.
When your regulator speaks, he talks about, I suppose, starting the process nearer a 12% quarter one and perhaps even implementing Basel III early. In the meantime, you seem quite happy to consume capital with growth. I'd just like to get your thoughts on that 15% return and what sort of capital levels you think it might be achievable. Thank you.
Nick, I can give you an extremely long answer on your first question. I'll try not to do that. I think the story is that this has been debated from regulators and from politicians in primarily Sweden, the dollar dependency of the funding situation. Where they've particularly been, or actually where they have been concerned, is where you use dollar funding to actually also do dollar lending. That's been where they think there could be a stability problem. As a consequence, they urge banks to finance such dollar lending either through long-term funding or through deposit. If you look at that slide you alluded to, you can see that our total deposits is EUR 23 billion approximately. Out of the total funding, you see a little lower on that slide, approximately another EUR 16 billion is long-term funding.
Of course, the EUR 23 billion and the EUR 16 billion taken as a whole, that EUR 39 billion is, of course, significantly bigger than the EUR 25 billion we actually do in lending. From the regulatory perspective, this is not a stability issue. Having said that, we are also using the very deep and liquid money market in the United States to also swap into other currencies. The reason is, of course, commercial. We are always able to do that from other countries or other sources, but it is an advantageous situation for us that few other banks can access. That's not, from a stability standpoint, any issue. Having said all of those things, just to final remarks, we access, of course, the Fed through our U.S. branch. We access the dollar facilities and ECB, and we access Swiss bank facilities, etc., etc.
From an accessibility problem, this is not an issue for us. On the contrary, it is actually one of the real strengths you can see on the funding situation at Nordea . It's a good part, a good story.
Yes. Thank you, Fredrik. The ROE on capital planning: we assume 11% core capital on the 15%. This implies, of course, since we build capital with our present ROE and growth, it's probably not going to be that big in the coming years in lending. We will build some capital, which we then plan, of course, to either pay out or to share buybacks. Not in the short term because in the short term, this is, of course, not possible with the regulatory pressure. I think in the medium term, we will see that. Maybe even growth will also be bigger. We have this organic growth, which actually is there and is very profitable in these relationship segments. The assumption is 11% the capital and 15% ROE. Now, the regulator pressure is, I think the Swedish regulator is still at 10% - 12% quarter one.
I think the gaps are narrowing. I don't think the spread is that wide anymore. I think Europe is moving up towards 10% in the discussions, also Central Europe. I hear very few countries talking below 10% now. Maybe 9% - 10% would be a reasonable number. 10% - 12% and 10% is very clear, close to each other. We are at 11%, so that's close too. We don't know exactly where it will end. You can say that the U.S. is probably the problem because they're talking about lower numbers. I think what is, and I know that this will be discussed among certain members of the G20 coming up, this calibration, because I know all regulators, especially ECB, are super worried about the outlook to have different capital ratios, which presents a systemic risk clearly to the system.
Therefore, I think that we will have this calibration and that the number will be chosen. There are a lot of details in how we actually implement the transition rules and dates and so on. It doesn't really impact Nordea that much. We are at 11%. I do not foresee a higher rate than 11%. Actually, it's more likely in a matter of one to two years down the road. If markets hopefully have quieted down and we are in a more normalized environment, then I actually think 10% is more the number. There might be other discussions coming up on the whole resolution recovery setup in the Tier 4, which has not been set yet. That's the work we're going to embark upon now because there are a lot of things.
It becomes a question about Tier 2 and bail-in methods for other liabilities, which is a huge discussion, how that will actually work out. That is still outstanding. That is also an unknown, of course, to us today. We are assuming that the 11% will hold well. As I said, this is what we have, and we will probably even build some more in the short run.
Okay. Thank you t wo, very clear answers.
Thank you. As a reminder, ladies and gentlemen, if you find that your question has already been answered, you can remove yourself from the queue by pressing star two. Thank you. We take our next question from Jacob Kruse with Autonomous Research. Please go ahead.
Hi. Thank you. Just two questions. Firstly, on Denmark, you talk about having a reprice by up to 50 basis points in the middle of the quarter. Still, your net interest margin on the lending side doesn't really move. Is the net effect of this repricing basically just to offset costs that you already had and not actually any positive NII impact?
Yeah.
The other question was just on the trading loss. If I look at your notes, you have a EUR 2 billion loss on equity positions. Could you just talk about what the size of that position is and how we should understand this number? Is it offset technically by the other numbers, or is this a sort of separate position that produced those losses? Thank you.
Yeah, Jacob, I will try to answer your question. First of all, if we start by the margins, as you rightly say, are flat. We have actually imposed in the middle of that quarter an increase to the extent. Our expectation is still that it will generate approximately the kind of profit that we have assumed, approximately EUR 20 billion per year with some funding basis points roughly, so in average for the portfolio. I actually think that margins should go up in the next quarter in Denmark. You're right, it has not so far. I think that's more for other reasons. You should see that margin actually coming through. Our expectation or the way we see it, nothing would suggest that it's not working so far at least. I'll comment on the equity position of the 2,189 that you're suggesting on or you're asking about on note four.
That's a really complicated IFRS note. You can actually see the corresponding amount in the balance sheet. If you look at the balance sheet from the report, you'll see that the equity holding is a bit over EUR 50 billion. Of course, it's down from a bit over $UR 17 billion. That's the decline. That's the basis for it. The absolute majority of that relates to life. If you take the total amount of 2,189, the life part is 2,100. The actual bank is, in fact, 89, out of which a part of that has counter items further down in that note. The actual revaluation or loss in the P&L for the bank as a whole equals EUR 58 million. That's basically what's left of that very significant adjustment. It's not easy to understand the IFRS accounting in the note four. I can clearly understand that issue.
As I said, it relates to the revaluation of the pool share possession of devices.
Okay, thank you very much.
Thank you. Our next question comes from Ronnie Rehn with KBW. Please go ahead.
Good afternoon. A few questions from my side as well. Starting off in Denmark, I could see the average risk rate, and I put it against loans, has gone up. What's the driver behind it? Do you see like the average risk rate of your loans already increasing given the difficult environment, or what else might be behind it? Secondly, do you have any exposure to Swiss franc lending in Denmark? Just want to get this question off my chest. The last question, actually two. In terms of the normal macro that you assume for your target setting, what's the sort of interest rate assumptions that you have in mind if you choose to disclose that today already? Otherwise, I'm happy to wait for the Capital Markets Day.
Lastly, I just want to get a quick update on your leverage finance operations, the size of the book, and sort of how it's been behaving so far. Thank you.
Right. From the Danish risks, it's a mixed impact on the risk weights. All in all, the rating migration has been positive, meaning that our probability of default in the corporate book and also in Denmark has actually improved, which is a good sign of this type of overall quality improvement in the average improvement in our portfolio. There are still problem cases in Denmark. As I said, it's coming from the SME corporate customers, but in this quarter also from the household customers. In that way, we have a mixed picture in Denmark. All in all, we are not so concerned about, let's say, future level of losses. We 're not forecasting the loan losses going forward, but there are no indications that there would be any trauma in Denmark.
If I just elaborate a little bit on this kind of macro situation in Denmark and the way we see this economic environment developing in Denmark, the Danish public finances, for example, are very strong. Unemployment still is very low. What are now a little bit weaker signs, and I think like in Denmark, it's going to reduce the consumer confidence and also some, let's say, disturbances in the housing market. That is becoming a little bit weaker. In that way, we have been cautious and went through our household lending book in prudency just to identify those potential profitable customers. That's the reason for increased household lending loan losses in Denmark.
What' s driven up the average risk rate if you have seen positive rating migration?
It's loss given default, the collateral values, because the asset prices, as I said, they are a little bit lower now.
Understood.
With Frank , I forgot that question. We don't have more or less any Swiss franc lending in Denmark. It's not material, I think. I don't remember now by my heart the exact figure. Probably we can find it somewhere from the fact book model. But in marginal, it's model.
Okay, great.
Leverage finance book, so that we still have a very diversified book. We have roughly 100 deal companies in that lending book. In the first quarter, we didn't see any kind of further iteration of that lending book. It is the fact that some of those deals are quite highly leveraged. Of course, that may signal some kind of, let's say, higher caution if this economic environment continues or if it's getting worse. We have to remember that those deals we have made now, especially lately, they have been done with a very high equity cushion by the sponsors of the fund. We do have local cushions also to take a little bit weaker, let's say, economic environment so that no bigger issues in the quality of that book.
Could you remind me, please, how big the size is of the book in euros?
It's roughly, let's say, EUR 10 billion.
Okay.
Now a little bit lower than EUR 10 billion, but the magnitude is that.
Thank you. On the interest rate assumptions, do you want to share that today already, or is it part of the big presentation next week?
Yeah. We'll elaborate on what we mean by normalized in more detail. Of course, normalized interest rate is, of course, not the 1% or so that we see at the current moment. It's more in the sort of 2% - 4% range. Exactly where that is is not the important issue because it relates to many different things, among others, our possibilities to increase margins or blended margins and all sorts of other factors. We'll elaborate on that much more as we meet next week. Just to give you a hunch, it is in the sort of 2% - 4% range.
Perfect. Thanks so much for your answers.
Thank you.
Thank you. For your next question, Dave Johnston with Macquarie, please go ahead.
Hi. Thank you. I just had a quick question, I guess, on NII and funding. You referenced in the release that there is maturing funding. One of the benefits of the maturing long-term funding refinance at lower market rates. This quarter, you've done mainly a secured funding. Was that secured funding rolling off? That's the first question. Another follow-through question. Should we expect a further impact for this in the fourth quarter once we get a full quarter effect of the cheaper funding that you've issued this quarter because it's secured?
No, I don't think you should expect. First of all, it's actually difficult to answer your question because it depends, of course, on the spread levels at the primary market. It will depend. Generally speaking, you can say that the spread market has moved up and down and were very high at some stage of 2008 and 2009, as you recall. Typically, debt from that period is expensive, and that's basically what has been replaced at this point in time. This is actually not a substitution between secured and unsecured. It's rather old debt actually maturing that happened to be expensive in the shape. Just generally on that note, we have funded pretty much more, a lot more than our actual redemption for the year.
We pre-funded all of the secured or, sorry, unsecured funding at the early part of the year at approximately, we're at approximately EUR 11 billion so far this year out of a total of EUR 28 billion. We have performed well. In the quarter, this was basically old funding at very expensive rates that matured and replied by already existing funding, pretty much to be honest.
Would you expect any further impact in the fourth quarter? I guess.
No, I don't think so, really, because for the time being, spreads are fairly high. We are, on average, for the total funding book, maybe even slightly below where the current spreads are. There's no really material things that will evolve in the near future. Of course, if spreads remain for the banking market where it is at this point in time, one could not, of course, avoid higher funding costs as old funding mature going forward in the next few years. That is, of course, extremely difficult to speculate on and will depend on the spread levels prevailing.
Yeah, that's right. Okay, thank you.
Thank you. Our next question comes from Claire Kane with RBC. Please go ahead.
Hi. Good afternoon. Yes, Claire Kane from RBC. I've got two questions for you. The first is just a follow-up to the last funding question. Can you just give us an idea of what your strategy is? As that secured funding is rolling down, are you replacing it with the same maturity or extended maturity, and is there a formal policy not to term in? Given you said your competitive advantage is your lower funding costs to peers, how will you reconcile that with the ability to term out and who has to term out faster? Do you have a timeline to meet in the liquidity rules that you said you are embracing somewhat? Moving on to your profitability trends and the 20% ROE for 7% quarter one and now 11% for 11%, I guess the implication is a lot of that is to do with your leverage.
How will you manage leverage going forward? I guess the expectation is that that will continue to fall. I'm somewhat surprised on the comments about the regulatory background, given we're discussing the implementation of level risk weights on mortgages. The regulators said they're keen for 10%- 12% and for no one to go any lower from current levels. Your peer has stopped its buyback program for the time being. I'm just wondering, can we assume that if you do have to lower the leverage and the quarter one does to stay higher, that 15% ROE target won't really be achievable? Thank you.
Yeah. Let me start with the strategy on funding. It was a complicated set of questions you had there. Generally speaking, we think we have a good mix in terms of covered bonds and senior and deposits and short-term, etc. We're basically maintaining that strategy. We've had an increasing size of our long-term funding, considerable size increase in the last several years. We have reached a position now which we think is very adequate from a behavioral maturity standpoint. The difference between behavioral assets and liabilities is basically 0.3 years, a quarter of a year. We think we have a very good funding and maturity position. That's our strategy, and that's basically to maintain it. I think your question was also secured maybe versus unsecured. Of course, we will continue to do secure.
It's also important to note that we have in the last year established covered bond programs both in Finland and in Norway, both of them which are very good markets. We have significant assets that are available for funding just like that. We want to maintain the beneficial funding markets and covered bond markets. We feel we have a very significant potential in those two covered bond programs. We will utilize them. We will, of course, remain on senior unsecured. It's not something imminent for us for the simple reason that we pre-funded such a big amount, as I alluded to before, EUR 11 billion. I think the conditions need to be right for us to issue on the senior unsecured. We're able to access that market at any time. Your second question was a more difficult one.
I think you alluded perhaps to the NSFR implementation and what our stance is there. I think we conclude just that the future of NSFR is highly uncertain at this stage. It's more likely than not that parameter settings and maybe the whole methodology will be changed as we go forward in the coming years. We are addressing it as we of course track this development. We all track figures, etc., although still actually difficult to calculate for any bank. We track them. Our ambition is not to deteriorate in terms of NSFR as we go forward. We just don't think NSFR is a very good measure. That's why we stick to the economic funding gap, as I alluded to before. We think that is a very, very strong position we have there. I think that was also your second question. The leverage continues to fall.
I'm not sure I fully understood that question.
Do you consider, how do you, in terms of your profitability, and I guess we'll get more detail at the capital markets day, how do you look at your return on assets? Because I guess that has fallen since 2007.
Okay. That's a good point. I'm sorry I didn't get your question the first time. I think return on assets in general, of course, are expected to increase, or we expect it to increase in the coming years as part of the new normal plan. There is a real simple reason for it, actually two very simple reasons. The first one is the obvious one. The reason, one of the major reasons why it has actually fallen is that deposit income has fallen fairly dramatically over the time span that you mentioned. Of course, deposits do not require any capital. Whilst we have compensated on the NII line to a large extent by margin increases on the lending side, lending, of course, requires a lot of capital while deposit does not. If and when normalized interest rate situations occur, then by definition, assets return is also increasing.
The second thing that we have much more control on our own is the capital efficiency of the group as such. Of course, we are working very heavily with all sorts of different things. We will be impacted by Basel III, as you know. We've given you those figures. We're also working with various model things and other efficiency gains within the existing business. We also feel we have the ability to increase asset return as we go forward in the coming years.
Sorry, just my final part of that was if the leverage you're not able to stay at 11%, the regulator won't allow you to return capital to keep at that level, can we assume that the ROE target will be adjusted down?
No, but we have a general uncertainty on the capital requirements, as we said. You should separate between political rhetoric going on right now and then a sort of more growing concern development sometime in the future, I think, one to two years from now. Obviously, when the capital is set, we are, of course, allowed to return capital. In the very short run, with all the turmoil on and with the political discussion going on in Europe about the banks and their profits, right now it's probably not a very good idea to buy back shares. I am not too worried about this. As I said, I clearly hear among key decision-makers that the calibration will happen on capital and there will be a rule setting. That will be in the area we talked about, 10%, 10% maybe 11%. I actually think 10%.
When that is said and all the parameters are finally done and we are a bit further ahead than now, I think it's fine to release capital if we have too much.
Okay, thank you very much. That's all very clear.
Thank you. We have a next question from Jan Erik Gjerland with DNB. Please go ahead.
Yeah. Good afternoon. It's Jan Erik Gjerland from DNB in Oslo. I have some questions. The first one is the size of your own holding, so equity in your group treasury area where you had these losses both from Pandora and the remaining private equity and stuff. Could you just elaborate on the size of that portfolio, please? Secondly, you have some increased technical provision in the life part over in your notes four again. It's been jumping up and down quite a bit. I just wondered if you had some reversal of the provision you set aside last quarter in this quarter. Also, on the life side, it looks like the buffers are running down quite dramatically in Denmark and Norway. If you could elaborate a little bit about the risks in those two portfolios, also how much is traditional versus unit linked.
Finally, on your net interest income slide, if you could specify household and corporate development on both the margin and the volume side, it would be great. Thank you.
Yes. The size of the equity holdings in Treasury, that was your first question. It is approximately EUR 360 million, EUR 358 million, I think it is. The second question was the technical provisions. I didn't actually fully get that. That was note four you mentioned again.
Yes. You have some EUR 155 loss or cost loss quarter, and then a EUR 51 gain this quarter. Just wonder where those items move around.
We will come back with a comprehensive answer. It's basically, you know, coming from the return we can have and the premium income. I will come back to you with a more detailed answer.
Okay. Thank you, Rodney .
Yeah. The third question was the risks and how much was unit linked in Denmark. It's very little unit linked related. It's mostly traditional in the Danish markets. There, we are still above 100% for all the four classes of guarantees that we have related to the business. The buffer side is not sufficient to actually take out shareholder fees to the P&L. What we've done there is to reverse, as I initially commented on, the shareholder fee that we took for first and second quarter, that amounted to EUR 30 million. I think whilst that's unfortunate, it's also important to say that most life companies, I guess, in Denmark have reached a situation where they are in the so-called "kush van," or basically where their assets do not cover the guarantees issued. We are not in that position. In relative terms, we have performed well.
When you talk about Norway, it is a similar kind of situation. Buffers have also there decreased. We've also, in Norway, not taken shareholder fees this particular quarter. Whilst the impact from Denmark was approximately EUR 45 million, the impact from Norway was approximately EUR 7 million.
Just a follow-up on Denmark there. If your buffer should go below zero here, is it a one-to-one shareholder injection into that company just to cover any guarantees?
Jan Erik, we will come back to you with a full answer to that. The rough answer is no. I will come back with a more detailed answer.
Okay, thank you.
Operator, we have room for one more question.
We have no further questions, sir. I would like to turn the call back over to you for any additional or closing remarks. Thank you.
I think I'd then like to close this conference call. Thank you for your many good questions. I hope we have delivered good answers.
Next week we will see each other, and we still have three seats in the front row for a very limited fee. We hope to see you all in London, and I think we will elaborate on a lot of these questions. See you all next week in London. Thank you very much.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may.