Good morning, and welcome to Nordea's Half Year 2024 Results Presentation. I'm Ilkka Ottola, Head of Investor Relations. Here in Helsinki, I'm joined by our President and CEO, Frank Vang-Jensen, and our Group CFO, Ian Smith. Today, we'll start with a presentation by Frank, followed by a Q&A session. Please remember to dial in to the teleconference in order to ask your questions. With that, let's get going. Over to you, Frank.
Good morning! Today, we have published our results for the second quarter of 2024. It was another strong quarter for Nordea. Our return on equity was 17.9% in the quarter, and 18% for the first half of the year, a level of profitability that puts us among the best performing banks in the industry. During Q2, we also delivered year-on-year growth on our two largest income lines, supported by a higher net interest margin and increased customer savings and investment activity. The Nordic economies remained slow. However, there are positive signs for the road ahead. Household and business sentiment has improved somewhat, inflation has fallen, and we saw the first rate cuts in three of our four home markets. With further rate cuts anticipated this year, the prospect for the Nordic economies should brighten somewhat.
Our results underline that we continue to make good progress on our strategic priorities. A key step this year is to strengthen our market position in Norway through the acquisition of a sizable Personal and Private Banking business. I have been fortunate to spend the second quarter in Norway, getting an even deeper understanding of the nuances in that market, and I'm convinced that we have great opportunities to target profitable growth across the business areas. I'm also glad to report that preparations for integrating the acquired businesses are progressing well, and we remain on track to complete the acquisition in the fourth quarter. We look forward to welcoming our new customers and employees to Nordea. Looking at some of the highlights for the second quarter, we increased total income for the quarter by 3% year-on-year.
The increase was driven by net interest income, which grew by 4%, and by net fee and commission income, which increased by 6%. Net insurance result was down 7%, while net fair value result was solid, but lower compared with the very strong Q2 last year. Operating profit was strong at nearly EUR 1.7 billion for the quarter. Our return on equity remained strong at 17.9%. We improved lending margins and grew solid lending volumes, even though the markets were slow. Mortgage lending was stable year-on-year, while corporate lending was down slightly. Deposit volumes were up, with retail increasing by 1% and corporate by 5%. Assets under management grew 10% from a year ago to EUR 400 billion, supported by continued positive net flows in our Nordic channels.
Costs followed our plan, and our cost-to-income ratio with amortized resolution fees was 42.6%. Our risk position is sound, and credit quality continues to be strong. Net loan losses were EUR 68 million, or 8 basis points, still below our long-term expectations, with the increase compared to last year driven by provisions for a small number of corporate client exposures. Capital generation remained strong, and our CET1 ratio was 17.5% at the end of Q2. That's a summary of the quarter. Let's now take a closer look at the results, starting with the income lines. Net interest income increased by 4%, a solid result, given the strong second quarter last year. The increase was driven by improved deposit volumes and margins.
Our net interest margin was higher year-on-year and was also stable for the third quarter in a row, a clear sign of our diversification and resilience. Despite the lending market still being slow in Q2, we maintained a stable level of mortgage lending. The corporate lending market also remained muted, and our lending volumes decreased 1% year-on-year. Quarter-on-quarter, we recorded a positive impact from our deposit hedging actions. We expect our deposit hedging to benefit us as rates come down further. Net fee and commission income grew by 6% year-on-year, demonstrating that we are able to serve our customers well with our broad offering. The quarter saw increased activity in savings and investments, and another outstanding performance in Debt Capital Markets following the good Q1, as well as improved Corporate Finance activity.
This led to higher net income from savings, brokerages, and advisory. We also had higher income from payments and cards, supported by higher customer activity. Our savings fee income was supported by higher assets under management, which grew 10% year-over-year to EUR 400 billion.... In Nordic channels, good momentum was maintained in Private Banking and Life & P ension in particular, with net flows totaling EUR 1.9 billion. Net flows in international channels were negative at EUR 1.4 billion, mainly driven by wholesale distribution. In the elevated interest rate environment, clients continue to favor other products, including fixed term or money market funds. Net fair value result was down 15% year-over-year. We saw high activity in customer areas with strong demand for foreign exchange and interest rate hedging products.
As we said before, this part of net fair value is more stable and clearly demonstrates our ability to support our customers in their risk management activities. Market making was slightly down compared with the strong quarter last year, when we saw high activity in interest rate swaps and FX. Treasury had a more regular quarter. The treasury result was lower compared with the very high level of a year ago, as low volatility resulted in stable valuations of hedges and holdings. Cost development was as planned, with an increase of 6% compared with the same quarter last year. Our cost for the year to date, including regulatory fees, were down 2% compared with the first half last year. Our Q2 cost-to-income ratio with amortized resolution fees was stable at 42.6%.
The lower resolution fees this year have given us the opportunity to further increase overall investment capacity. We have continued making significant investments into our technology infrastructure, data and AI, our digital offering, as well as into financial crime prevention and other risk management capabilities. During the quarter, we also had integration costs from the Norway acquisition. These investments ensure the bank remains resilient, safe, and trusted in a fast evolving environment. Fraud prevention and detection is a key focus, given it is a growing issue for societies globally, including the Nordics. We are working hard to keep our customers safe, and we aim to have a leading position within this area. We are deploying more sophisticated prevention and detection capabilities.
For example, we have implemented transaction limits and introduced a safety feature that delays withdrawals, giving customers more time to reach out to Nordea to interrupt a payment. We continue to be very active in raising awareness about fraud through active dialogue in society and in our marketing. All in all, we expect these factors to drive our total full year cost to be slightly up compared with 2023. Our risk position is sound, and credit quality continues to be strong and in line with our long-term expectations. During the quarter, we had net loan losses and similar net result of EUR 68 million or 8 basis points. This was higher than previous quarters, where our loan losses have been below the long-term average and was driven by provisions for a few single corporate client exposures.
We have a very well-diversified credit portfolio spread across sectors, and this has helped us to maintain strong credit quality. During the quarter, management judgment allowances were reassessed, and EUR 30 million was released due to this, to the improved macroeconomic outlook with lower inflation and interest rates. As a result, the management judgment buffer now stands at EUR 464 million in local currencies. Capital generation remained strong, and we further reinforced our capital position. At the end of the quarter, our CET1 ratio stood at 17.5% or 4.4 percentage points above our capital requirements. In July, we received ECB approval for new capital models for retail exposures, and the new models are expected to go live in Q3 this year.
The impact on REA, after adjusting for the prospective rule changes recently proposed by the Norwegian FSA, is broadly in line with our expectations. Following the approval, we have initiated a dialogue with the ECB regarding a resumption of share buyback programs from early 2025. Our four business areas performed well in the second quarter. In Personal Banking, we had good income growth, driven by our deposit and savings products. Throughout the quarter, we stayed close to our customers. Our advisors were especially proactive, holding 7% more customer meetings than last year. Use of our digital services also grew to a record high. The number of private app users and logins increased, respectively, by 5% and 12% year on year in the quarter. We have continued to strengthen the digital experiences for our customers and further improve the self-service features in the mobile app.
For example, customers can now enjoy improved savings insight and get a holistic overview of their earlier savings advice and profile. We have also made it easier for non-savers to start savings through the app. As a result, deposit volumes increased by 2% year-on-year. Customer investment activity picked up through the quarter, supported by the expansion of our digital deposit product offering in all countries. During Q2, we maintained a stable level of mortgage lending, along with improved margins. The housing market remained slow in the quarter. However, there were signs of improvement at the end of the quarter, where we observed a year-on-year increase in loan promise requests. Total income for the quarter was up 4%, driven by higher NII and higher savings income.
Return on allocated equity was 19%, compared with 20% in the same quarter last year, and the cost-to-income ratio was 48%, unchanged from a year ago. In Business Banking, we delivered solid income growth despite the slow markets. We maintained stable lending volumes year-on-year in local currencies. We also supported our customers in securing both equity and bond market funding in a more stable interest rate environment. Deposit volumes grew by 1% year-on-year in local currencies. In Q2, we made further enhancements to our digital services, such as adding more self-service options. I was pleased to see our customer satisfaction scores increase. Our net loan losses were at EUR 29 million or 12 basis points, net of the EUR 30 million management judgment buffer release.
While the gross losses were higher than in recent quarters, it is important to note that they were driven by provisions for a few single customers affected by specific circumstances. Credit quality remains strong. We do not view these as a trend to extrapolate from. Total income for the first quarter increased by 4% year-on-year. The increase was driven primarily by improved deposit margins and higher customer activity, especially in the capital market area. Return on allocated equity was 18%, unchanged from last year, while the cost-to-income ratio improved to 40% from 41%. In Large Corporates & Institutions, we continued to see good momentum in the business following the strong first quarter. Debt Capital Markets activity was especially strong, and we supported our customers with a third of 150 transactions following on from the more than 200 we did in Q1.
Issuers were keen to front-load their funding plans in the current favorable market conditions and more stable interest rate environment. In Equity Capital Markets and mergers and acquisitions, we also continued to see improved sentiment and momentum in the market, with deal activity, including initial public offerings, slowly picking up. Deposit volumes for the quarter increased by 12% year-on-year. The lending markets remained slow, with our lending volumes decreasing by 2%. The credit quality of our LC&I loan book remains strong. Net loan losses and similar net result amounted to net reversals of EUR 1 million. Total income for the quarter was up 6% year-on-year. The increase was driven by increased net fee and commission income. Return on allocated equity was 17%, 17%, up 1 percentage points on the same quarter last year.
The cost-to-income ratio improved to 38% from 41% a year ago. Asset & We alth Management also delivered a solid quarter. The strong momentum in our Private Banking business continued, supporting positive net flows of EUR 2 billion. Net flow was positive in all countries, with Sweden and Denmark being the main drivers. In line with our growth strategy, our Private Banking business has welcomed an all-time high number of new customers in Sweden and in Norway in the year to date. Assets under management increased by 10%, supported by positive development in the equity market and the positive flows in Private Banking. We saw outflows in our international business. We continue to grow with strong momentum in our life insurance and pension business. Gross written premiums reached new record highs, increasing to EUR 2.9 billion from EUR 2.2 billion a year ago.
Total income was up 3%, driven by higher Net Interest Income and the higher assets under management. Return on Allocated Equity was 36%, down from 41% a year earlier, driven by increased capital allocations. The cost-to-income ratio was stable at 41%. To sum up, this was a strong quarter and a strong first half year for Nordea, with good levels of customer activity despite the slow markets. We have performed well and are driving sustainable higher profitability and capital generation. Our results demonstrate the benefit of being diversified and operating at scale across the Nordics. This is something which makes Nordea unique as the only truly Pan-Nordic bank. Our results also keep us on track to deliver strong profitability for the full year.
...The outlook is unchanged. We expect to achieve a return on equity of above 15% for 2024, and also target a return on equity of above 15% for 2025. We are determined to push forward with our strategic priorities and further improve customer experience and operational performance. Thank you.
Operator, we're now ready for the questions.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Markus Sandgren from Kepler Cheuvreux. Please go ahead.
So, I was thinking about the lending margins. Could you give us some more flavor on both on the corporate space and what's happening there if you compare to the bond market seems to have opened really well, and how's the competition from that? And then secondly, on the Is there still flows from transaction accounts to savings accounts? Is that factoring in the margin drop? Thanks.
Morning, Marcus. So on lending margins, I think the last quarter we've seen pretty stable, actually. And it's welcome to see certainly that stability in mortgage margins across the board. Bond markets are very active. The first half of this year, we've helped our customers on record numbers of transactions. And I think rather than putting pressure on margins, I think maybe it's an alternative, I guess, source of credit for customers. Maybe rebalancing a little bit the quietness that we saw in 2022 and 2023. So, you know, an improvement in bond markets has been really good for our Corporate Finance business.
Overall, I think it's been welcome to see a bit of stability in lending margins the last quarter. And then on the mix of deposits, it's actually pretty stable, this quarter in our retail business. The proportion, I think is exactly the same as we saw it the quarter before. A little bit of movement on Business Banking, but not really that much to speak of. So I think stability, and that maybe suggests that the mix shift has bottomed out for now.
Okay. Thank you. And then secondly, I was thinking about capital. Why, why are you talking about that you will resume buybacks in next year? I mean, should we take this as you're adequately capitalized for now, or why is it brought up now?
So I think there's some important news today in terms of having received the ECB approval on models, which is obviously a big impact on the CET1 trajectory going forward. We have a couple of other events coming up on the capital front. We're expecting to bring in the new Norwegian business in Q4 this year, which will absorb 40 basis points of CET1, and then some moving parts early next year. So you know, a couple of things. First of all, we're absorbing and dealing with those changes over the next six months or so. And then we wanted to flag that because we're you know, always generating capital throughout that we'd be in position to resume buybacks from early next year.
We'll keep that under review, of course. But you know, I think we're on the same page with the ECB as far as getting back onto buyback programs is concerned, and we just wanted to flag that for investors.
Okay. Thank you.
The next question comes from Nicolas McBeath from DNB. Please go ahead.
Thank you, and good morning. So, a follow-up question on the impact from the Norwegian acquisition. So first, if you could say anything about the kind of revenue implications, how much NII impact do you anticipate the acquisition to have? And then also on the acquisition, on the capital impact, I know that you keep the 40 basis points headwind from the impact that you guided for initially when the acquisition was announced, but I note that the lending portfolio has shrunk a lot since then. So I was just curious why the capital impact has not changed, given the much lower size of the lending portfolio.
Yeah. Morning, Nicolas. So we've always talked in terms of what the business we're acquiring delivered in 2022. And the reason for that is that was the best available information we had, and we also have to recognize that you know what the NII that we will learn from it depends on the portfolio that comes across. And there's been strong competition. I think we've seen Danske reporting some attrition on that portfolio. A couple of competitors in the market have been pretty aggressive. And that's fine. We expected to see some churn, and we will still acquire a very substantial portfolio that will be very good for strengthening our business in Norway.
In terms of what it will deliver, it's hard to say at this stage. Back in 2022, it was around EUR 145 million of NII. It'll be lower than that because the portfolio will be smaller. But I think one of the things that's good to note is that some of the business attrition has been in low-margin mortgages. And so overall, I think we'll get a helpful boost to our NII expectations in 2025, in an environment where I think, you know, we might see growth slowly starting up, but it's helpful for our delivery next year.
The other thing I think it'll give us, and this is about more than NII, Nicholas. It's a customer base that has had little by way of sales of other products into it, and we expect to be able to really work with those customers and introduce a bunch more Nordea products to them, so it's about more than NII. And then, in terms of the capital impact, again, I think we just stick with our original estimate. If it turns out being lower, that's, I guess, helpful for the CET1 ratio. We haven't felt the need to adjust it at this stage, because, you know, well, let's see what the final portfolio balances are.
All right. Thank you. And then a question related to cost. So, I think, Frank, you mentioned now cost slightly up in 2024, versus 2023. I think the previous guidance was flat or slightly up, so just wanted to clarify, is this a kind of changing guidance? And have you, you know... Are you now anticipating more cost headwinds than previously or more investments? And then related to that as well, the increase in cost for 2024 versus 2023 suggest quite high underlying cost growth before one adjusts for the, one-offs last year, and also the fact that regulatory fees are coming down a lot this year.
I was just curious if you could say anything, whether you think you can substantially bring down the cost growth, into next year, given now that revenue trends are, clearly softer, versus, let's say, one year ago. Or should we think that you will continue to invest and strengthen the bank in a grounded fashion also, going into next year?
So thank you. It's Frank speaking. So, costs, sort of like, for the full year, is expected to increase slightly to the full year 2023. That is basically what we have been saying all the time. We have said flat to slightly up. Now we are saying slightly up to 2023. So you're right on that one. If you look at the Q2 to last year, it's up 6%. If you try to sort of like split, sort of like the 6% in different baskets, around 2.4, as I recall it, is ordinary run cost, meaning, salary inflation, inflation coming from what we buy externally, and so, and 3.4% is investments.
So investments in technology, foundation, in digital, data, AI, and in risk management capabilities, especially within the non-financial risk area. So we have increased significantly to a high level from last year. And of course, we can change that. But currently, we have no plans changing it, as we believe it will be very helpful for the bank long term to have an even more increased resilience and also growth. And in the 3.4%, we have the one-offs for Oslo as well. Oslo, Danske Bank's or the acquisition of Danske Bank in the quarter. So that's why it is a 6% run rate-wise this year. But as you understand, the majority is actually on investments. Could we reduce the number?
Yes, we could. As I mentioned, more than half of the increased costs are coming from investments, and we are investing on a already high number, so we could, but we feel it's the right thing to do. And we are, of course, looking for positive jaws for sure. Whether that is possible next year or not is difficult to say, but that's our ambition. Ian, anything to add here?
Okay. Thank you very much.
Yeah, I think, as Frank says, you know, we've gone from. We talked earlier this year about stable to slightly up. It is now very much that we would see a slight increase on last year's total costs, and you probably want to think about 1%-2%. Certainly no more than that.
... Great. Thank you.
The next question comes from Andreas Håkansson from SEB. Please go ahead.
Morning, everyone. I'm looking on your slide 17, and I just had some questions on your risk weights and the delay in the buybacks. Let me understand it first. You used to say that EUR 16 billion was the increase you expected in your risk-weighted assets, EUR 10 billion for the IRB approval and EUR 6 billion from Basel IV. Now you said that it's going to be EUR 17 billion with what is it you say, EUR 4 billion coming from Basel IV. So has the IRB model gone from EUR 10 billion to EUR 13 billion? That's the first question.
Yeah. So broadly speaking, after the sort of anticipated changes in Norway, and you know, Norway has been, I think, the key sticking point for the ECB in terms of its discussions with host regulators on all of this. But our estimate is that after those changes that have been proposed in Norway, we'll end up to start with on IRB at net 15. And then the Basel impact is reduced to 4 overall, and you know, approximately half of that comes at the start of this year, at start of next year, and half the following year or later, depending on what happens with the delay on FRTB.
All in all, that gives us 17 at the beginning of next year versus the 16 that we were projecting.
Okay. And then I had a feeling, and I might be wrong, of course, that in Q1, it sounded like you expected to initiate your buybacks once you got the approval on the IRB models, and now you got it, and you've delayed it. Are there any other factors impacting? I mean, we read in media that you have a Danish court case on AML with an uncertain outcome, of course. Could you tell us, has that had an impact? And also, when do you expect to have an outcome of that court case?
So let me deal with just the specific question on the court case first. First of all, it has had no impact on our thinking on capital return, because as we've stated, based on our assessment of the case, we're adequately provisioned for current circumstances. So that's had no impact on our capital thinking. And I guess as to timing of the resolution of that, we'll have to let the court process take its course. And so I think, you know, that that'll certainly be working through the course of next year. So, nothing imminent in terms of resolution and difficult to predict the timing. But, it's had no impact on our thinking on capital return.
And then in terms of you know, the rest of it, again, going back to slide 16, we've tried to kind of set out there some of the different moving parts. So first of all, the impact of the IRB models, and then importantly, the absorption from the Norwegian acquisition. And I guess, as we look at those two, we think that you know, generally speaking, better to generate the capital before paying it out. But we'll deal with those moving parts, let them settle, and then we'll resume buybacks.
Okay. And then for a final question on risk weights. You haven't put in the expected benefits from your corporate models that we expect to happen in 2026. Could you help us give us a rough size of that, so we can compare it to the negative impact on retail today?
Yeah, we stayed away, Andreas, from talking about impacts there because there are always uncertainties associated with, you know, where the ECB comes in terms of their model assessment and other things. So, while we expect there, you know, even from the removal of the risk weight floors that we have on certain portfolios, there should be benefits arising. We've been prudent and not included those in the model for now. The non-retail application will be submitted next year, and as we've said before, you know, not before the end of 2026 would we expect it to be in. But, we're being prudent in terms of impact there.
Okay. That's it for me. Thank you.
The next question comes from Magnus Andersson from ABGSC. Please go ahead.
Yes, thank you, and good morning. I note that you have not lowered your deposit rates in Finland as a response to lower short-term rates, while you did so in Sweden, and you have announced cuts in Denmark, which comes into force tomorrow, if I remember correctly. So why not in Finland? If you could tell us something around that, please.
So, It's Frank, Magnus, I can take it. So nothing sort of like bigger than we felt a need to fine-tune our pricing, or the business here felt a need, and that's why the pass-through has not been as high in Finland as in the other countries. We don't see that as a, you know, some signs of sort of like that could be used to any forecasting on so. And we believe that we are very well positioned price-wise now in all the markets. So that's basically what we can say.
It would point, at least if we should try to estimate, that the coming rate cuts could play out, as we have been saying all the time, that the first one will come with a quite high pass-through. And then, of course, it's up to competition, and so, but... Yeah, so nothing has really changed more than sort of like fine-tuning in Finland.
Okay, so this is according to plan, so for your responses in Sweden, Denmark, and Finland?
Yeah, I would say so. Ian, do we have any opinions here?
No, I think that's entirely in line with plan. And as Frank says, you know, we generally expect, subject to tweaks in response to market actions and things like that, to sort of pass through certainly the earlier rate cuts, and therefore NII should be resilient.
Mm-hmm. Yep, okay. Thank you. Sorry, I might have missed it. It was a bit noisy here, but did you say why you slightly raised your cost guidance? What it was referring to, what the reason was.
That's investments. So if you-
Yeah, if you were.
If you basically chop up the 6% cost growth for the second quarter to last year, around 2.6% is ordinary operational costs increases, salary inflation, inflation from things that we are buying, and so... And 3.4% is investments in technology, infrastructure, digital, AI, data, and then non-financial risk capabilities across the board, I would say. And then it's the acquisition costs that we are taking on, the Norwegian acquisition. And we intend to keep investing on an elevated level for the coming period, as we simply believe that it is best for the bank shareholders to increase our resilience even further and invest in growth.
But of course, if we can't sort of like find the income pockets, we will, of course, reassess whether it is the right level. But currently, we are feeling that we are doing investing at the right level at the moment. And looking forward, that will lead to a sort of like slightly higher cost this year, compared with full year 2023.
Okay. Thank you.
Thanks.
The next question comes from Gulnara Saitkulova from Morgan Stanley. Please go ahead.
Hi, good morning. This is Gulnara from Morgan Stanley, and thank you for taking my questions. First one, follow up on the buyback. So you stated that you aim for the buyback early next year. Maybe can you elaborate, how should we think about the size of the buybacks going forward? Would you still prefer to do the smaller but more frequent buybacks, rather to go for a bigger size buybacks once a year? And if you were to do the more frequent buybacks, would you apply for approval for the total amount at once, or it will be two separate approvals from the ECB?
If I start with the first one, then Ian, and take the latter part. So buybacks, for us, is an integral part of our capital distribution, and, the only reason for why we have paused at the moment is that we were in the middle of new models. Now, we have them approved, and that's why we have initiated the dialogue with ECB to get back on buyback tracks. Then, of course, we can discuss whether it's sort of, well, it could be in fourth quarter, it could be in first quarter, but that's, for us, not the key, right? The key is that it is an integral part, and we have it in our capital distribution policy or plan, actually.
We will likely go with smaller programs and then keep it on more or less all the time. Of course, dependent on how much capital we generate and how much excess capital we have. In Q4, we are using some of our excess capital for the acquisition in Norway. We hope to do more acquisitions, but there's not that many acquisitions in the Nordics. So when you look at our capital generation, which we try to explain on page 17 in the material, we will generate capital on top of the 60%-70% buyout. And buyback is the instrument to manage the excess capital.
Yeah. Thanks, Frank. And Gulnara, hi. I mean, in terms of size of the application, I think it's unlikely we would, you know, apply for more than we were about to execute. But the... We've got a pretty good process with the ECB in terms of submitting applications and getting them approved. So the timing and size of application, I think, will be commensurate with what we plan to execute, and then we'll go and do more when we're ready. You wouldn't do more than that in an approval because it'd be deducted from your capital straight away.
... Thank you. Very clear. And can I ask another question to follow up on the competition? How would you describe the competitive environment across your key markets, and especially in Sweden? Because as the market outlook seems to improve, the customer activity should return. And would you say that the competitive pressure could subside in the coming quarters, or do you think it's still early to see the visible improvements in the near term?
No, I think sort of like, as you said, it's early, early days, right, in the recovery. But we do clearly see that there the activity is slowly picking up. A number of mortgage applications across the Nordics are picking up now in the latter part of the quarter. The bond market, so our debt capital and our ECM business was more active than before. M&A, more M&A deals, and so large corporates are quite active. I would say that there's the small and mid-sized segments within corporates are still subdued, which is just natural. They're very much dependent on the consumer confidence, and so all in all, clearly picking up across the Nordics.
In Sweden, we are in a very good spot, so continue to win within retail. We are on the winning side as well on Private Banking and wealth. We're doing very good on SME, and LC&I is continuously a game about not jeopardizing the profitability, yet still capture the growth and work with all our clients to get all of the business, or at least most of the business. So I would say, it's looking like we are moving in the right direction, although it's still early days.
Thank you very much.
Thank you.
The next question comes from Sofie Peterzens from J.P. Morgan. Please go ahead.
Yeah, hi, this is Sofie from J.P. Morgan, and thanks a lot for taking my question. I see that in your report, you write that the retail model approvals also include some regulatory REA add-ons. And then you say that after completing the planned remediation action, you expected to get EUR 4 billion-EUR 6 billion of risk-weighted asset release, but this is all subject to regulatory approvals. Could you just clarify for me what the remedial works are, and also what these add-ons are? Which portfolio, what products? Just give a little bit more detail. And also on the remedial work, is it more a data issue or is it a system issue that you're having? That would be my first question. Thank you.
Morning, Sofie. So these add-ons, as we say, we expect to remove around EUR 4 billion-EUR 6 billion of RWA by addressing the conditions, I guess, the ECB have put on their approval. And those conditions principally relate to, you know, so model enhancements or model replacements. So our PD models, for example, need to be further developed to ensure that we can capture the risks arising from joint obligors. That's an example of some of the enhancements we have to make. And also to enhance some of our loss given default models, and in particular, to take that down a further level in terms of granularity. So this is about adding a bit more detail, a bit more detailed capability to our models.
And that takes some time, first of all, to develop, and second of all, to approve by the ECB. So those are the key things that are going to reduce the REA add-ons that we currently have from ECB.
Which is a usual practice from ECB to add some REA on top of, and then align with us on the timeline and in order for the banks to remediate sort of like the things that they feel that needs to be strengthened.
But I guess the follow-up question here would be like, how likely is it that you will get it in 2026? Is it more like a 2027, 2028, or even further out, considering that... I mean, from the outside at least, it sounds like it's a quite complicated process, and also if all these models then need to be approved by the ECB, which we know always takes more time than expected.
Yes, you're right, Sofie. It is a complex process and can be difficult to predict. I think what's on our side in this respect and why we feel, you know, we feel good about the timing is first of all, this is just in the ECB's hands. You know, as we've talked about before, a lot of the why it took so long for the original approval was because of the negotiations with other regulators in our four home markets, and so it's solely in the ECB's hands. And the other thing is, the ECB has an awful lot of model approvals on its plate at the moment and has a pretty strict schedule. So we've agreed a window with them, whereby we deliver-...
The models, they undertake the review, asks their questions, and then come back. I think that so long as they stick to their commitments on timing, we should be fine.
Okay. Okay, that's fine. And then my second question would be on the hedge. So, the hedge, the deposit hedge, it looks like it shrank a little bit, and then quarter-on-quarter, it was small positive to net interest income. But why was the deposit hedge year-on-year at EUR 26 million drag to your net interest income? And could you just remind us how much the hedge is kind of costing Nordea's net interest income every year? And how should we think about the hedge benefits as rates come down, especially in 2025 and 2026?
Yeah. I mean, the reason it was a small increase year-over-year this quarter is really a sort of question of timing. What impacts the hedge most at the moment is the pace at which we roll off old hedges and replace them with new, higher-rated hedges. I think going forward this is probably the last quarter where we'll have seen that sort of blip of it being slightly higher year-over-year, and we'll see some small benefits in the rest of this year. Where the hedge really delivers is when you start to see rate reductions.
And so on the current rate path, with assumptions of, you know, further rate cuts this year and next year, we'll see an improvement from the deposit hedge in 2025. And then just to remind you, last year, it cost us, you know, in terms of a headwind, in the higher rate environment, we saw it at about EUR 650 million. Be similar this year to slightly down, and then we expect there to be, you know, a substantial reduction next year as we start to see rates move. So it'll really do its job from 2025 onwards.
Okay. Thank you. Then if I may, just a final follow-up. Of the 3.5% cost investment or cost growth that you saw from investment, how much of that cost growth comes from kind of financial crime prevention? And how much of the financial crime prevention is kind of forced by the regulators, because it seems that financial crime is becoming quite an issue in the Nordic region?
I mean, we haven't talked about the different components. Financial crime prevention is substantial, and it's certainly a driver of FTE increases, because these, I guess, step up in requirements are coming from regulatory changes. The regulators are asking for more and more. They're adding to the rules, and the only way that we can deal with those quickly is by hiring more people. Over time, we'd expect to try and automate that, and we've got plans for automation in financial crime, but our response now has been to new regulatory requirements, and the step up in activity that promotes.
Okay, thank you.
The next question comes from Shrey Srivastava from Citi. Please go ahead.
Hi, Frank. Hi, and thanks for taking my questions. You've obviously reiterated the distribution from 2022- 2026 for the clarity, if that's possible, capital distribution 2026 and onwards, since obviously that's when add-ons guided to come off, in addition to potentially a further from your corporate models. Are you thinking, you know, that's my first question. Thanks.
Shrey, you broke up quite badly on that. So could you repeat the question?
Yeah, sure. Is this better at all?
So far. Yep.
Yeah. So you've obviously reiterated the EUR 17 billion-EUR 18 billion for 2022-2025, but I'd like to get further clarity on distribution from 2026 onwards, since obviously, that's when you're guiding for the retail model add-ons to come off, in addition to potentially a further benefit from your corporate models. How are you thinking about additional distribution from 2026 onwards, relative to what we can expect for 2024 and 2025?
Yeah. So-
Thanks.
Thanks, Shrey, and it's encouraging to see you looking so far into the future. I guess our starting point is our capital policy, our capital and dividend policy. And so, you know, that remains in place. So, you know, a dividend payout ratio of 60%-70% gives us one of the strongest dividends in the sector, and that excess capital is used for bolt-on M&A, for buybacks, you know, whatever we think is right at the time. We will continue to generate excess capital. You know, this is a very strong capital generation machine, and so we will...
There's no reason to not see that coming through from 2026 onwards, and it will simply be a question of at the time. What's that level of excess capital? Is it sort of normal generation levels, which, you know, we sort of estimated around about 25-30 basis points a quarter? Or is there something else that comes from regulatory improvements? And we'll deal with that at the time. But you can rest assured that we're firmly behind our stated policy, and we would expect to be a regular, strong returner of capital to our shareholders, consistent and reliable as you've come to know us.
And we're definitely not want to sit on excess capital, that's for sure.
Thank you very much for that. And my follow-up, having looked further into the future, something a bit there. The EUR 17 billion that you've given for retail models in Basel IV obviously include the EUR 2 billion benefit from the Norwegian proposals, LGD floors, and mortgage risk weights. What gives you so much confidence that those will come through to include that in your plan? If you could provide a bit more detail. Thanks.
Yeah. So there are two components there, Shrey, and they are currently subject to a proposal by the Norwegian FSA to the Ministry of Finance. So, clearly, the Norwegian regulator stands behind those two developments. I think the first ought to be a no-brainer. You know, that Norway is expected to adopt CRR3 from first of January next year, and the LGD floors on mortgages in Norway fall away under CRR3. So that would appear to be on autopilot and be, you know, consistent with what the Norwegian FSA has proposed. On the other item, we should look at them separately. Again, the Norwegian FSA has proposed a 25% risk weight floor for mortgages applying to all lenders.
That, you know, that's their prerogative, I guess, and so long as it's applied, whatever they propose is applied to everybody equally, we'll deal with that. And, you know, the market will adapt to it. If it doesn't happen, then the market will respond accordingly. So, you know, I think that's the basis. We think best to include these items, based on our current understanding and, you know, what's out there in the public domain. There may be some shifts and changes, but particularly if the risk weight floor doesn't... So, so long as it's applied equally, we're comfortable with competing on a level playing field.
Okay. Thank you very much for that.
The next question comes from Namita Samtani from Barclays. Please go ahead.
Morning, and thanks for taking my questions. Firstly, does this Danish AML investigation put you off from doing business in Denmark, given how the authorities are treating you? Secondly, do you think the good DCM activity this quarter was driven by customers front-loading, i.e., doing activity ahead of the U.S. elections, rates volatility, or are we on a new trajectory for DCM, and ECM, and IBDs? And lastly, just a question on the interview, Frank, you did with Dagens Industri, where you referred to Nordea operating in four countries with 3,200 internal software applications, and the need to reduce these applications to get processes which run the same in all four countries. I just wanted to ask, wasn't this the point of the Core Banking platform project to operate on one system?
I'm curious to understand why four countries operating on one system hasn't been achieved yet, and whether you believe you can achieve cost efficiencies going forward, or it's actually impossible given the complexity of operating in four countries. Thank you.
Thank you. So, let's start with the AML. So the AML case is, as we all know, a very old case. It dates back more than 10 years in the period, from the period 2012 to 2015. It is not about money laundering, it's about not having the appropriate processes in place and practices in place at that time. And we have basically accepted that that was the case back then, that we didn't have a full alignment to the requirements at that time, and we have also said many times that we expected to get a fine. That said, there is nothing else to be expected.
We would have hoped to get the case closed earlier, but as Ian explained, that has not been possible. But it should have, of course, no impact at all to the business that we run. And just to remind you about, since 2015, we have invested more than EUR 1.5 billion into fighting financial crime, and we have more than 3,400 out of our 30,000 people working, fighting financial crime full time. So no concerns there. When it comes to the DCM, I think it's a start to a new period. Of course, it's not a straight line, but it is seasoning up
... customers are more proactive now. They believe more in the future, and the bond market is clearly in a better shape than it has been for very long. So I would say that we have probably seen the beginning, and then, remember, we are not sort of like sort of like operating in a single country. We are a cross pan-Nordic bank, and that means that sort of like when we get all cylinders up to run up to speed, it will be quite impactful, while there are some countries right now that are more speedier than others. So we're quite positive but also realistic. It will take a bit time to get it full up and running across the Nordics.
When it comes to Nordic scale, it's much, much more than sort of like a system. It's processes, it's a way we work, it's a way we work with our branding and marketing cost. It's a way we work with our talents. It's a way we have, for example, our data and our data sources. It's a way we run our, for example, our corporate lending, which applications we run on and so. So, T24 and Core Banking, that's just one part. This is sort of like a much more fundamental cleanup that we are in the middle of now. Would it bring any cost savings? Yes, of course, it will.
We don't-we haven't mentioned a number, but there will be, of course, a significant upside when we have one process for example, mortgages across the Nordics instead of four different processes. I could mention the same with the payment corporate payments. Instead of having a number of process, a number of applications, having one process covering most and much fewer applications would, of course, also mean a lot. On the data side, much more golden sources, less fragmentation, very, very big and sort of step to take. And all this, we are executing on concrete plans, making progress every single day and follow it very carefully in our leadership team and with the board as well.
And I'm a very sort of like positive to the outlook on what that will bring. But again, it's nothing that comes easy. It's hard work, and it will take some time, but it is something that you'll start hearing us talking more about and also show concrete the evidence of why we are progressing and how we are progressing on each of these streams. But more to come.
That's helpful. Thank you very much.
Operator, we have time for one more question.
The next question comes from Piers Brown from HSBC. Please go ahead.
Yeah, good morning. There's two for me. One is on assets under management. That number obviously still being held back by the outflows you're seeing in international AUM. Is there anything which gives you hope that you're anywhere close to a turnaround on the international AUM picture? And then the second question is just back to capital again, but thinking about the underlying pace of risk-weighted asset growth just from new business, what are you thinking—and when you think about capital planning, what sort of pace of RWA growth, excluding all of the considerations around model reviews, et cetera, are you thinking of? And I'm just thinking back to Q1.
I don't think you've given a Pillar 3 report yet for Q2, but in Q1, if I look at the IRB numbers, it looked like you had reasonable inflation for asset size growth, but offset by a reduction in for improved asset quality. Just whether you think that dynamic continues to play out in incoming quarters? Thanks.
Yeah. So, I'll deal with the RWA question first. I think the outlook for this year, Piers, is pretty muted. I think, you know, we've said all along that we'd expect to see relatively low growth, perhaps with an improvement coming next year as we start to see the benefit of rate cuts coming through. And that remains the case. So I think, you know, fairly muted this year with a bit of a pickup next year. And I guess what you'll see from Pillar 3 when we publish it is, it ebbs and flows in terms of credit quality. So when we have strong quarters with improvements, we see benefits coming through.
Where we see one or two provisions needed, then it goes the other way. It isn't gonna be a big needle mover. So, I think all in all, slow pace this year, and then let's see what next year brings. On assets under management, yes, we continue to see net outflows in international wholesale distribution. We've always said it's gonna take some time to deal with that, both in terms of just what's happening in the outside world. You know, high interest rate environments are not helpful when we have been very successful on the basis of you know, products that work in low-rate environments. So we're turning that around. I think we're seeing it slightly better.
Certainly, the overall net outflows were lower last quarter. That might indicate that it's slowing down a little bit. We're very focused on it. We said it would take some time to fix. You know, we'll update later in the year.
Great. Thank you very much.
All right. I think we have reached the end of the ending of the meeting. So thank you so much for all the questions and good dialogues, and looking forward to speak to you again. And as always, just reach out. We're here for you. Thank you so much.