Good morning, ladies and gentlemen, and welcome to Nordea's fourth quarter and full year 2021 result presentation. Here in Helsinki, we have our Group CEO, Frank Vang-Jensen, our Group CFO, Ian Smith, and my name is Matti Ahokas from Investor Relations. As usual, we'll start with a presentation by Frank, and after that you will have the opportunity to ask questions. In order to ask a question, please remember to dial into the teleconference. With that, I'll leave the word to you, Frank. Please go ahead.
Thank you, Matti, and good morning. Today we have published our fourth quarter and full year results. Before going into the actual results, I would like to take us back to October 2019. The situation was not satisfactory for Nordea at that time. Customers were not satisfied, and our financial performance was clearly lagging behind our ambitions and behind our peers. We had a return on equity of 8.4% and a cost-to-income ratio of 58%. It was clear that we need a restart. We opened a new chapter for Nordea with a revised strategy and clear priorities and targets. Today, I'm happy to confirm that we have exceed our 2022 financial targets one year ahead of the planned schedule.
We are clearly growing our business volumes and gaining market shares while maintaining good cost control. Our return on equity in 2021 was 11.2% against a target of 10% for 2022. Our cost-to-income ratio was 48%, while our 2022 target was 50%. Also, all of our business areas meet their respective targets and improved customer experiences. Now, the journey continues, and we are aiming even higher. Today, we have disclosed our new financial target for 2025, which is a return on equity above 13%. Our target is focused on growth within prioritized areas and will be supported by a cost-to-income of 45%-47% and normalized loan loss levels of around 10 basis points. It will also be complemented by competitive and healthy dividend and capital policies.
I'll get back to the new business plan and target later in the presentation, but first I will go through our Q4 and full year results. 2021 was a successful year for Nordea. I'm proud of how we have progressed as a bank together with our customers. We have been able to do so even though the pandemic continued. Some of the highlights in 2021 were our business volumes grew, and we gained market shares across the Nordics. Our mortgage lending grew by 6%, SME lending grew by 6%, and assets under management by 17%, reaching all-time high levels. We improved customer experiences, and we reduced customer complaints by 9% year on year, and we are now receiving 41% fewer complaints than three years ago.
Our 2021 operating profit was over EUR 4.9 billion, which is 67% higher than in 2020. Our return on equity was 11.2%, up from 7.1% last year. Our credit quality remained strong with low levels of net loan losses, and our capital strength is continued to be among the best in Europe. We are pleased with our performance in 2021. Of course, the banking industry enjoyed favorable markets last year, but the results of hard work executing on our strategy are clearly visible. Looking at fourth quarter results, it was again a strong quarter for us. Keeping in mind that the fourth quarter last year was also a strong one. In Q4, net interest income increased by 7%. We had very strong net fee and commission income growth. NCI was up 16%.
Net fair value was up 14%, and our return on equity was 11.3%, and the cost-to-income ratio improved to 47% from 57% a year ago. For the coming strategy period until the end of 2025, our key financial focus will remain on growing revenues faster than costs. We will invest in organic growth and remain open to selected inorganic bolt-ons when the right targets are available to support our strategy. We will also continue to invest in digital capabilities, data, ESG areas, and to meet regulatory demand to make the bank better and well-equipped for the future. We will create space for these investments by driving structural cost reductions, just as we have done the previous period. For 2022, we expect to deliver a return on equity above 11% with continued profitable growth.
Our cost-to-income ratio is expected to be 49%-50%. Remember, in 2021, the cost-to-income ratio benefited by a full percentage points from exceptional high financial market income. We expect to invest for continued growth and also to incur higher regulatory costs this year, including the Swedish bank tax. Our operational efficiency will keep improving, and we expect our cost-to-income ratio to decrease in the coming years. Let me now go deeper into the numbers, starting with the income line. In the fourth quarter, we grew our customer business volumes faster than the overall market, and we continued to gain market share across the Nordics. Our net interest income grew by 7% year-on-year, and this demonstrates the strength of our business model and the solid development of our franchise across the board.
We were able to maintain high sales activity with profitable growth in our mortgage business, and as a result, mortgage loan volumes increased by 6% year-on-year, which, with growth in all markets. We are gaining market shares in Denmark, in Sweden, and in Finland, while in Norway we are growing roughly in line with the market. During the quarter, we continued to actively support our corporate customers and increased our lending to SMEs by 6% year-on-year. Mortgage market margins faced some pressure during the quarter, mainly due to the Norwegian rate hikes. We were supported by lower funding costs compared with last year. Also, higher deposit margins support the year-on-year net NII growth. One of the highlights of the quarter was the growth in our net fee and commission income.
The result was very strong, with NCI up 16% year-over-year. We were able to grow our savings business throughout the year, and the fourth quarter was no exception. Driven by strong net inflows in assets under management, savings fee increased by 24% compared with last year. Brokerage and advisory fee income was supported by continued high customer activity. Payment and card fee income has picked up from the subdued levels seen in the fourth quarter of 2020. Our net fair value result was up 14% in the fourth quarter. This increase was driven by high customer activity and supported once again by asset valuations in treasury. The trading result was lower due to unexpected interest rate moves, but income picked up towards the end of the quarter. Moving from income to costs, we continue to increase our operational efficiency and build a strong cost culture.
In the fourth quarter, our costs were down 10% compared with last year. The decrease was mainly driven by lower restructuring and IT costs and was supported by a VAT refund. The quarter-on-quarter cost development was flat. Staff costs were down despite the fact that our strong business performance and activity led to a higher variable, pay-related cost during the year. In 2022, we continued to find further efficiencies, but will also invest in growth in line with our updated business plan. All in all, we remain focused on growing revenues faster than costs while maintaining strict cost control. Looking at our credit portfolio, the quality of our portfolio remained strong, as has been the case during the entire pandemic, supported by our well-diversified lending portfolio.
The full year 2021 net loan losses and similar net result was very low at EUR 35 million or 1 basis point. Net loan losses and similar net results for the fourth quarter amounted to EUR 56 million or 7 basis points. Loan losses during the quarter included the impact of model changes in our real estate portfolio and the strengthening of provisions for agriculture lending as export markets remained subdued. Even though the portfolio is in a very good shape, we have kept our management judgment buffer unchanged at EUR 610 million. We find this approach prudent since the pandemic-related uncertainty remains. Our capital position is one of the strongest in Europe. This means that we can continue to support our customers, pay out dividends, and deploy excess capital, benefiting both our shareholders and society at large.
At the end of the fourth quarter, our CET1 ratio was 17%, which is 6.8 percentage points above the current requirement. Reflecting our very strong financial performance and capital position, our board has proposed a 2021 dividend of EUR 0.69 per share, a significant increase on the dividend of EUR 0.39 per share for 2020. The board's proposal translate to a payout ratio of 70% in line with the upper range or upper end of our dividend policy. Meanwhile, our share buyback program continues. We consider share buybacks to be an integral part of our capital management for an efficient capital structure. Today, we have deployed 75% of the initial EUR 2 billion buyback and have now bought back 140 million shares from our shareholders.
We also submitted our application to ECB in January 2022 for a potential follow-on program. Let me now move on to our business areas and their respective results. I'm pleased to see that all business areas have continued to deliver strong performances. The combination of a decisive customer focus, digital and in-person services, high business activity levels, and an efficient way of working has delivered a solid financial performance. In personal banking, we continued to strengthen our omni-channel customer experiences. Our availability and digital capabilities drove further increase in mortgage market shares across the entire Nordic region. Due to this activity, mortgage volumes were up 6% in the fourth quarter. Savings growth supported the income in the quarter. We continued to develop our digital channels, with digital sales contributing to around 60% of all fund sales during the quarter.
Margin pressure, particularly in Norway, partly offset the result. Total income was up 8%. Return on capital at risk improved to 16% compared with 14% a year ago. The cost-to-income ratio improved to 52% from 54%. In business banking, the strong business momentum continued, resulting in an improved financial performance. We are clearly the leading Nordic SME bank. I'm pleased to see that we are performing well and have a very strong position throughout the customer segments, from startups to the largest Nordic mid-size enterprises. Lending volumes were up 6% year-on-year. Business activity was high, and especially in Norway and Sweden, and we are growing faster than the overall Nordic market. Net fee and commission income was up 12%, mainly driven by a growth in savings and advisory fee income and recovering payment and card fee income.
We saw improvements in all fee types. We are actively and continuously developing our digital capabilities. We have released a new online store in our corporate net bank, and the store will go live in the mobile bank this year as well. Total income was up 12%. Return on capital at risk improved to 16% compared with 13% a year ago. The cost-to-income ratio improved to 44% from 48%. In Large Corporates & Institutions, the stable performance and high business activity continued in the fourth quarter. In addition, customer satisfaction remained high. We helped customers complete large corporate transactions across many industries in all four markets. This drove good growth in advisory fee income. We began the repositioning of our LC&I business in 2019 when we decided to focus on profitable growth. This has meant somewhat lower volumes, but better profitability.
After the turnaround, the fourth quarter was the first time we grew our Large Corporates & Institutions lending volumes since 2019. Together with improving margin development, this supported income growth. Net interest income was up 9%. The trading result in the quarter was lower due to the challenging market conditions, but activity income remained very high. Economic capital was down 3% year-on-year, and return on capital at risk was 12%, and the cost-to-income ratio was 47%. All in all, our Large Corporates & Institutions business has demonstrated a significant performance improvement compared with 2019. In Asset & Wealth Management, the fourth quarter was characterized by significant positive net flows in all channels and strong investment performance.
Our net inflow was EUR 4.9 billion in the quarter, and I'm particularly happy about the performance of our internal channels, especially retail funds and private banking, where we continue to grow our business across the Nordic region, with the highest growth in Sweden and Norway. This shows that we have been successful in our key focus segments driven by proactivity, strong product offerings, and smooth digital services. Assets under management increased by 17% to an all-time high of EUR 411 billion, and total income was up 31%. We are a leading player within ESG investments in a European context. ESG products were the primary driver of our growth, generating close to 100% of net flows in the quarter. The demand for sustainability-linked product offerings is continuously increasing, and we are ready to meet it.
In addition to the ESG segment, we continued to expand our offering in many other areas, such as alternative investments. Return on capital at risk improved to 32%, and the cost-to-income ratio improved to 41% from 52% a year ago. In October 2019, we launched a new strategy, our strategic direction for Nordea. With ambitious financial targets for 2022 and an updated business plan, our aim was to retake lost ground in business and improve our financial performance. We decided to focus on three key priorities to create great customer experiences, drive income growth initiatives, and optimize operational efficiency. I'm happy that our work has paid off. We have surpassed our 2022 financial targets one year ahead of schedule. All of our four business areas have met their respective targets. We have done what we said we would do.
We've been very focused on delivering on our targets and priorities. We have put customers at the center of everything we do, and have tried to do all things a little bit better every single day. No magic tricks, but hard work, consistency, and clear follow up, and most importantly, teamwork. These results could not have been achieved without our skilled, passionate, and very dedicated employees. I couldn't be any prouder. I want to take the opportunity to thank you all. Now it's the time to turn the page and take the next steps. Today, we have disclosed our new financial target for 25, which is ambitious, yet realistic. We are targeting a return on equity above 13%. Our financial focus is clearly on growth and profitability.
This will be supported by a cost-to-income ratio of 45%-47% and normalized loan loss levels of approximately 10 basis points. Our dividend and capital policies remain unchanged. Now we will move forward to deliver best-in-class omnichannel customer experiences, raise the bar on our financial performance, and drive further value creation for our shareholders. We want to be the preferred partner for Nordic customers in need of a broad range of financial services. In two weeks time, on the 17th of February, I would like to welcome you all to join our virtual Capital Markets Day, where we'll present our 25 financial targets, respective business area plans, and updated priorities, and discuss a new strategy period in more detail. While we have a new target and updated business plan, our direction as a bank is not going to change.
For more than 200 years, we have played a key role in supporting our customers and developing the Nordic societies. That will be our role going forward as well. Thank you, and looking forward to meeting you again soon.
Thank you, Frank, and we will soon take your questions. Before that, we'll take a brief pause. I would also like to extend the invitation to our Capital Markets Day. We have the registration open at nordea.com. We'll take a brief pause and questions in just a while. Thank you. Operator, we're ready for the questions. Thanks.
Thank you. If you do have a question for the speakers, please press zero one on your telephone keypad. Please hold until we have a first question. Our first question comes from Magnus Andersson with ABG. Please go ahead.
Yes, hi, and thank you. Just to start with your cost-to-income ratio target in the short term, the 49%-50% for 2022. I was just wondering if you could be a bit more specific about the investments you expect to do there, if there are any specific IT initiatives, and if you could say something around what kind of headcount development you foresee year on year. Related to that, you also write in your statement there you expect profitable growth in 2022. My question is just how explicit that is. Is it profitable growth in terms of income, in terms of pre-provisioning earnings or what that is? Thanks.
Sure. Morning, Magnus. It's Ian. Thank you for the question. Yes, we're very focused on continuing to grow our business and the areas that we would expect to see some additional spending next year, in particular, are in our key growth areas. For example, private banking across the Nordics where we'll invest in people, in our Asset & Wealth Management business where we have a heavy product development slate in order to meet the considerable demand for our products. We also, you know, continue to strengthen our regulatory position. You know, we continue to invest in financial crime prevention in other areas.
Those are the key things that we expect to see coming through in 2022 in particular and contribute a little bit to the cost-to-income ratio that we've set out. Profitable growth, our key lens is return on capital. You know, we think that we can grow across all of our business areas profitably meeting return on capital hurdles that will help to maintain our development and return on equity for the group.
Yeah.
Yeah. Okay. Just in terms of head count there, can you say anything? I mean, in underlying terms, head count is down I think 10 quarters in a row.
Yeah.
Is that expected to continue or will it halt in 2022?
Hi Magnus, it's Frank. The expectation is that the number of employees in Nordea will continue downwards. That is a trend I expect to see in the years to come and probably for many years to come. Digitalization and technology will play an increased role also in the years to come.
Okay. Thanks. The second is just on capital. You mentioned that you have asked for another share buyback mandate from the ECB. Is there anything you could share with us at this stage about desired size and or timing? I guess what I'm after is whether you expect to be able to seamlessly continue to buy back shares once you are done with this quite substantial one you're pursuing right now.
Yeah. Magnus, I think it's much easier to answer the second part of your question. You know, the timing we would expect to be able to continue our buyback activities pretty much seamlessly. We've, you know, chosen to stay silent on the amount. We guided the last time that the second program would be a little smaller than the first. We should have some news, you know, fairly soon in terms of how we intend to prosecute that. You shouldn't expect to see any break in our activity.
Yeah. Okay. Thank you very much.
Thanks.
Our next question comes from Andreas Håkansson with Danske Bank. Please go ahead.
Hi, and good morning everyone. Two questions on the return on equity target above 13%. First one, could you tell us what you include in terms of higher interest rates in the future, and also what do you assume in terms of resolution fees primarily for Finland and Sweden that should be changing over that period of time? That's my first question.
Yeah. Morning, Andreas. Our assumption is that we will, towards the end of the strategy period, see some rate increases. I know that there is plenty of speculation at the moment that might come a little bit sooner. Our planning assumption is some modest rate increases, leaving aside Norway, I'll come back to Norway. In our other home countries, modest rate increases towards the end of the strategy period. In Norway, well, I think the central bank has set out the rate path pretty clearly there, with further rate hikes coming through 2022.
In terms of resolution fees, you know, our assumption is that the sort of heavier cost of resolution fees in Finland and Sweden will end after 2024. Of course we have the, you know, the Lord giveth and the Lord taketh away. We have the Swedish risk tax coming in that period also. Some abatement in resolution fees from 2024 and, you know, our efforts on cost efficiency recognize that there are still plenty of regulatory charges out there.
Okay. Thanks. Then also on the return on equity. I mean, it makes no sense of course to compare your return on equity target to, for example, Swedbank and SEB since they're pure Swedish banks. If I look at each of the markets, if I look at our target of Danske, DNB. In Finland, it's harder to find a peer, but overall you seem to be targeting above 13% which is better than the average of your peers. Do you feel that you now after last couple of years improvement actually start to benefit from having the scale that you have and are you confident that you can actually beat your competitors locally even though it's a bit different geographic mix?
Yes. Hi Andreas, it's Frank. Yes, we are comfortable that we will beat our competitors in the respective markets. As you said, we are targeting above 13%. Let me just start with what that means. In Nordea, a financial target is a target with a firm timeline and is a target set to be met. I'm confident that we will meet our target above 13%, just as we have met our previous target, which was on the ROE above 10%. When we are going to the market with a target above 13%
It's not wishful thinking or aspirations. It is a firm plan that is backed, and it is supported by plans across the bank in all units. It is in group finance, it is in the business areas, it is the group functions, and all leads up to above 13. When we say this now, we are confident that we are able to deliver on it just as we have delivered on our previous targets, and the ROE was above 10%, and we delivered that one year ahead of schedule.
Perfect. Just quick follow-up on Magnus' question. Could you tell us normally, how long does it take for the ECB to handle an application for a buyback?
They have up to three months. You know, having been the first mover in buybacks across the ECB regime, they're used to us and it'll be quicker this time. You know, I think we should expect something in the next few weeks.
Okay. Perfect. Thank you.
Thank you.
Our next question comes from Johan Ekblom with UBS. Please go ahead.
Thank you. Just to continue maybe on the ROE target for 2025. You talk about a capital requirement of 15%-16%, with an unchanged management buffer. Can you maybe lay out how you get there? I think if we take the systemic risk buffer in Norway and countercyclical back to pre-COVID levels, some still struggle to get to those levels.
Yeah.
That's the first thing. Maybe to follow up on Andreas's question on, you know, what's in store for rate gearing and resolution fees, et cetera. Could you know, are you assuming these go to zero, or can you give us some indication as to, you know, would you be north of 13 in 2025, even if we don't see rate hikes, for example?
I guess your first question, the capital assumptions. We've you know, talked regularly about seeing capital requirements settle 14%-15%. I think when we last talked about this, or you know, we've had some focus on the moving parts, which are you know, the macro-prudential buffers go back to pre-COVID levels, and one of the uncertainties is what happens in relation to the Norwegian systemic risk buffer. I think we said that if we were to suffer that in full, we would be towards the upper end of that range, and that remains our base case. That's where we think we should end up.
What might vary that, first of all, you know, 15%-16% I think is a reasonable and conservative planning assumption. We're talking about 2025 levels here, and we have some, you know, moving parts in terms of the pace at which regulators might normalize. You know, we're expecting to see with the already announced changes to countercyclical buffer, another sort of 80-100 basis points on capital requirements by the end of 2022. There are a bunch of other things that factor into our thinking. We have seen, I think, a slight change in tone from regulators about where they might wanna go with buffers.
Will they go any further than they have in the past? We just don't know. We think it's a sort of sensible and conservative or prudent planning assumption to sit at 15%-16%, while our base case, our belief is that where we should be is in that 14%-15% range we've spoken about for some time. In terms of, I think your second question was a mixture of resolution fees and rates, wasn't it?
Yes.
Um-
Yeah, just basically saying, you know, the target is north of 13%.
Yeah.
You know, can you quantify the impact you expect there or, you know, would you still be north of 13% if we didn't see higher rates or lower resolution fees?
Yeah. Look, we
Just to get an idea of the magnitude.
Yeah, I won't be drawn on specific figures, but you know, we would certainly expect to see by 2024 an improvement or a reduction in all of the regulatory levies that we currently experience. That helps. And somewhat, the rate increases' impact in our planning assumptions is relatively modest.
Yes. Our approach, just to add here, our approach has not changed to how we have worked the last couple of years. That is, we are not calculating in or incorporating anything that we are not quite convinced about will happen. When it comes to, for example, net interest rates, we have been, I should say, on the safe side. It can become even higher and potentially have an even better, positive impact on the bank, but that is not our start point. Our start point is to find what is a reasonable, yet very ambitious, yet realistic level, and then with hard work, the right actions, enabling us to meet this target.
We are quite confident when we say above 13%, with the information we have, as of now.
Our next question comes from Nicolas McBeath with DNB. Please go ahead.
Thanks and good morning. First, another question on the 2025 target for ROE. I was wondering if you could share any thoughts on what you see in terms of RWA inflation up till 2025 and how large you think that equity base would be around that point. Do you think that it will be roughly at the similar levels as today? I think it was a bit north of EUR 33 billion. Or do you see substantial movements in the equity base by that point?
Yeah. Nicolas, I'm sorry, I'm gonna disappoint you a little bit here. We'll talk in a lot more detail at Capital Markets Day in two weeks' time on this. You know, because it's a topic that needs to be, you know, probably laid out. If you don't mind, we'll wait until then.
Okay, fair enough. One more question for 2022. What kind of loan loss ratio have you assumed in your above 11% ROE ambition or outlook for 2022?
We don't disclose our assumptions for 2022 loan losses at the moment. The way we're thinking about this is that we would see something of a normalization, I guess, in terms of experience on the customer side. We're still, you know, cautious around impact of pandemic. That's the main reason we've held on to our management buffer. We would see that. I think it's reasonable to assume that from 2022, you will see us either start to utilize that management buffer to cover any losses that emerge or if we conclude that it's right to do so, perhaps to see some releases. It's a complicated picture.
We haven't guided on 2022 for those reasons.
Okay. Final question on the capital again. I was wondering if you're confident that you will have calibrated down your CET1 ratio to within the range you've indicated as a kind of normalized long-term between, I think, 15%-16%, from the current level, by 2022 year end.
Again, we'll talk to you a bit more about that on Capital Markets Day. Certainly our plan is over the coming years to converge our capital level with the normalized capital requirement. That's, you know, that's been our promise all along, which is to deal with the excess capital in a sort of measured pace over the next two to three years.
Okay. Thank you.
Our next question comes from Gulnara Saitkulova with Morgan Stanley. Please go ahead.
Yes. Hello. Thank you for the presentation. A couple of questions. First of all, on your 2025 targets, this improvement in cost-to-income ratio, do you include any benefit from the IT overhaul by 2025? And just wanted to check if you're gonna present divisional targets at the Capital Markets Day, does this shift towards a single ROE target mean that you won't impose cost-to-income thresholds for specific divisions? The other question is, can you remind your sensitivity to a 25 basis point hike? If possible, provide a bit more color by geography, given the clear rate hikes in Norway. And just a small clarification, if there is any impact of Basel IV assumed in your CET1 level of between 15% and 16%. Thank you.
All right. Thank you for the questions. Let me start and then over to you afterwards, Ian. On the cost-to-income ratio, what we do now is that we are having one financial target, that is the return on equity. That's actually the most important financial target, and it includes everything. Capital efficiency, credit losses, and include also, you can say the relation between cost and income. So that is the most important metrics, and that is why we have it as a financial target. Then, cost-to-income is we see cost-to-income as an enabler. Of course, that points also to how cost efficient we are running our operations.
there we are guiding for or we are estimating 45%-47%. From a few comments here. The 45%-47%, this is just a service information. There you have to remember that we are booking our resolution fee as a cost, while our Swedish and Norwegian peers are booking as a deduction in income. If we were to apply the same method, booking the resolution fee cost as a deduction income, it will improve our cost-to-income ratio with 1 percentage point. It's just a service information. It will still be a very, very important metrics, and we will be carefully watching this one. It will of course be applied to all divisions across the bank.
They have, of course, also a very clear follow-up on how they improve, consistently improve their cost-to-income ratio. We expect, as we also are stating, that the cost-to-income ratio of Nordea will continue to come down over the years to come. Over to you, Ian.
Just to supplement what Frank said, what we'll talk about on Capital Markets Day is what the BAs are targeting both from a cost-to-income ratio and a return on capital perspective, and those are two important lenses. The overall group target is how we bring all of that together to deliver an ROE above 13%. You had a question about Basel IV. Our thinking on capital requirements and RWA development does include the first phase of Basel IV, which is in relation to the Fundamental Review of the Trading Book and the new operational risk capital requirements. Yes, that's baked in because that'll be in by 2025.
You had a question on rate sensitivity.
Oh, yes. Rate sensitivity.
Just to follow up on sensitivity and if there's any benefit from IT overhaul.
Yeah. That's not the case. We have not included any benefits during this period from our you can say investments continuously strengthen the core. What is the real important part that is on growth when it comes to and their digital is the enabler.
Rate sensitivity, we've you know consistently disclosed that a 50 basis points increase, you know, a parallel shift you know should deliver around EUR 300 million of additional net interest income. Of course, there's the you know understanding that is fraught with difficulty because it depends on levels of pass-through. It you know rates move at different speeds. It's as an indicator more than anything else of you know a substantial benefit from a 50 basis points increase.
Our next question comes from Martin Ekstedt with Carnegie. Please go ahead.
Thank you. Two questions or perhaps two clarifications from my side. First on the ROE, and I understand this is a firm target rather than aspiration, which I think of course is very helpful. But I just wanted to understand the choice of 13 as the baseline. Is that what you think is realistic for a bank like Nordea? Have you taken a top-down approach and then everything above 13 is a bonus and then driven by market factors like we saw in 2011 with strong capital markets revenue? To see how you got to that number.
Yeah. Let me start, Ian, then you can jump in. What we're looking at, I think, is an ambitious but yet realistic, and that is important to us in Nordea as you know. Let me turn it around. What we do is what we say, and that is also the case here. We have looked into what is an ambitious target for this strategy period, and this is a period up to 25. We are confident that with the plans we have, we are able to deliver above 13%. It could be 13.1%, or it could be higher. We have four years to get closer to that.
We are confident that we are able to deliver higher than or more than 13% in the coming strategy period. Ian, anything to add?
I think you know if you think of the different moving parts in there, you know, one of the reasons is that we sort of set 13 as a baseline because there is a lot of things that can happen between now and 2025. I would just underline your confidence, Frank, that that's a minimum for us.
Mm.
You know, we expect to deliver above that.
Yes.
Okay. Fair enough. Thank you for that. Yes, a clarification on the loan loss provisions. I mean, I hear what you're saying about a normalization in underlying credit quality during 2022, but at the same time, you also talked about the management overlay, which presumably if things are gonna get worse, you will start to use that. Is it then, without you giving a precise number, it's not fair to assume that the net effect of those two during 2022 should be perhaps somewhere between where we end at 2021 and your long term through the cycle, the guidance of 10 basis points? Or am I missing something in that?
That's quite a wide range 'cause I think you've said, is it gonna be between 1 and 10 basis points. Look, I think it's difficult to call because we just, you know, the key uncertainty is, as I say, the way our customers, you know, fare through the next year or so. We think that 2022 and 2023 are the years in which things will get back to normal. You know, it's hard to be drawn on the precise level we'll land at because that depends on the performance of the portfolio. You know, I appreciate it's difficult for you guys to project numbers at the moment for any of us in this.
Look, let's see. I think we still have a couple of years of, you know, I guess slightly unusual levels, because of the impact of either using or releasing overlays, that kind of thing.
I think, and of course I do understand that you would like to have an even more clear answer for the very short-term period. What is very important for us also is to understand the long-term levels, that is what we believe the loan loss levels will be. Here, some few comments about the quality of our credit portfolio. It is very strong. It is a very well-diversified portfolio across the Nordics. What we have to remember compared to earlier days, that is we are purely Nordic-focused business.
We have exited Poland, we have exited Luxembourg, we have exited Baltics, we are exiting Russia, and the exposure is very limited. We are running a 100% focused Nordic bank. Then within that business, we have gone the last two twi and haf years more towards retail. Household retail now corresponds to, including private banking, around 60% of our lending, something like that. It's a very strong portfolio, probably with a LTV, if I don't recall wrong, I'm looking at Matt here, around 60%. We have a de-risked LC&I business, oil and offshore, several reductions within the different risk areas has happened the last 2.5 years.
Today we have a very, in my opinion, very strong portfolio, and that's why we say that we believe that roughly 10 basis points probably is a reasonable long-term level. But when that will, you know, happen or when that materialize is difficult to say. It looks like the years to come will be quite, you know, strong years. Of course we are always and should be cautious as bankers and of course are guiding on the long term instead of the short term.
Yeah. Thank you. That's very helpful.
Our next question comes from Namita Samtani with Barclays. Please go ahead.
Hi. I want two questions, please. The first one, there was quite a lot of investment related to replacing the core banking platform a few years ago. Are we yet to see more efficiencies related to this? Can they be quantified or are we done here? Secondly, on Norway, how are you seeing the competition in the Norwegian mortgage market post the rate rises? Thanks.
Ian, if you take the first one, then I can take Norway.
Yeah. I mean, we have, as you say, we've been focused on our core banking program for a number of years. The work continues, and you know, it's gonna be an important part of our suite of technology and infrastructure upgrades alongside all the things we're doing on digital and a bunch of other stuff. We've been pretty consistent and cautious, Frank and I over the last few years in terms of saying that, you know, we don't expect to see significant benefits either from lower run costs or decommissioning as part of our financial performance. We're sticking to that. You know, we think that the cost of IT in banking remains substantial.
We're not pinning our hopes on substantial cost savings from platform replacement, but we will deliver a stronger, more effective bank from all of our technology investment.
Norway mortgage competition? Yes. Competition is quite tough. We are doing pretty well, roughly in line with our back book market shares, or market share. I would say that we have no change in our appetite. We have no change in. There's no reason for we long term, mid long term should not defend our back book market share. If it's profitable then, we have also plenty of room to grow.
As of now, there is a negative impact on our margins due to the notice period from the central bank's rate hike till we can first of all decide about an increase in customer prices and then apply to the customers. We have a notice period of six weeks, and that is what happens now. Norway, the Norwegian Central Bank increase rates, we take a decision whether we want to follow. We have followed both the last times, and then we increase the customer prices, but there is a notification period of six weeks.
You know, there will be like a delayed effect on our positive effect on our NII. As NIBOR has like jumped ahead all the time. That will probably also be the case for the coming quarters. You know, it will, of course, long-term be beneficial for the bank.
Maybe one could add as well that the notice period will be longer from Q3 onwards. The notice period will be lengthened from 6-8 weeks because of the regulations. That's also a factor to keep in mind in H2.
Okay, helpful. Thanks very much. Our next question comes from Robin Rane with Kepler Cheuvreux. Please go ahead.
Yes, good morning. In terms of the cost base and further efficiency gains, should we consider now that most low hanging fruits are taken and that you are now in a position that you're mostly fighting inflation in underlying costs and that we should see investments on top of this? Or are there things that can be done in order to have a reduction in the underlying cost base from this point then? Related to that, what assumptions are you making on salary inflation in the coming years? Thank you.
Yes. Let me take the first or the last part first. We have a lot of efficiencies that we can continue to make and then or to do in the bank. It is not a one-off, it's not a cost program. I, as I have said before also, dislike these programs. It's not normally sticky. What we have created and are strengthening every day, that is a cost culture. I should say that when I look across the bank and look at how we work, things that we do, bureaucracy, number of, you know, meetings, teams, whatnot, we have still a lot to do. This will be important levers for the coming period as well.
If you could say all else equal, we would and we are calculating with a continued cost efficiency improvement. Of course, as you said, also alluded to, as I at least hear it, we will invest in growth. We will invest in some things that will strengthen the bank and our aim is to grow income faster than costs. You should look into some positive jaws. We will use both levers, income and costs. Ian, anything to add?
Yeah, look, I think the sort of productivity gains that we have delivered in each of the last couple of years we expect to continue because every year, you know, we start with a clean slate. We have payroll inflation as you allude to, and we bake in, you know, what we think we'll be able to agree with our labor unions. We have an increasing depreciation and amortization burden and you have that as you go into the year. We continue to find productivity gains and efficiencies exactly as Frank has outlined to offset those.
What we also see is the impact of investment which I think is a positive for our business because it will drive income and you should expect to see the positive jaws that Frank has referred to.
Great. Thank you. Assumptions on salary inflation, please.
We don't normally disclose those externally. I mean, you know, we're still talking to stakeholders in that regard, so,
Yeah. Okay. I understand. Well, great. Thank you very much.
Thanks.
Our next question comes from Shrey Srivastava with Citi. Please go ahead.
Yeah. Hi. Here is Sophie from JP Morgan. I was wondering if you could just give, well, it's a follow-up question on one of the earlier. You mentioned the Basel IV, that you have partially assumed the Basel IV impact. Could you just kind of let us know how much of the Basel IV impact you have kind of assumed in your 15%-16% CET1 ratio? Could you also discuss if you have any regulatory capital headwinds or tailwinds that we should kind of take into consideration in 2022? I recognize you have the IRB model spending, so any update here?
My final question would be kind of, you have a new chairman, is anything kind of changing with the new chairman that Nordea has? Anything kind of strategically more focused on life products, potentially doing more M&A? Anything kind of structurally changing with the bank? Maybe if I can squeeze in actually a last question. TLTRO, what kind of benefit should we expect from the TLTRO for Nordea in 2022? Thank you.
Frank, I'll do the capital and TLTRO and-
Yes.
And-
That's fine.
Hi, Sophie. Let me be clear. It isn't that we've brought in a sort of partial Basel IV assumption. We've factored in the entirety of Basel IV impact through 2025, which is that first phase in relation to FRTB and operational risk. The other requirements are further out. We will talk about both of those elements at Capital Markets Day in terms of impact and how we're thinking about it. There is nothing new in terms of regulatory tailwinds, headwinds for you to factor in. It's all the stuff that we've talked about regularly up until now.
As you say, the replacement of IRB models, the impending normalization of macro buffers, all of those kinds of things. Again, more detail on CMD, but nothing new to report. We'll just give you a bit more detail about the moving parts. On TLTRO, you know, we're still just doing the final checks and ensuring that we've got a good handle on where we ended up. We should, I think be able to claim the bonus rate, and as we previously disclosed, we've had EUR 12 billion of borrowings outstanding, 50 basis points, it's around EUR 60 million of income, you know, should we be able to claim it.
I think we will be able to book that in the first half of this year.
Good. In regards to our strategy and our coming chairman, I would say that we have a great journey in Nordea, and we will continue our journey. The strategy is clear, and it has just been decided by the board and is supported by Stephen Hester, which he has also been clear about in the Shareholder Nomination Committee's announcement.
That's very clear. Thank you.
Thank you.
Our next question comes from Martin Leitgeb with Goldman Sachs. Please go ahead.
Yes. Good morning. Thank you for the presentation and for taking my question. Could I just one point of clarification to the 14-15 quarter one and the 15-16, and I'm sorry if it's repetitive. But is the message here that the amount of equity you think you need to run the bank at is unchanged, and so you're being essentially conservative with underlying the 15-16 for the return target? Or is it that you include the impact of Basel IV, so potentially risk weights are higher and so the amount of equity might be a touch higher compared to where it used to be? Following up on comments you made in terms of buybacks, I think you're 75% through with the current one.
The next approval within weeks, that seems to imply that you wanna keep the kind of daily buyback volumes progressing. Last time you announced a buyback, you also announced intention to apply for a further one. Should we expect a similar announcement when the next one comes through so that in essence, we could have a seamless continuation of buybacks throughout 2022? Apologize if this goes too much into the Capital Markets Day. Finally on NI, strong growth during 2021. Is there anything you can steer us in terms of 2022 NI progression? Should we think in absence of any meaningful rate hikes outside of Norway, of current trends to continue, so essentially loan growth to drive NI expansion at margins broadly stable? Thank you.
Morning, Martin. Look, in our view of the amount of equity we think we need to run the bank hasn't changed. I think it is a sensible and conservative planning assumption that we've talked about today. That essentially allows for, as I say, a fair bit of, you know, stuff to happen between now and 2025, including our regulators maybe taking a different view about capital requirements. Our base case remains, as I said earlier, 14%-15%, and probably towards the upper end, thinking about Norwegian SRB. Basel IV, phase one is not a big part of, you know, it. It doesn't have a big impact on us.
We'll talk more about that at Capital Markets Day. Buyback volumes, yeah, look, we'll get on with the follow-on program, if subject to ECB approval. Again, you know, in a couple of weeks' time, I think we'll give you a bit more clarity about where we go next with that. On NII, and what we might expect to see in 2022, you know, we feel good about our ability to deliver growth. We're in markets that are growing, so, you know, we would expect to see continued growth in volumes that will help with NII. We have a bit of margin pressure.
Frank talked about the challenge in Norway with rate hikes and other things, and as we've often flagged, that'll continue through 2022. You know, a net benefit once we've worked through those changes. We're also seeing a bit of margin pressure in Sweden in mortgages. The key driver of NII is going to be loan volumes next year, and we feel good about our ability to capture our share of the market.
Yes. Just to add, our franchise is very strong, and there's nothing that points to that should change. We are not using price as the main enabler to, like, gain market shares. Where on the contrary, I should say, we are probably a little bit above the average. That is exactly where we would like to be. Why we win is because our availability, our proactivity, and the focus that we have, the momentum we have in our organization, in this case, primarily in mortgages and then in SME business. I cannot see why that should changRe, at least for now.
Perfect. Very clear. Thank you. Thank you very much.
Operator, we'll take the last question now, please.
Thank you. For our last question, we have Antonio Reale with Morgan Stanley. Please go ahead.
Hi. Morning. It's Antonio from Morgan Stanley. Just two questions from me, both on revenues, one on fees and on NII. When I think of the drivers of your recent targets that you've delivered, I guess one of the appeals in the story was that a lot of the initiatives you presented were in your hands, and this was the case not only for cost savings but also for revenues where you focus for instance on fees coming from asset management, the distribution mix. Now we're seeing record year for inflows and AUM growth, and you've essentially closed the gap with peers. My question is, can you talk a bit more about how you see your market presence and product penetration now and what could drive fees from here, leaving aside market performance, of course?
My second question is actually very similar but on NII. One of the key levers for NII growth the last couple of years has come from higher volumes, and we've seen it visibly in your market share gains in mortgages, in SMEs, in Sweden, Norway. I wonder how you see the levers of NII going forward. You've talked about rates, and that's very clear, but more from a managerial standpoint of the things that are more in your control, where do you see the best opportunities to grow? Any products or market exposure you'd like to have more of and your thoughts about that. Thank you.
Yeah. Thank you for the questions. They're very relevant questions. Probably we will disappoint you a bit by saying that these are the levers we would like to talk about at the Capital Markets Day. Let's come back to this. I'll say that we have many areas where we can grow, and we will do so. We would like to tell about our plans at the Capital Markets Day.
look forward to seeing you there.
Thank you.
Thank you.
Thanks. Okay, guys. Thank you so much for all the good questions. A pleasure as usual. Hope to speak to you soon and see you at the Capital Markets Day two weeks from now. Thank you so much.