Good morning, and welcome to Nordea's first quarter 2022 result presentation. Here in Helsinki, we have our Group CEO Frank Vang-Jensen, 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 a chance to ask questions. In order to ask a question, please remember to dial into the teleconference. With that, I leave the word to our CEO, Frank Vang-Jensen.
Good morning. Today, we have published our first quarter results. The start of 2022 has been extraordinary. Within the first couple of months, we witnessed a new wave of the pandemic, followed by a rapid lifting of restrictions. The war in Ukraine started in late February, shaking our societal building blocks, peace, security, and stability.
Our thoughts are with all who are suffering, fearing for their life, and worried for their loved ones. We are carrying out our role in society, supporting our people and customers, helping the people of Ukraine, and ensuring business continuity. We have made sizable donations to help the Ukrainians, and our people have been increasingly engaged in activities related to humanitarian aid. Nordea is a strong bank and continues to be a safe, trusted, and stable partner for customers, for employees, for shareholders, and for broader society. In these turbulent times, this is more important than ever.
The resilience of our business has been tested and proven in many crises. Building on the strong foundation, and despite the turbulent external environment, we maintained strong business momentum, gained market shares across the Nordics, and delivered a strong result in the first quarter. In Q1, we continued the positive lending volume trends. Our mortgage lending increased by 7%, our SME lending was up 6%, and our large corporate lending grew by 11%. Assets under management grew by 6% year-on-year, but quarter-on-quarter we saw a decline of 5% due to the negative impacts from financial markets.
Total income was up 3%, driven by net interest income, which was up 8%, and net fee and commission income, which was up 5%. Net fair value result was 20% below an exceptionally strong Q1 a year ago, but still at a high level and up quarter-on-quarter. Our operating profit increased by 6%. Our cost-to-income ratio was 48%, stable compared with last year, even though regulatory costs were clearly higher this year. Our credit quality remained very strong, with low levels of realized net loan losses.
Our return on equity increased to 12.5% from 11% last year. In Q1, we completed our exit from Russia. We also made loan loss provisions for our direct financial exposure to the remaining few Russian counterparties. In relation to this, we had some extraordinary items during the quarter, and we have treated them as items affecting comparability. I'll come back to this a bit later. Let's look at the numbers, starting with the income lines. In the first quarter, we continued to drive customer activity, which in turn led to strong growth in customer business volumes. Net interest income grew by 8% year-on-year. That growth was mainly driven by strong volume growth in all business areas and markets. This demonstrates our ability to capture profitable growth across the board.
We were able to maintain high activity in our mortgage business, even though markets have been cooling down a bit. Mortgage loan volumes increased by 7%. We grew in all markets, with the highest growth rate in Sweden and in Denmark. On the corporate side, SME lending increased by 6% with the highest growth rate again in Sweden and also Norway. Large corporate lending increased by 11%. The volumes have now been growing for two quarters in a row following the repositioning of the business. The competitive environment has put some price pressure on lending margins, but our approach is focused on profitable growth as always. On the other hand, deposit margins increased, supporting the NII growth. Market interest rates increased in some areas during the quarter.
If, in addition, policy rate hikes materialize in the Eurozone, now in Sweden and in Denmark, this is expected to contribute positively to our financial performance. Also, lower funding costs and the recognition of the benefit from the ECB's longer-term refinancing operations contributed to the positive NII development. Net fee and commission income continued to grow, rising by 5% year-on-year. Savings income increased by 9% year-on-year, mainly driven by higher assets under management compared with the first quarter of 2021. Naturally, market turbulence and seasonal outflows had a negative impact on our savings income, which was down 10% quarter-on-quarter. The underlying net flow from our internal channels was positive despite the very turbulent markets. In addition, many corporate finance transactions were postponed due to the increased economic uncertainty.
However, our pipeline is very strong, and we expect this area to recover when the confidence increases. Payment and card fee income continued to increase following the removal of the COVID restrictions and higher activity. Our customer activity was very high during the quarter, and the net fair value result in customer areas improved by 15%. There was a clear increase in demand for FX and interest rates hedging products. The overall net fair value result was up 19% quarter-on-quarter, but down 20% year-on-year due to lower trading income in markets following the exceptionally strong first quarter of 2021. Moving from income to costs. Our cost development is progressing according to plan. We saw an increase in regulatory costs, primarily due to resolution fees and the Swedish bank tax. These were the main drivers of our cost increase.
Excluding these regulatory fees, costs were up 2%. This was due to higher business activity. All in all, we remain focused on growing revenues faster than costs while maintaining a strict cost control. The quality of our credit portfolio remains strong, as has been the case during the entire pandemic, and now even following the outbreak of the war in Ukraine. Our high credit quality is supported by our well-diversified and managed lending portfolio. Realized net loan losses were very low during the first quarter. Net loan losses and similar net result amounted to reversals of EUR 12 million or one basis point. Even though the credit portfolio is very good, we have kept our management judgment buffer unchanged at EUR 610 million. We find this approach prudent, as it means we are well protected against potential future credit losses.
Let me now describe the impact of the war, our exposure to Russia, and items affecting comparability. We have no business in Ukraine, and we have made a strategic decision already in 2019 to exit all our Russian operations. Since then, we have been actively winding down our business there. Our direct exposure to Russia is very, very low. In Q1, we completed our exit from Russia. In relation to these decisions, we had some extraordinary items during the quarter. The first relates to the recycling of the accumulated OCI losses. We transferred EUR 529 million to the income statement, which was previously recognized in other comprehensive income. This is a technical accounting item which has no impact on our equity, CET1 ratio or dividend and buyback capacity.
In connection with the liquidation process, we also made loan loss provisions of EUR 76 million for our direct financial exposure to the few remaining Russian counterparts. These two Russian related items, the recycled effect changes and the loan loss provisions, are regarded as extraordinary and non-recurring and are being treated as items affecting comparability. Furthermore, Nordea Asset Management decided in March to exit all fund investments connected to Russia. After the latest wave of the pandemic, customer activity has been picking up. However, there's no doubt that economic uncertainty remains high and business and consumer confidence is more fragile than in 2021. We expect to get a clearer picture of the potential effects of the broader macroeconomic impacts of the war, including higher energy, food, and commodity prices on our customers during the second quarter.
All in all, Nordea remains strong and stable and continues to grow and gain market shares despite the turbulent external environment. For 2022, we continue to expect to reach a return on equity above 11%, meaning better than 11%, and a cost-to-income ratio in the range 49%-50%. Our capital position continues to be one of the strongest in Europe. At the end of the first quarter, our CET1 ratio was 16.3%, which is 6.1 percentage points above the current requirement. This means we can continue to support our customers, pay out dividends, and distribute excess capital, benefiting our customers, our shareholders, and broader society. Our annual general meeting in March approved the 2021 dividend of EUR 0.69 per share.
Including our share buybacks, we have distributed an almost EUR 4 billion to our shareholders so far in 2022. Moreover, we launched a new EUR 1 billion share buyback program in March. We are also in discussion with the ECB regarding potential follow on share buybacks in the second half of the year. Let me now move to our business area results. I'm pleased to see that all business areas had a strong start to the year. In personal banking, we demonstrated the strength of our omnichannel business model. We continued to build on our digital services, expanding our digital offering and improving customer experience. In Sweden, we were named Digital Coach of the Year 2021 by the business magazine Privata Affärer, which highlighted our efforts to help tackle digital exclusion. Our high customer activity led to further increase in volumes and mortgage market shares across the Nordics.
Mortgage volumes increased by 6%, and total lending volumes increased by 5% year-on-year. This is a strong signal in an environment where we see some signs of the market cooling down a bit. Margin development was relatively stable, but competition remains tight in the market. We are focusing on driving profitable growth by ensuring good service availability and expertise across all channels. During the quarter, we made it even easier for customers to manage their savings, for example, by expanding the product offering in our digital channels. Monthly saving maintained the momentum, increasing by 3% year-on-year. Naturally, savings income growth was negatively affected due to the financial turbulence. Total income was up 5%. Return on capital at risk improved to 18%, compared with 16% a year ago.
The cost-to-income ratio improved to 50% from 53%. In business banking, the strong business momentum continued despite the market turbulence. We are reinforcing our position as the leading SME bank in the Nordics. Lending volumes were up 6% year-on-year. Our performance developed strongly, especially in Sweden and Norway, where we also continued to gain market shares. We were the number one bank for small corporates in Prospera’s 2022 customer satisfaction survey in Sweden. We received first place ranking in 6 out of 10 categories in the survey, which led to the highest ranking for overall performance in Sweden. This result reflects our focus areas, knowledge, expertise, timely support in advice, and in relation to sales and service in all channels. We also continue to actively support customers in the sustainability transition.
Our green loans more than doubled year -on -year, and we continued to perform deep dive assessments on the most climate exposed sectors. Net interest income was up 12% and net fee and commission income was up 3% despite lower capital markets activity due to the increased uncertainty. On the other hand, we had strong growth in net fair value results, driven by high customer demand for FX and interest rate products. Total income was up 12%. Return on capital at risk improved to 18% compared to 15% a year ago, and the cost-to-income ratio improved to 42% from 46%. In Large Corporates & Institutions, the high customer activity and good performance continued in the first quarter. We have continued to support our customers in multiple ways. This has led to increased lending volumes and increasing demand for several other financing solutions.
Our lending volumes increased for a second quarter in a row following the successful repositioning of the business. Net interest income and lending volumes were both up 11% year-on-year. Net commission income remained solid, supported by strong bond income. As in business banking, LC&I had very strong customer activity in FX and rate products. On the other hand, many corporate finance transactions were postponed due to the increased economic uncertainty. Naturally, the pipeline remained strong, actually very strong, waiting for more balanced market conditions. Net loan losses amount to reversals of EUR 29 million, mainly due to restructuring in the offshore portfolio. Economic capital was up 1% year-on-year. Return on capital at risk was 19% and the cost-to-income ratio was 38%. In asset and wealth management, market turmoil affected the first quarter performance.
Our assets under management increased by 5% quarter-on-quarter due to market turbulence and seasonal net outflows like dividends. However, excluding seasonal effects, the underlying net flow from our internal channels was positive despite the very turbulent market. In private banking, we generated net flows of EUR 300 million across the Nordic region during this quarter. In Finland and Sweden, net inflows was particularly strong. Customer satisfaction in private banking remained high, driven by our proactivity, personal customer relationships, and innovative digital services. Year-on-year, assets under management increased by 6% to EUR 389 billion, and total income was up 4%. Return on capital at risk was 30%, and the cost-to-income ratio was 45%. In addition, in March, we announced our acquisition of Topdanmark Life in Denmark.
This will strengthen our customer offering and position in pension savings in Denmark and increase the share of capital light income in line with our strategy. In February, we disclosed our new financial target and followed up with our Capital Markets Day, where we went through our plans for the strategy period 2022 to 2025. Our new financial target for 2025, a return on equity above 13%, meaning better than 13%, is a firm target that we are fully committed to meeting. Our plans and target have been created to stand the test of time and equip the bank for the future. In order to reach our target, we have reshaped our key priorities, which are to create the best omnichannel customer experience, to drive focused and profitable growth, and to increase operational and capital efficiency.
We are also focusing on two key levers across the entire bank, being a digital leader among our peers and integrating sustainability into the core of our business. That is how we will pave the way forward to be the preferred partner for Nordic customers in need of a broad range of financial services in both good and challenging times. Thank you. Now we are happy to take your questions. Thank you, operator. We're now ready for the questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. Please ensure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. A voice prompt on the phone line will indicate when your line is open. Please state your name and company before posing your question. We will now take our first question. Caller, please go ahead. Your line is now open.
Yes. Hello. This is Magnus Andersson at ABG. I would like to start just with NII. First of all, I noted a good NII trajectories you had quarter -on -quarter in all business areas and also the strong volume growth, particularly in large corporates and institutions quarter -on -quarter. I just wanted to ask you whether there is anything in there of kind of more temporary nature, bridge financings, et cetera. Any effect that we should expect to potentially roll off in the coming couple of quarters, unless obviously markets would pick up or anything like that. That's the first one on NII. Secondly, of course, just on rate sensitivity.
You have previously talked about the EUR 300 million sensitivity to 50 basis points higher rates, EUR 150 million in Sweden and EUR 50 each in the other Nordic countries. If you could be a bit more specific there, confirm that this is still your base case and talk us through the dynamics there with floored lending volumes, deposit pricing, et cetera, how we should expect this to play out going forward. Finally, just on costs, whether you can confirm that you still expect that the lion's share of the resolution fees will be abolished from 2024, and preferably tell us how much that is.
I just realized that consensus estimates are almost flat quarter-over-quarter, and if 75% disappears, that's roughly 4% of the cost base alone. That's my questions. Thanks.
Thank you, Magnus. Ian, with you.
Yeah.
Please.
Morning, Magnus. Ian here. We had a really good end to the quarter in LC&I, with both sort of, you know, regular underlying lending growth, but also as you identify, we had some bridge financing, bridges to equity, others. I think our broad sort of estimate is about half of the NII growth is the underlying lending volume development, and then probably the second half of it is related to some of the more temporary lending. A really good finish to the quarter in LC&I.
On rate sensitivity, I think our sort of base case estimate of EUR 300 million or so for 50 basis points across the board still holds as a good sort of estimate of impact. As you point out, lots of different moving parts in there. You know, Swedish rates moving, we will start to see benefits immediately. It'll take a little bit longer to start to see the real benefits come through in Denmark and the Eurozone for a couple of different reasons.
In Denmark, as you know, we currently charge for certain deposits, and of course, there'll be a bit of a dynamic while rates move from negative into positive territory, as we work with customers on, you know, what the right sort of deposit pricing is. That'll sort of move a little more slowly with early hikes as they move towards zero and into positive territory. Similar in Finland because of the zero rate floors on lending there. I think the key message is we'll start to see some benefits immediately when the Swedish rates move. As Denmark and the Eurozone move towards positive territory, we'll really start to see the benefit come through there. That's the sort of broad shape of things.
On resolution fees, we've never so far disclosed the impact, the sort of quantum that we expect to fall away. It is substantial and no reason to believe yet that it you know. Sorry, let me rephrase. Our working assumption continues to be that it will reduce significantly from 2024 onwards, and nothing to change that as yet.
Yes.
Okay. Thank you. Just to be clear then on the rate sensitivity, I mean, in this 50 basis points, EUR 300 million, I mean, you are starting at -50 basis points down in the Eurozone, and at zero in Sweden, I presume.
Yes, that's right.
That's from the current levels. Yes.
Yeah.
Okay. Thank you very much.
We will now take our next question. Caller, please go ahead. Your line is open.
Yeah. Hi, it's Andreas Håkansson from Danske Bank. To start with, just following up on Magnus' question, you didn't mention Norway, and of course, you've seen a problem in Norway that every time we have a rate hike, you have a short-term negative impact due to how you communicate with your clients and so on. Now you start to see more of a positive impact. Would you say that we now reached a level where we're all gonna have the positive impact coming through, even if there are further rate hikes? Let's start there.
Hi, Andreas. That will be our assumption, yes. Exactly how it will play out is difficult to assess, of course, or finally conclude on, but the assessment is that now we start to see, like, the benefits of the rate increases. Ian, anything to add there?
Okay.
Yeah. I think the only thing to add, Andreas, is we always indicated that the successive rate hikes in 2022 would make 2022 a bit bumpy and then in clear water in 2023.
Yes.
As Frank says, we're now starting to see the benefits of that come through, having taken a couple of those sort of lag periods on the hike so far.
Okay. Sweden and Norway is what's gonna drive the rate part of NII rather than Denmark and Finland, and I would assume at least during this year or first half of this year.
In the short term, yes.
Just curious, we hear different com-- Hmm? Sorry?
I said in the short term, yes.
Yeah, exactly. We hear comments about different drivers of loan growth in each of the countries. Could you tell us a little bit, where do you see potential for accelerating loan growth or good loan growth, especially on the corporate side across the Nordic region at the moment?
The corporate side is growing this quarter actually quite fast in both segments, the SME segment by 6% and we've discussed 11%, which include like some temporary or some bridge finances. On the contrary, on the other side is like the nature of an LC&I business. We are growing fast in BB, business banking SME in Sweden, and we expect to continue to do so. Norway is showing very strong growth. We expect to continue to do so. Finland is up 3% and are actually growing a bit faster than the market. I think that will probably what you will expect to see also in the coming quarters.
Denmark is not showing any growth. That will change. That we expect to change. That is our expectation to the leadership team in Denmark. I see some positive signs. Let's see how that will play out. When it comes to LC&I, it is profitability that is the main focus of ours. Now actually it's quite encouraging to see that we, after, like, two and a half years having trimmed down the business, made it much more profitable, much more focused than Martin and the team after this successful change, also actually find profitable growth, and we have seen that in two quarters now. I would expect LC&I in D&L to show some growth in the coming quarters.
Ian, anything to add here?
I think you've covered it, Frank. Thank you.
Okay. That's it for me. Thank you.
We will now take our next question. Caller, please go ahead. Your line is open.
Good morning. It's Antonio Reale from Morgan Stanley. Two questions for me, please. One on the implications from rates and the second one on costs.
You've talked about sensitivity. How shall we think about the possible impact from higher rates on other items such as fees or credit demand, especially from corporates, going forward? That's my first question. My second question is on costs. You've confirmed your cost-to-income ratio guidance of 49%-50% for this year, which if I remember right includes investments, regulatory costs, as well as, Swedish bank tax. Now my question is what flexibility do you have on the cost side, to mitigate any, you know, potential additional cost inflation you may experience? Would you reconsider or delay some of the investments you had planned? Thank you.
Yeah. Would you say?
Yeah. Morning, Antonio. I think it might, you know, sort of rate rises and other things might have an impact on loan demand. I suspect on sort of reasonably small hikes it might not be that material. I think the bigger watch out, I guess, is growth.
Yes.
The sort of likely broader macro. I think there is still among central bank forecasts that are out there's a sense that we will see growth in the Nordic region. I don't think we're particularly concerned about that, and I think the rate hikes are good for our business. On costs, we have the usual flexibility exactly as you described, in terms of what we might do with discretionary expenditure or the pace of investment. Of course, it's a bit of a trade-off, isn't it? Whereby, you know, we want to make the investment because we see real benefits for our business in doing so. I think we'll just have to work carefully through that.
As you point out, we do have some flexibility if we see some slightly tougher conditions on cost inflation. At the moment, I think we feel pretty good about being able to invest in our business as planned and deliver on our cost-to-income ratio.
Just to add, we have a high bar to allow any increase in operational costs, right? It is very much about doing what is good for the value creation for the long term in the different parts of our business.
Right. Yeah, thank you.
As a quick reminder, if you wish to ask a question, please signal by pressing star one. We will now take our next question. Caller, please go ahead. Your line is open.
Yes. Good morning. Maths Liljedahl, SEB here. Most has been answered, if we just can continue with maybe a little bit on Russia. Is that all done now, or could we expect further impairments or adjustments in the coming quarters? That would be the first question. Just seeing here ROE of 12.5%, and you still have a lot of capital and share buybacks ongoing, targeting 11% ROE for the full year, with the rate hikes coming, et cetera. Is it the time to revise that? Thanks.
Morning, Maths. I'll take your Russia question. We've done our best to sort of clear the decks on Russia in Q1. There was obviously the technical item on the historical FX recycling. In terms of the provisions, as you know, we start from a point of very low direct exposure. I think we've done a pretty good job of identifying where we might need provisions. And clearly, if we felt we needed more, we'd have done so. I think, you know, I think we've cleared the decks. We're not expecting to see impact going forward.
Okay. Thank you. Very clear.
Hi, Mats. In regards to the outlook or the guidance for this year, we are stating above 11%, meaning better than 11% on return on equity. This quarter we show 12.5%. You're right, we have a very strong capital base, more than 6% above the requirements, and we continue to distribute our excess capital. We are confident with the information we have as of now that we'll be delivering on the outlook above 11%.
You don't dare to raise it yet?
We are one quarter into the year, right, and in the middle of a war. I think from a banker's perspective, it would be prudent to stay to the outlook we gave like 1.5 months ago or two months ago. We are confident that we will deliver on this.
Yeah. Okay. Thank you.
We will take our next question. Caller, please go ahead. Your line is open.
Hi. It's Namita Samtani from Barclays. I just had one question. The cost of living is clearly going up in the Nordics, with mortgage rates going up and energy prices going up. Which parts of the Nordea P&L are you most worried about on the back of this? Is it lending volumes or asset quality? Thanks.
Hi. It's Frank. If we start, like, with the risk side, we're not concerned about the risk. You are right, cost of living is increasing, I think in most areas or at least many areas of the world. That of course includes also the Nordics. Our credit portfolio is super strong. It has been tested again and again during different type of crisis, and we come out very strong each time. I should say, if anything has changed, then it's only to the stronger this time. What will happen when like all the costs and the interest rates, potentially increased interest rates hits the customers, consumption will go down.
That will be my expectation. There will be some smaller or some lower confidence in the future, and then that will lead to lower consumption. That will slow down, I believe, some activity within the housing area. That is only positive, to be honest. I think that is fine that we get a little bit slower speed in the Nordics. The question is how much that depends on how fast the interest rates will increase. On the other side, what we do see when we talk to our clients on the corporate side, both SMEs and LC&I, they have a very high activity level. We actually, in this quarter as well, saw very high activity within the lending side.
I would say that it's very likely scenario that we'll see a little bit like the opposite of what we have seen the last couple of years through COVID, that the lending demand within the household really went up. On the contrary, then the lending demand within the corporate side went down. It might very well be that that rebalance a bit. How to conclude on that when looking at the NII, it's very complicated. We don't expect any negative surprises here, to be honest.
I mean, just to add to that analysis, Namita, you might see a bit of, you know, rebalancing between fees and net interest income, particularly if we see a bit of a slowdown on the assets under management, which is always affected by confidence and market levels. We're very optimistic about the outlook for NII.
Yeah.
That's helpful. Thank you.
Thanks.
We will take our next question. Caller, please go ahead. Your line is open.
Hi, good morning. It's Robin Rane from Kepler Cheuvreux. Two questions from my side, please. You're still taking mortgage market shares across the Nordic countries. Looking at now when we are going into a rate hike period, do you expect the competitive dynamics to change within the mortgage markets from this? Then secondly, your SME growth is, as you mentioned, very strong, in particular in Sweden and Norway. Are there any particular sectors that you're seeing the activity being stronger than others? Or and are you growing faster in some sectors than others? Thank you for that.
Good. Thank you. In regards to the mortgage markets, I should say that the competition has always been strong. The last many years, when I look back, that has been the case all the time. The competition is also strong now. The question about will it change the dynamic or something structural within the market as I hear you? I don't believe so. You might see, and we expect that to become the case, that the activity in general, and then the growth in the market in general will go down a bit. But then it's about how we relatively to our peers are positioned.
We have a very strong position, and that's why we gain quarter -after -quarter market shares, although our prices are on par or higher. It's about service, it's about availability, it's about focus, it's about having the advice, having the different channels. It's many things. It's retail, it's digital. That will not change. We expect to have a relatively as strong position going forward in the different markets, and then might be that the pool is a bit smaller, but that will not impact anything significantly to our income base. That we might take. On the SME side, I should say it's a little bit. We don't really look at it in the segments as like you, which I understand, ask for.
There will of course be segments in industries that will be growing faster or having more demands on the lending side. I don't have any particular view on which segments we believe that will bring most growth actually. There's a good upside in all countries. We have like the sequence we have that is two countries growing very fast. We expect them to continue to grow fast and gain market shares. That's Sweden, that's Norway. Finland is growing above market and are having a super strong position.
We have Denmark, where it has been a repositioning of the business that has been managed well, and now we are starting to grow and to find the areas where we want to have the edge over our competitors. Let's see.
Thank you very much.
We will take our next question. Caller, please go ahead. Your line is now open.
Thank you. Thank you very much for taking my question. Something that is not 100% clear to me from some of your preceding statements. When we look at loan growth across the board, and especially on the corporate side, it's not clear to me whether you think this might eventually slow down in the coming months. Basically saying the corporation exercises the opportunity to exploit particularly favorable financing conditions or maybe they were scared about what was going on between Russia and Ukraine and they saw the opportunity to grab lending. Something similar maybe to what happened with COVID-19. Well, at some point there was strong demand and then it slowed down all of a sudden. Is that something possible?
It's not clear whether you think the current rate is gonna go on like that. The second question I have is on the asset quality side. What should we think about the EUR 610 million of management buffer provisions? Will those be part of the furniture forever or will you use at some point? With regard to RWA, should we expect at some point some negative risk migration if the current situation is gonna be prolonged? Or do you think that in any case will not be too much of an issue? Thank you.
Hi, Riccardo. So look, I think Frank was pretty clear that certainly on the corporate side, both in business banking and LC&I, we still see good prospects for growth. What we saw in LC&I at the end of the quarter was just, you know, companies turning to us to provide financing, particularly where equity and debt markets weren't functioning effectively. I think that's a strong point, but we do have some good underlying growth as I pointed out. You know, I think we feel pretty good about the prospects for loan growth on the corporate side. Frank highlighted, you know, perhaps some of the risk to growth on the personal side.
I think the corporate side looks pretty good. On asset quality, I mean, we talked about this at our Capital Markets Day a couple of months ago. The portfolio continues to perform really well. We highlighted that over 2022 and 2023 we might expect to normalize, and that would either be to use our management judgement buffers for the purposes that we set them up or to release them, but to do that in a measured way. The portfolio still continues to perform well. As Frank highlighted in his remarks, we'll take a look at how we might expect the macro risks to play out in the portfolio over the coming quarter.
We'll spend a fair bit of time looking at that. I think it's a very different situation to what we saw with COVID. I think the short answer to your question is we do not expect the EUR 610 million to stay around as part of the furniture. As we said at our Capital Markets Day, we would expect either to utilize it or release it over the next sort of 12-24 months. In terms of your final question on negative sort of credit risk migration in RWAs, we're not anticipating to see material movements in that regard so far. Things may change depending on what the macro picture does, but at the moment, not expecting to see anything significant in there.
We will take our next question. Caller, please go ahead. Your line is open.
Yes. Thank you. This is Maria Semikhatova from Citi. Two questions from my side. First of all, do you see any risk for the wage growth outlook in the Nordics in the high interest rate environment? If there is any risk to your cost growth outlook of 1%-2% through your strategic plan. Second, if we think about the impact of over 55 basis points hikes once rates move above zero in Denmark and Finland, how does it compare to the EUR 300 million guidance? Thank you.
All right. Thank you. Let me start, and then Ian, you can take the
Yeah.
The latter part of the question. As I understood your question about costs, that was whether we expect to stay within the guidance of ours, growing 1%-2% the cost base and then delivering positive jaws. As of now, we have no intentions of changing that outlook or that, you know, assumption. The most important for us, of course, is to deliver positive jaws, and that we are very, very confident that we will do.
As of now, our plans on the cost side are unchanged. Of course, we are also following what will happen, and the inflation and the interest rates and whatnot. Now, as of now, we stick to our assumption.
Okay.
Yeah.
Hi Maria. I think if rates are to move positive in Denmark and the Eurozone, I think we'll see a bit of an additional benefit coming through on top of our broad sort of base EUR 300 million. We haven't guided much more detail than that, but it does start to, you know, accelerate the benefit on the widening of deposit margins and as loan rates start to move. It's good for us.
I think, could I just add there, I think what is very important that we all remember that is very simplified, a bank as ours has three engines on the income side. We have the left side, like the airplane, that is like the deposit engine. The right side, that is the lending. Then in the middle, we have like the fee. As of now, in the last, what, seven, eight years, almost ten years, we have had only two of the engines. Actually the left engine, the deposit engine, started to go backwards, to run backwards when we went into negative territory. That due to the change in, for example, Denmark of negative interest rates, it's not rolling backwards, it's actually silent at the moment.
Still, we don't have a deposit engine that help our earnings. In the future, when the interest rate will go up, then of course we will get a more normalized earning space. That's just important to remember.
As a reminder, if you wish to ask a question, please signal by pressing star one on your keypad. We will now take our next question. Caller, please go ahead. Your line is open.
Thanks. Thanks for taking this follow-up. I have a kind of curiosity on capital return. The buyback is an instrument that, or maybe I'm exaggerating a little bit, but a lot of banks in Europe are planning or would love to implement and go on with buyback. It's not that distinguishing factor, can I say, if I may say that. Would you eventually consider to try to be the best in cash payouts rather than in buybacks to better distinguish yourself among other European peers supervised by ECB, of course?
I could take that one, Ian, and then you please, chip in. I think we are among the best, if not the best. That's true due to two reasons. Two reasons. The first, in order to have a dividend capacity, you have to have a strong earnings. That we have. We are delivering a return on equity of 12.5%, and we are targeting above 13%, meaning better than 13%, going forward. It's very predictable. It's very stable. It's a business with very low risks. The Nordea you see nowadays is delivering strong and has a strong earnings capacity. With a very high cost and capital efficiency, we will be able to distribute a high dividend.
Our policy is 60%-70% of the earnings out as dividends. This year it was, as I recall, 69%, and that was technically didn't become 70%. Of course, we are aiming, you know, as a start point for distributing as much as possible, as a start point. With the business model we have, we will generate and are generating excess capital, meaning capital above the 60%-70%. Our intention is to distribute that by buybacks. That is the capital policy and dividend policy we have. On top of that, we have excess capital. We have more than 6% above the requirement of from the auditor from the regulators.
That excess capital is what we now are in a sort of accelerated way distributing to our shareholders. I would say that we will have a very strong payout, plus a buyback going on, hopefully also in the many years to come. Ian.
Yeah. I think absolutely overall we're among the best, and we would expect to always be there in terms of cash to shareholders. The mix of that will obviously depend on facts and circumstances. We feel pretty good about that balance between dividends and buybacks at the moment. It's very consistent with how we set out our position back in 2019. But of course, we'll keep it under review. I think our shareholders are very happy with that mix at the moment.
Yeah.
That's very clear. Thank you.
Thank you.
We will now take our last question. Caller, please go ahead. Your line is open.
Hi, here is Sofie from JP Morgan. My question would be on the Russia provisions. You did EUR 76 million this quarter. You don't have any operations in Russia or Ukraine. But one of your peers that has a subsidiary in both Russia and Ukraine is saying that they don't need any provisions, given that they have parent guarantees on this exposure. Could you maybe just talk us through why did you take EUR 76 million? And is there kind of any possibility that we could also see write backs on the EUR 76 million provision for Russia, and how much do you rely really on parent guarantees? That would be my first question. My second question would be on kind of capital headwinds and tailwinds that you see going forward.
Anything you can say on the IRB models? Anything you expect from the Swedish overhaul on capital? And any kind of European regulatory impacts that we should be aware of on the capital side. Thank you.
Hi, Sofie. Look, I think we feel that we've done a good job of identifying, you know, potential exposure to losses in the very small number of direct positions we have open. Sometimes it's a little bit technical. You know, Russia has been downgraded, and you can't rate a Russian corporate any higher than the sovereign. Even in circumstances where you feel pretty good about the cash flows, you're required to calculate a provision. I think we've done, as I say, a good job of thinking about what our potential exposure might be. As I said earlier, you know, we wouldn't expect to see anything else coming through on that.
I can't speak about, you know, the decisions taken by our peers, but I think we've done the right thing here and we move on. On capital headwinds and tailwinds, nothing new to report. You know, as you remember, we had a pretty detailed exposition of how we thought the capital requirements and other things would move during our CMD. Nothing changing that at the moment, so.
Okay. That's very clear. Thank you.
All right. Thank you guys. Thank you for the questions and the dialogue, and looking forward to speak soon again. Thank you.