Good morning, and welcome to Nordea's Third Quarter 2021 Result presentation. Here in Helsinki, we have our Group CEO, Frank van Jenssen Group CFO, Ian Smith and my name is Matti Hagerst from Investor Relations. We will follow the usual procedure and start with a presentation by Frank. And after that, you will have a chance to ask questions. To ask a question, please remember to dial into the teleconference.
But with those words, I leave the floor to you, Frank. Please go ahead.
Thank you, Matti, and good morning. Today, we have published our 3rd quarter results. I'm happy to report we continued to make good progress in implementing our business plan and again delivering strong financial performance. In recent months, we have witnessed many encouraging developments in the Nordics. Societies have been reopening, and millions of people have been able to resume a more normal way of life.
Also at Nordea, we have been able to start returning to our offices and finally meet in person again. COVID-nineteen has rapidly increased our customers' needs and wishes for even more flexible services. We have proven the strength of our omnichannel business model by meeting the increased demand. As the year progresses, we continue to develop our digital offering. This quarter, our efforts delivered a 7% increase in mobile bank users and 14% more mobile bank log ins than a year ago.
On our Nordic digital platform, we had on average 88,000,000 customer log ins per month During the quarter, saving product sales through digital channels increased to 66% of all retail savings. Our customers are also using mobile banking our mobile banking app more actively in the mortgage process. On the corporate side, we continue to build on our digital capabilities. Our Corporate Netbank App continued to receive positive feedback. And as an example of our new services, We launched a new service enabling corporate customers in Sweden to make real time payments to consumers.
I believe that our combination of high quality digital and in person services is key for our customers. It is one of our main levers to become and remain their preferred partner for customers in need of a broad range of financial services. Our strong customer focus, continual growth in business volumes, Quality income growth and good cost control led to a strong result in the Q3. Our business volumes grew strongly across the Nordics. Mortgage volumes were up 6%.
SME lending was up 9%, and assets under management were up 21% year on year. On the income side, net interest income was up 7% And net fee and commission income was up 19%, while net fair value result was down 13% due to weaker market conditions and seasonal effects. Costs are developing in line with our plan, and our operating profit increased by 17%. Both return on equity and cost efficiency improved. Return on equity for the quarter was 10.8%, upfront 10.1 percent a year ago, the cost to income ratio improved to 49% from 53% a year ago.
Credit quality remains strong with a net loan loss Reversals of €22,000,000 Our capital position is very strong, and we continue to generate capital. We have now distributed a dividend of €0.72 per share, and we will start our buyback program tomorrow. Let me now go deeper into the numbers, starting with the income line. In the 3rd quarter, net interest income increased by 7% year on year. I'm pleased to see that we continue to gain market shares following further growth in business volumes.
This growth was a main driver for the higher net interest income, demonstrating that Our franchise is developing strongly across the Nordics. Mortgage volumes grew in all markets And we're up 6% year on year. And we have been very active in supporting our SME customers. Our lending to SMEs increased by 9% in total and by 5%, excluding Nordea Finance Equipment. Also deposit volumes were up 7% in local currency.
Market development was relatively stable. Our margin development was relatively stable. Mortgage margins are facing some pressure, especially in Norway and Sweden. But the changes are small, and we have been somewhat offset and they have been somewhat offset by higher deposits and pricing adjustments compared with last year. Net fee and commission income was up 19% in the 3rd quarter.
This strong development was absolutely one of the highlights of the quarter. We had a very good increase in saving fees income, which was up 25 percent, driven by strong net inflows within all channels. Income from both payments And cards is improving now that most pandemic restrictions have been lifted. This quarter, we saw higher numbers of consumer card transactions following the reopening of societies and the boost provided by the summer holiday season. Now corporate card transactions also started to increase.
It's a little it is still a little too early to determine Whether these increases will be sustained, but the signs have been encouraging. The Q3 is seasonally slow for brokerage and advisory fees, But we saw the activity increase again in September after the summer holiday season. On net fair value result, our customer activity remained high in all customer areas, which supported results. On the other hand, the quarter was challenging for the trading result due to weaker market conditions and seasonal effects. However, The end of the quarter was better and the trading results improved in September.
In addition, the overall net fair value result was supported once more by strong investment valuations in treasury. Moving on to costs. We continue to optimize and increase our operational efficiency and ensure strict cost discipline. All in all, we remain focused on growing revenues faster than costs. In the Q3, costs were lower than in the previous quarter, where we booked additional variable pay provisions due to significantly higher business activity and strong performance.
Reported costs increased by 1% year on year due to the integration of Nordea Finance Equipment and exchange rate effects. Adjusted for these items, underlying costs were down 1% year on year. The cost development is in line with our plan, which was communicated in Q2. Costs for 2021 are expected to be around €4,600,000,000 As we have said, our main focus will continue to be on costs relative to our income development. The quality of our credit portfolio remained very strong.
Early indications show that our customers are, in general, emerging from the pandemic restrictions, in good shape. As a result, net loan losses in the 3rd quarter were very low, and net loan impairment amounted to reversals of EUR 22,000,000 or 3 basis points. This demonstrates the strength of our very well diversified lending portfolio. Net individual provision and write offs were low in all business areas, and Stage 3 loans continued to decrease. Our assessment is that net loan losses will be significantly lower this year than in 2020.
However, we have kept our management judgment buffer Unchanged at €610,000,000 we remain alert to the risk of losses emerging in the loan book as governmental support schemes comes to an end. This prudent approach ensures that we have resilience to overcome potential setbacks in the recovery from the pandemic and can cover expected further changes to provisions, models and processes. Our capital position is very strong, and we continue to generate capital. At the end of September, the ECB, as widely signaled, withdraw its recommendation for bank to limit dividends. Following the change, we distributed the unpaid ordinary dividend of €0.72 per share earlier this month, in line with our previous communicated plan.
In total, This distribution amounted to €2,900,000,000 in dividends to our shareholders, who include More than 500,000 private individuals and a large number of pension funds across the Nordics. Our dividend payments will give a boost to the Nordic economies and help support the post pandemic economic recovery. In addition, Our capital and dividend policy states that share buybacks are a tool to maintain an efficient capital structure Sure. And to distribute excess capital. This tool will now be used to deploy our excess capital as intended.
We received supervisory approval for a share buyback in September and were among the 1st banks in Europe to do so. The board has decided to initiate the buyback program starting tomorrow. We are also in dialogue with the ECB about a potential follow-up program and expect to make a formal application in early 2022. Even after the capital deduction related to the buyback, our CET1 ratio remained very strong at 16.9%. This is 6.7 percentage points above the requirement and makes us one of the best capitalized banks in Europe.
Let me now move on to our business areas and their respective results. I'm pleased to see that all business areas are delivering strong performance. Our decisive customer focus has led to high levels of activity, which have resulted in solid income growth. In Personal Banking, we continue to drive high levels of business activity. Mortgage volumes were up 6%, and we are growing in all markets.
Consumer lending volumes are also picked up and grew in line in 3rd quarter as well. Competition continues to be intense, but mortgage margins have remained relatively stable despite temporary lower margins due to the interest rate change in Norway and some pressure in Sweden. Deposit margins improved during the quarter, and total income was up 10%. We continue to develop our omnichannel model to create even better customer experiences. Our digital offering is being very much appreciated by our customers, and we had a 12% increase in mobile bank logins, and the number of mobile bank users increased by 7%.
While Nordic countries So our Nordic societies have reopened. Online meetings have remained the most popular option for customers accounting for 67% of total meetings. Naturally, it is our customers' need that define the best way of interacting. We will provide smooth and helpful experiences, both digitally and in person. Return on capital at risk improved to 18% compared with 15% a year ago, and the cost to income ratio improved from 54% to 50%.
In Business Banking, high business activity continued, resulting in an improved financial performance. The SME sector is a key driver of the sustainable economic recovery, and I'm happy to see that our SME lending volumes accelerated to 9% during the quarter. Excluding the integration of Nordea Finance Equipment, the volumes were up 5%. Business activity was high, with particularly strong momentum in Norway and in Sweden. Also, Denmark showed good growth momentum.
We continue to integrate sustainability into our advisory and risk processes and to enhance our sustainable offerings for corporate customers. During the quarter, we introduced green corporate loans in Finland and Sweden, in cooperation with the European Investment Fund. Overall, in Business Banking, our sustainability linked lending, grew by 13% quarter on quarter. Return on capital at risk improved to 16% compared with 13% a year ago, and the cost to income ratio improved to 47% from 51%. For large corporates and institutions, the Q3 is usually seasonally slower in some areas.
Despite this, we managed to maintain high business activity and leading market positions. Our Investment Banking and Equity businesses continued to develop very well, while our market business was impacted by the weaker trading conditions over the summer before improving in September. Overall, total income was down 8%. In line with our strategy, we have increased our focus on ESG products and even further integrated ESG considerations into our credit and advisory processes. During the quarter, we continued to engage with our customers to support them in their transition towards a low Carbon Economy.
On the product side, we continue to rank 1st for Nordic Sustainable Bonds. Thus, Corporates and Institutions is progressing well with a repositioning of the business and becoming a more focused and profitable business area. Economic capital was 13% lower, return on capital at risk was 12%, and the cost to income ratio was 48%. In Asset and Wealth Management, assets under management increased by 21% to an all time high of €393,000,000,000 The strong developments in assets under management And net inflows have continued now for 6 consecutive quarters, demonstrating the solid position of our franchise. We achieved a net inflow of €4,100,000,000 in the quarter with all channels supporting this performance.
This was the primary driver of the growth in the quarter, and total income was up 28%. In Asset and Wealth Management, we continue to combine our key focus areas, digitalization and sustainability. Digital purchases are continuously increasing. Volumes were up 90% year on year. Net flows in our sustainability linked funds represented around 95% of total net flows in the quarter.
Our expertise, combined with customer demand is creating strong growth. Return on capital at risk improved to 29%, and the cost to income ratio improved to 47% from 51% a year ago, despite a performance driven increase in variable pay provisions recorded in the quarter. If we take a closer look at one of our focus areas and long term success factors. Sustainability. We see that we are progressing well with the implementation of our strategic plan.
During the quarter, total greencorporate lending was up 22%. And as mentioned, ESG products represented around 95% of our net fund inflows. This demonstrates our strong position within sustainable investments, which we started to build more than 10 years ago. We are determined to support our customers' transition and ensure progress towards our 2,030 emission objectives. Since the beginning of 'twenty, we have reduced our exposures to and emissions associated with some of the most climate exposed sectors.
The transition towards a low carbon economy presents a business opportunity for us as a bank. But we also want to make sure that we grow our business in a way that is consistent with our 2,030 emission targets. This is not a trivial matter, but reducing emissions is a societal challenge that we will tackle together with our customers. All in all, An ambitious, realistic and step by step approach to the sustainable transition will be good for society and good for our business. This is also our direction as a bank together with our customers.
To conclude, we remain well on track to meet our financial targets. Over the past 2 years, we have consistently delivered on our business plan and key priorities to create great customer experiences, to drive income growth initiatives and to optimize operational efficiency. This has led to a solid development in our financial performance, which in turn has enabled us to make Decisive progress towards our 'twenty two financial targets. A cost to income ratio of 50% and a return of on equity above 10%. Given this progress, we are now preparing updates to our business plan and financial targets.
We intend to publish new financial targets alongside our Q4 and full year report in early February next year. Our targets will be updated, but our direction as a bank is not going to change. We want to be a bank that is personal no matter where or how we meet with our customers. We want to be a responsible bank showing that we deeply care about gaining our customers' trust and supporting a sustainable future. And we are experts at what we do.
For more than 200 years, we have played a key role in supporting and growing the Nordic economies. And that will be our role also in the future. Thank you.
Thank you, Frank. We're now ready for your questions. So operator, please go ahead.
Yes. Thank you, sir. And we have our first question from Andreas Hockensson from Danske Bank. Please go ahead.
Hi, good morning, everyone. Can I just start with the net interest income? There seem to be 2 drivers that are a little bit on the weak So the Norwegian NII and the Swedish NII. Norway seems to be more temporary. Could you tell us a little bit about How long the negative impact from the rate hike is going to be present?
And when we're going to start to see the benefit, if we start with Norway?
Yes. Let's do so. Ian, would you try to update on the mechanics? And it is temporary.
So sure, and good morning, Andreas. Nice to talk to you. The key sort of temporary headwind in Norway is A lag in deposit reprice sorry, yes, a lag in repricing the mortgage book versus deposits. So We estimate it's around about sort of 5 to 6 weeks in terms of that temporary hike sorry, temporary headwind. And of course, as we will see this going into next year as we're expecting A number of hikes, Nordisk Bank has indicated that it expects to hike 3 or 4 times next year.
But it's temporary. And as we work through that, we would expect to see some margin widening in Norway.
Thank you.
Thanks. And then in Sweden, could you tell us because I assume it relates to the mortgages, and is that more a sustainable problem? Or what's your comment there?
Not a big issue. We see some change from shorter term interest periods To longer term, that brings a little bit lower margin at least as of now. On the other side, it, of course, Reduced the churn, somewhat, potential churn. So all in all, not a big issue. And then in mortgage markets, And we have also always seen that like the competition is high.
It's high now and it will be high in the future. But all in all, I think it looks is not a big issue as of now.
Okay. Then just one question on your activity level or the outlook, right? Because When I look at your brokerage and your ECM and M and A line, it's weak for seasonal reason, but it's actually quite weak On a year on year basis as well. And I would expect it to be somewhat stronger. So what's your outlook for I mean, we see quite a big activity level on the ECM side and Potentially on M and A, what do you see in the market at the moment?
Yes, please.
Andreas, July August were quieter than September came back very strongly and back at the sort of levels that we had experienced in Q2. So we're pretty confident about sustained activity levels. Just having had a slow summer season, and I think we're also seeing comparison to The comparative recovery in Q3 last year, that's that sort of year on year effect as well. But pleased to see that September things really got back into action.
We see that one of your competitors, one large competitor in Sweden has actually started to hire quite aggressive in that space because they realized that they missed out to some smaller players. Do you think you also need to put more money into this space in order to catch up or keep up rather?
I think we are in a good position, and we have been investing quite a lot also in that business. So let's see how it will play out. But We have unchanged high ambitions, and I think we have what we need. Then We're looking at the especially the Swedish market. It has been very heated.
And then, of course, the question is, Can it continue to be as heated as it has been? Or will it slow down somewhat? That's the but our ambition level is unchanged.
Okay. Thank you.
So next question from Magnus Andersson from ABG. Please go ahead.
Yes. Good morning. Just a question starting off with a question on capital. As you mentioned, You are in a dialogue with ECB about the follow-up program, buyback program, and you expect to do a formal application in early 2022. Just one question there.
What kind of size we should expect? Should we expect you to launch SEK 2,000,000,000 programs now on an ongoing basis? Or just if you could give us some indication of The amount of share buybacks we could expect in 2022 onwards. And related to that, in your capital planning, I assume you take the potential Norwegian systemic risk factor effect into account of 95 basis points. But is there anything else that we should be aware of?
Magnus. So we were really pleased to get our buyback efforts started with A meaningful first step. And I think having got through that hurdle and being one of the first banks in Europe to do so, We now see follow on programs as being part of our sort of ongoing business. You should expect it is a we still have a substantial capital excess that we will deal with on a measured basis over time. The follow on program, you shouldn't expect it to be as large as the first one, but it will be meaningful and will be a next It's a step that we intend to follow regularly.
In terms of the capital outlook, capital planning, Absolutely. We have factored in potential outcomes on Norwegian SRB. We're still Comforted by the fact that the regulatory authorities have put reciprocation on hold for now. So that indicates they're still not convinced. But we have factored into our sort of medium term capital planning the impact of The highest the sort of worst case outcome there, which as you said is 95 basis points.
In terms of other things with impact, I mean, there's a whole bunch of stuff that we've talked about before. We've cleared a number of hurdles with Comfort. So the stress test was a big piece of that in terms of capital development. We're progressing well with the submission of new capital models, our MDP program. And of course, we await with interest what may be announced next week by the Commission on Basel.
But we're very comfortable with the guidance we've given on our medium term capital levels and an indicator that there is still substantial capital excess to work through.
Okay. Thank you. And Secondly, just on costs, we can see that you continue to take down headcount quite significantly quarter on quarter and you've done that I think The 9th quarter in a row or so. When I look into 2022, is this going to be the main Lever also going forward in order to offset cost inflation? Or is there anything else?
And second, related to that, Do you still foresee net cost reductions beyond 2021? Will you leave that for the Q4 report?
Yes. Let me take the first part and then Jan, you could take the last part about the cost level. And we, of course, will come back to it as you look through in the Q4. But I should say that, of course, a large part of our cost base is If people related. So it is, of course, a big lever to increase operational efficiency.
But there are also many other things That we work with consistently. And we are trying, as I have said earlier also many times, to build a strong cost culture, And it starts to work, right? It is challenging. All our processes is challenging. What is not really supporting our customers or is important for our risks.
We will challenge. We'll try to figure out how we can do it differently. We are looking into different technologies supporting our way of working. And so I think it will be all over. And by that said, we have to also remember that Around 70%, as I recall it, is people related, as I recall it.
But an important part here is That we intend to grow our or strive our aim growing our income faster than costs. So we don't focus on a hard cost level, right? We focus on continuously Increasing operational efficiency. That is super important. Ian, any comments on the last part of the question?
I'll just supplement it, Frank, with we always focus on cost efficiency across the board In order to create capacity to invest in our business. And we think it is important to continue to build the muscle. And so I wouldn't be flagging at this stage substantial net cost reductions in 2022.
Okay. Thank you very much.
So next question from Sophie Peterson from Hi.
Kiri Stafly from JPMorgan. So just a follow-up question on the share buyback. You mentioned that the 2nd buyback program might not be as big as the first one. But do you have any view on a directed share buyback versus Just doing kind of a general buyback in the market and maybe if you could just talk about your thoughts here.
Sure, Sophie. Good morning. So important to understand that our follow-up program It will be the 2nd step in the series. So don't be concerned about We will keep up progress on managing down our excess capital. In terms of a directed buyback, We're very focused on, I think, offering sort of Our shareholders the opportunity all shareholders the opportunity to take part in our buyback.
If Sampo was to come forward, for example, with an ABB as they have done in on 3 previous occasions. The independent broker that we've appointed will have the opportunity to take part in that. We have no plans beyond deploying our €2,000,000,000 capacity in the market and responding to opportunities as they arise if they're in the interest of Nordea.
Okay, great. That's clear. And then my second question would be, there are some Bloomberg headlines From Sebian this morning, they think your ROE target that you announced next year could be 12% to 14%. Yes, do you think this is a reasonable level? And what are your thoughts here?
That is a bit early to comment. The statement from Sveon and Krista is not new. It's repeated. It has been repeated again and this quarter. And as mentioned, we are updating our business plans as at the moment and also Our financial targets.
And we finalize that work or intend to finalize it early February, and will publish new financial targets alongside our Q4 result. So let us come back to that when we have more to share.
Okay. That's clear. And then just a final question on M and A. In the past, you have said that you're consider you have to consider kind of small bolt on M and A transactions, Similar to what we have seen with Gjensidige or SG Finance, what are your thoughts on Handelsbanken's Businesses in Denmark and Finland, is this something that might be of interest?
We have, Of course, note the news. We will follow the development. We are already a leading bank in Denmark and in Finland and have A strong business momentum in both of these countries. So it's not top of our agenda. And we welcome all potential customers.
And as I understand, we already had quite a lot of inbound calls yesterday to our call centers and branches. So I think that's what we can say as of now.
Yes, that's very clear. Thank you very much.
So our next question is from James Hallen from Carnegie. Please go ahead.
Thank you and good morning. Two questions from me. First one on loan loss provisions. So I mean you still have a significant management Overlay buffer. But if things stand as they are, is that then something that we should expect will be released over And over the next 12 to 18 months?
Or how do you think about it?
We have kept it unchanged at the moment Due to the uncertainty that still is visible in the market, right? So things look, at the moment, clearly Increasing, clearly positive. We just feel it's prudent to keep it unchanged, to be able to cover For any COVID-nineteen related costs that or risks, losses that might come and for the cyclical part. Then we have a structural part. And as we addressed during the coming period, 'twenty two, 'twenty three, we will use probably use the structural part, while the Secondly part, it's up to be it's up to the future to see how it will develop.
There are still Corporate is dependent on the governmental schemes and so. And we have been expecting to see more bankruptcies and etcetera. But again, it looks very stable as of now, but let's see. So we will start next year to assess how to look at this provision, and then we'll come back to the question.
Okay. Perfect. And Second question is just a short one on costs. When you look at sort of costs for 2021, are there any temporary Lower costs that we should consider that should be coming back into next year. I mean, I guess travel might be 1, but then of course, you also have that changing Customer behavior, as you say, you have most meetings online now.
But on the have you could you quantify that number so that I guess we're not surprised in 'twenty two And those are coming back.
There is nothing major in there that is going to be different in 2022 versus 2021. We've invested strongly in our business, so that does drive depreciation and amortization charges. But we're also looking, as Frank has said, at cost efficiency everywhere. So There's nothing that we should worry about that is coming back in 'twenty two that wasn't there in 'twenty one.
So we have another question from Maria Semikratova from Citibank. Please go ahead.
Yes, hello. Thank you for the presentation. A couple of questions on NII, specifically first in Business Banking division, I've seen that margins slightly decreased over the quarter. Is there anything you can highlight? And what's the Underlying SME margin development from here.
And then in large corporates, We've seen that volumes are coming down. This is in line with EO's strategy, but you managed to support NII with some TLTRO benefit, but also repricing of The portfolios. If we look into 2022, how do you think if you can grow an AI for this division? And what could be the drivers here? Thank you.
Hi, Marie. So in terms of Business Banking, the underlying margin development is stable. We did see a small benefit in Q2 from TLTRO in Business Banking that wasn't there in Q3. But the underlying margin in BB is pretty stable. On LC and I, we've done a lot of the hard work of Repricing the portfolio, getting margins in the right place, and it's encouraging to see margin stability there even If you sort of strip out the impact of TLTRO.
And so the key there is selected growth. And we've seen A reduction of the portfolio over the last few quarters. I suspect that We now have opportunities to grow in selected areas, but at a measured pace with the right profitability.
And Maria, just to keep if you look at our factbook on Page 9, the NII bridge in Business Banking and ALCI and actually all the business areas, The TLTRO is under other and not whereas on the group bridge, it's under the cost of funds. So that you should keep in mind.
Okay. Thank you. If possible, can you disclose What was the negative temporary impact from Norwegian rate hike in the bridge?
We can take that offline.
It was roughly €10,000,000 but we can get back.
Thank you.
So next question from Johan Ekblom from UBS. Please go ahead.
Thank you. I just wanted to talk a little bit about the fee income from savings and investments And what we can see in the Wealth and Asset Management division. So if I look at that, in the Wealth and Asset management division. It looks like there is a very strong sequential increase in fee and commission income, Whereas at a group level, the savings and investments commissions are marginally down. Average AUM is up something like 3% in the quarter, which is hard to tally with a 10% increase in fees in the Asset and Wealth unit.
Is there something going on here with booking between divisions or with margins or anything? How should we think about that trend?
I think the trend is pretty clear. If you look at the Q3, there were some kind of corrections or a Couple of corrections between the quarters. So if you look at the year to date figures in a company our size, there's always between the quarters a bit of movement, especially between the different countries. So how I would look at it here is just look at the kind of trend for the 1st 9 months and kind of use that as a proxy of both the margins and the development. So that's how I would answer that.
Okay. Thank you.
So next question is from Jacob Kruse from Autonomous Research. Please go ahead.
Hi, thank you. So I guess just two questions. Firstly, on the buybacks, you mentioned the second, This other application would likely be smaller than the first one. Just in terms of your structure here, is it Is that the buyback for 2022? Or should we look for further applications post the AGM or later in the year?
Or is Kind of an annual thing. And then secondly, when it comes to the target setting, you say that the targets are kind of Continuing on the same vein or the strategy as you currently have, is that still a greater focus on cost and revenues? And do I understand you correctly that your target market is very firmly still the Nordics? Thank you.
So let me take the first one, Ian, and then over to or the second one, then over to the first one to you, right? So in regards to the business plans and the financial targets, we will go, Of course, into the details when we publish our targets. So let's come back to that. And what we just have said is that we have made Strong progress towards or delivering on our business plan and towards now also on our 2022 financial targets. We have met these targets, And we feel that it's the right time to update these.
And that will happen in 3 months from now. So let me come back to the question when we get there. The first question,
Jaeme, please. Jaeme, good morning. So A little bit like we're pleased to announce a buyback and then the prospect of a second one and you're going, what about the 3rd? But look, We're off the mark here, and I think we will get into a rhythm of regular sort of annual buybacks. And we'll talk more about the outlook for that when we come back in February, I'm sure.
At the moment, I think work on the basis that We started with €2,000,000,000 We will have a substantial follow-up program that means that over the course of The next five quarters, we will do we will meaningfully address the capital excess. And we'll talk about next steps and the regular rhythm when we come back in February.
Yes. I think it's important here, and Ian has stated A couple of times now. And I do understand that it's just it's like a different time now as we actually are able to start It's using the lever capital efficiency, which has not been able we have not been able which we have not been able to use the last couple of years. But just to remember, when we kicked off our new business plan, our you can say our repositioning 2 years ago and announced it On the Capital Markets Day exactly 2 years ago, we also decided about a new capital policy, a new dividend policy. And what our capital policy that we were targeting a buffer of 150 to 200 basis points above the requirement of our policies.
And then the way we are distributing capital to our shareholder is by, First, dividend of 60% to 70% of our earnings and any excess capital to be distributed by buybacks. So it is an integrated part of how we manage our capital efficiency and rightsize the capital position. We have not been able to use that in 2 years, and now we have the ability. And we will use it. And it's not a one off.
It is an integrated part of how we work with our capital efficiency. And it's just I'm very happy and so Are we all that we now are able to start kicking off the different programs.
Yes. Okay. Thank you very much.
So we have no more questions for the moment. Ladies and gentlemen, I remind you that if you want to ask a question So we have another question from Riccardo Rosveri from Mediobanca. Please go ahead.
Thanks. Good morning. Good morning, everybody. Just a couple of follow ups, if I may. First of all, On the risk weighted assets, if I remember correctly in previous calls, you mentioned that you should not you've not expected Any major impact from the overall in or the assessment of IRB models?
And I was wondering whether this is still the case and still related to that given the asset quality and the amount of provisions that you have been Showing over the past systematically, obviously, over the past three quarters, can we say that any negative risk Migration impacting risk weight, especially as Corporate and Retail can now be For Gothen once for all. And the other question I had was a little bit of An explanatory, when I if I have to look at your management buffer on capital of 150 basis points to 200 basis points, What is included in this buffer? Do you include also maybe a piece of that in case you have to do acquisitions? Is that It will be included in this 200 basis points. Last question I have, and this is literally a clarification.
I'm not sure what I got Correctly. A previous comment, I think, was from Ian on the fact that maybe costs in 2022 May not decline that much, on whatever the level will be in 2021. But again, I'm not sure I got it correctly. Thanks.
So good morning, Ricardo. So on risk weighted assets, yes, the working assumption we've had, now remember, Our retail models are in the middle of the approval process at the moment, and we'll be submitting our Non retail models later this year for approval. But our sort of broad based assumption is No major impact on risk weighted assets, and we'll continue to work with that. On asset quality, we've seen positive impacts on risk weighted assets from credit migration In the last couple of quarters and our outlook, as Frank has said, the portfolio and our customers are performing well. So in those circumstances, provided they come through the transition to normality, We wouldn't expect to see negative migration, but that all depends on progress.
On the management buffer, 150 to 200 basis points, there's a degree of flexibility in there. The reason that we state the range is that if there were Reasons to go below €200,000,000 We have the capacity to do that. An acquisition is an example. So it gives us capacity and the buffer is there to cover a range of different eventualities, both sort of positive and negative. So and it's a prudent buffer and one that has a little bit of flexibility in it with the range.
And then finally, what I conveyed on costs was, while we invest And we offset the cost of that investment with efficiencies. You shouldn't expect big net declines in cost next year.
So there are no further questions gentlemen.
Good. But thank you so much. It's a pleasure as usual talking to you. And Joel, reach out anytime if you have further questions. Thank you so much.