Good morning, welcome to Nordea's third quarter 2022 result presentation. Here in Helsinki, we have our 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 a chance to ask questions. Please remember to dial into the teleconference to ask a question. With those words, I leave the floor to our CEO, Frank Vang-Jensen.
Good morning. Today, we have published our third quarter results. The autumn has started with high uncertainty. The continued war in Ukraine weakened macroeconomic picture, rising inflation, higher interest rates, and reduced consumer confidence. All of these are putting pressure on private individuals, businesses, and societies. We should expect that this uncertainty will be significant also in the coming quarters. As a bank, Nordea is well-placed to weather more difficult conditions. Our business model has been tested many times and proven to be very resilient, and we have all the tools and solutions needed to support our customers. In the third quarter, we maintained high momentum and solid business volume growth in line with our business plan and key priorities. We continued to grow lending volumes despite the volatile environment. This was led by solid growth across the board, especially in the corporate sector.
Mortgage volumes were up 4%, and corporate lending grew by 12% year-on-year. Operating profit increased by 2% to EUR 1.3 billion. Q3 is usually seasonally quieter, yet we delivered 7% income growth. Net interest income increased by 15%, supported by strong growth in corporate lending volumes and higher deposit margins. Net commission income was down by 6% due to the market turmoil, which led to a 13% decrease in assets under management, and capital markets activity remained subdued. Net inflow remained positive in internal channels. Net fair value result was up by 18%, driven by strong customer activity. Return on equity increased to 12.7% from 10.8% last year, and the cost to income ratio, excluding regulatory fees, improved to 45% from 47% a year ago.
Including regulatory fees, it was 48%. Our credit quality remains very strong, with very low realized loan losses. Loan losses and similar net resolved amount to EUR 58 million, affected by model-based fair value adjustments in our Danish mortgage portfolio. Our capital position continues to be strong and among the best in Europe. Our CET1 ratio decreased to 15.8% from 16.6% in the previous quarter following approval of our third buyback program. The ratio is now five percentage points above the regulatory requirement. Overall, a strong set of results driven by the active customer focus of our employees and our decisive action to continuously improve our business momentum. Our strong performance over the first three quarters of this year means that we have updated our outlook for 2022.
The cost to income ratio for the full year of 2022 is now expected to be 48%-49%. Previously, the range was 49%-50%. Our return on equity outlook for 2022 is unchanged and will be above 11%. Let's now look at the results in more detail, starting with the income lines. In the third quarter, we maintained high customer activity and business momentum to drive volume growth across the business areas. Net interest income grew by 15% year on year. Greater economic uncertainty and increased interest rates had a negative impact on mortgage and SME lending volume growth during the quarter. Despite this, we continued to win market shares across the region, with mortgage lending up 4% and corporate lending up 12%. SME lending grew by 6%, while large corporates lending grew by 25%.
We saw an uptick in event-driven financing from large corporates seeking acquisitions to capitalize on the current valuations. We also saw a significant increase in short-term liquidity financing needs, for example, in the energy sector in the Nordics. We are well positioned to meet and to capture the increased demand on the corporate side. Alongside lending growth, the increase in net interest income was supported by higher deposit margins. On the other hand, there was visible lower consumer activity in the Nordic housing market during the quarter. Market growth is slowing down, but we are still growing and increasing our market shares across the Nordics. The margin pressure on lending continued in the current fast-moving rates environment. During the first quarter, central bank policy rates in Denmark and in Finland turned positive, following those of Norway and Sweden in previous quarters.
We adjusted customer deposit rates to support our deposit saving offering across the Nordics. Although the higher interest rates will dampen economic activity in the midterm, they should also be seen as healthy adjustments, gradually returning us to more normalized market conditions in the long term. For many years, only two of our three engines have been working, the lending and the fee engine, but now the deposit engine is back as the third one. Higher deposit margins have clearly started to contribute to our income growth. We expect this trend and the clear positive impact on our results to continue. For a bank, this signals a healthy return to more normal market conditions. Continued economic uncertainty and weaker financial markets impacted net fee and commission income. Net fee and commission income was down by 6% year-over-year.
Savings fees were down following the reduction in assets under management, which were 13% lower in the quarter. Even in more challenging markets, the strength of our business is visible. For example, private banking had a continued strong positive net flow in the quarter. Brokerage and corporate finance fees are still subdued due to lower customer activity. We have a strong pipeline, and this is an area that is likely to recover when there is more confidence in the markets. The NCI result was supported by higher payment and card income, which increased by 11%. This was due to higher customer activity, especially in consumer cards. The net fair value result was supported by our high customer activity in the quarter. The contribution from customer areas improved by 21%.
The volatile market conditions have increased the demand for FX and interest rate hedging products, and our product and service offering is meeting the high demand well. Market making operations was also up, driven by FX, rates and equity trading and supporting the overall positive result development. The overall net fair value result was up 18% year-on-year. Cost increased by 4% year-on-year in line with our plan. Cost excluding regulatory fees increased by 3%, driven by investments in line with our business plan, which prioritizes growth in specific areas. Staff costs were flat. Going forward, we will remain focused on maintaining strict cost control and growing revenues faster than costs. Our credit quality remains strong. We have the most diversified portfolio among banks in the Nordic region, both in terms of countries and sectors.
In the third quarter, net loan losses and similar net result amounted to 7 basis points or EUR 58 million. Realized loan losses were very low across the sectors during the quarter. New net provisions for loan losses increased slightly to EUR 29 million. We also booked a EUR 29 million model-based fair value adjustment due to lower house prices on our mortgage loans in Denmark. We kept our management judgment buffer unchanged at EUR 565 million . This allowance continues to ensure a strong reserve to cover both credit losses and planned improvements to provisioning models. Our capital position continues to be very strong and among the strongest in Europe. Our CET1 ratio was 15.8%, down from 16.6% in the previous quarter. This followed the reductions due to the third share buyback program.
As expected, our CET1 requirement increased to 10.8 during the quarter due to increased countercyclical buffers in Denmark and in Sweden. Our CET1 ratio is 5 percentage points above the current requirement, and as outlined at our Capital Markets Day earlier this year, we continue to implement an efficient capital structure and distribute excess capital to our shareholders. Let me now move on to our business area results. Our business areas continues to deliver strong performance in the quarter. In personal banking, we maintain high levels of activity and continue to provide proactive advice and support our customers during the financial markets turbulence. Due to the market environment, our customers' investment activity decreased while their interest in deposit products increased. Payment and card fee income also saw positive developments.
The rate hikes improved our deposit margins, whereas mortgage margins remained under pressure in Sweden and in Norway due to higher funding costs. With positive central bank rates across the Nordic region, we now also provide our customers a broad deposit saving offering in all countries. Mortgage lending volumes grew by 4%. Despite the lower housing market activity, we continued to gain market shares across the board. During the quarter, we launched a new version of our mobile app in Finland, completing a full Nordic rollout. The new app was created based on customer feedback and provides an even more personalized experience and further tools for customers' financial well-being. Overall, feedback on the new app has been very positive. We have also continued to see a steady increase in the number of mobile users, up 6% year-on-year.
Total income was up 6%, return on capital at risk improved to 19% compared with 18% a year ago, and the cost-to-income ratio improved to 49% from 51%. Business banking continued its solid growth as in previous quarters, and lending volumes increased by 6%. Net interest income increased by 23% year-on-year, driven by higher volumes and improved deposit margins following the rate hikes. Meanwhile, equity and debt capital market income remained subdued due to the macroeconomic uncertainty. Credit quality remained strong with low realized loan losses. We are continuously developing new digital features for our SME customers in order to make banking smoother and easier. For instance, we piloted a digital cash management solution within Corporate Net bank, enabling our customers to speed up, streamline, and simplify their internal treasury and payment processes.
We also continued to support the transition to a more sustainable future. Our green loans portfolio increased by 80% year on year, and green deposits more than doubled from the previous quarter. We see a clear upside in sustainability-linked products and services. Return on capital at risk in business banking increased to 18% compared with 15% a year ago, and the cost-to-income ratio improved to 42% from 48%. Large corporate institutions continued to drive up customer activity. The combination of high proactivity and customer demand led to a significant lending growth in the quarter. Lending volumes increased by 25% as corporates increasingly turned to us for their financing needs. As mentioned earlier, we saw an uptick in event-driven financing from corporates seeking to capitalize on current valuations.
There was a significant increase in short-term liquidity financing needs, for example, in the Nordic energy sector. The weakening markets meant that progress and corporate financing or finance remained muted, and capital markets activity was lower. Credit quality remained strong with net reversals in the quarter. Within sustainability, we are on track with our target to facilitate EUR 200 billion in sustainable financing by 2025. In addition, we were once again ranked number one for Nordic financial sustainable bonds. Economic capital was up 10% year-on-year due to the increased lending and higher requirements for market risk capital in a more volatile business environment. Return on capital at risk increased to 16% compared with 13% a year ago, and the cost-to-income ratio improved to 41% from 46%.
In assets and wealth management, the quarter was heavily impacted by the weak financial markets. We maintained very good business momentum in private banking. Net flows were at the highest level ever for the third quarter, amounting to EUR 1.1 billion. This was mainly driven by increased new customer acquisition. We continue to leverage our internal network to attract new customers. For example, we focused on new wealth generated through sales of businesses. These efforts contributed to increases of 9% in lending volumes and 15% in deposit volumes in private banking. Our private assets offering had an inflow of around EUR 500 million in the first nine months, gaining further traction during the third quarter. We also continued to strengthen our digital capabilities to become the digital leader within savings. Naturally, market conditions were challenging during the quarter.
Total income decreased by 1% following the development in the asset under management. AUM were at EUR 341 million in the quarter, down 13% year-on-year. Despite the challenges, return on capital at risk improved to 34% compared with 28% a year ago, and the cost to income ratio improved to 45% from 47%. To sum up, Nordea showed a strong performance in the third quarter, and we made progress in executing our business plan and delivering on our financial target. The Nordic countries have faced increased macroeconomic uncertainty following the higher inflation and lower GDP forecasts. Visibility is currently low, and we expect the challenging environment to continue during the coming quarters. The times ahead may be tough, but the Nordic societies are strong and well prepared to weather more difficult conditions.
At Nordea, we are well-positioned for this environment, and we have a resilient business model. We expect to benefit from the strength and the breadth of our business as well as from the higher interest rates. We are committed to reaching our 2025 financial target of a ROE above 13%. In order to improve our performance and reach our financial target, we will continue to deliver on our three key priorities, creating the best omnichannel and customer experience, driving focused and profitable growth, and increasing operational and capital efficiency. We are also delivering on our two key levers across the entire bank, being a digital leader among our peers and integrating sustainability into the core of our business. Nordea is a strong and safe bank.
We are here to support our customers and the societies where we operate, and that is our way forward to be the preferred financial partner for our customers in both good and challenging times. Thank you. Operator, we're now ready for the questions. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. A voice prompt on the phone line will indicate when the line is open. Please state your name before posing your question. We will take our first questions from our participant.
Yes. Hi, this is Magnus Andersson at ABG. I have three questions on NII. Just thanks for providing that NII or interest rate sensitivity on slide 17. I was just wondering about the interval there for 2023. You have an interval of EUR 300 million, which is roughly 5% of the probable outcome for 2022. I was just wondering what the main uncertainties are there. Is it actually various degrees of pass through between account types, et cetera, you wrote about there on the slide, or is there something else? Secondly, I was just wondering about the negative lending margin impact here you had of EUR 72 million in Q3.
How much of that is due to floors in euro-denominated lending, i.e., how much will disappear now when we go from positive territory to positive, even more positive in Q4? Thirdly, just on your volumes, as you say, you have very strong corporate lending volume growth year-on-year. When I look at the sequential development, it looks like it slows down a bit here in Q3 versus Q2, whether there are any temporary bridges, et cetera, rolling off or if it's just lower demand. Thank you.
All right, Ian, would you take this?
Yeah. Morning, Magnus. I'll
Morning.
I'll tackle your first two and then maybe you can repeat the third because I was busy scribbling.
Yep. Yep.
In terms of the NII sensitivity slide, I think you indicated you understand it. It's the gross impact of solely policy rate rises. There are a bunch of things that will also impact the NII development next year. In terms of the interval, very specifically, I think there's, you know, still a degree whenever you project the future of uncertainty as to timing and quantum. You know, that's why we have a bit of variation there in our estimate. On the negative lending margin, specifically around about EUR 40 million of that related to the erosion of the floor boost.
Mm.
You know, the pressure we saw on the lending side came from that, and also still a little bit of catching up in Sweden and Norway with customer pricing versus what we've seen in terms of increased funding costs. Those are the components there. Of course, the floor boost is now or the floor boost impact, the negative, is now largely eliminated. That won't be a feature going forward. Your third question?
Yeah, yeah. May I just follow up first on the NII sensitivity there. Is it fair to say then that I mean, I see your pre-assumed policy rate path. Is it fair to assume that some of the uncertainty is due to the fact that you also have to estimate the IBOR rate moves around that?
Uh.
That might be timing differences, et cetera.
Yes, a little bit of that.
Yeah.
Yeah. That's.
Yeah.
Why we give a range.
Yeah. Yeah. Okay. Thank you. Yeah, just on the volumes, I mean, you have strong growth year-over-year there, but I noted on the business areas that the volume-driven NII part is lower in Q3 than in Q2 on the corporate side, whether that's due to anything temporary rolling off in this quarter or if this is a more reasonable underlying growth, quarterly growth rate on the corporate side.
I think the key driver there is about mix. For example, you know, where we are providing additional lending to very highly rated corporates, there's a little bit of margin mix on that. Mix related rather than anything else.
Yeah. Okay. Finally, just if I may, it looks like your appetite for property management loans in Sweden is much lower than some of your peers. It's been like that for the last couple of quarters. You have Handelsbanken and Swedbank has ramped up within that segment. We'll see if that has continued in Swedbank next week, while you are down to almost zero growth there. Is that a deliberate decision of you to be more cautious within that segment?
Um-
Rather than taking the opportunity and perhaps add on some good credit.
Yeah. Hi, Magnus, it's Frank.
Yeah.
We have been cautious for quite a long time. I think that is very helpful now, to be honest. It is not that we are closed for new lending, right? We just want to ensure that the customers do have the repayment capacity if we end the new business. You should not expect us to have a like big step-up or increase here on the commercial real estate for the coming quarters. If there's high-quality business where we can support, of course, we would be positive to look into it.
We have to remember, it's always what you have done up to a crisis that is important, and then you can do some management within the crisis or during the crisis. If you enter with, like, a solid quality and low exposure, then of course it becomes a little bit easier.
Yeah. Okay. Thank you very much.
Thank you. We will take our next questions from our participant.
Hi, it's Andreas Håkansson from Danske. Two questions. Coming back to Magnus' questions on the NII sensitivity on page 17. It's a gross number that you talk about, this EUR 1 billion - EUR 1.3 billion, and then you give four other drivers of NII. Could you give us a little bit feel on these other four drivers? Would you say that those are gonna add positively or negatively to the EUR 1 billion - EUR 1.3 billion, so the overall NII is gonna be better or worse than EUR 1 billion- EUR 1.3 billion?
You want me to take that one or do you want to do your second question as well?
You can take that one first if you want.
We highlight, as you say, Andreas, this is sort of solely related to the rate impact. Clearly, volumes and we expect to see some growth will help. Wholesale funding costs, you know, should be pretty clear that they're going up. We also have, I guess, a small headwind from the rolling off of deposit hedges, certainly in 2023 and a little bit into 2024. Those are things that go against us. The one that is very difficult to call is what happens on the pricing side on lending, and particularly the impact of competition, and so difficult to understand where that will end up.
Our estimate is certainly that volume benefits outweigh the two negatives of funding cost increases and deposit hedging. The big unknown is asset pricing. Andreas, we have to leave some things for you guys to guess.
No, we appreciate that. Thanks for that. I have a question on cost, because clearly now you're guiding for what seems to be a very attractive revenue momentum. You have very much talked about cost/income now in this year. If I just put in the revenues into consensus, we start to see a cost/income ratio coming down quite low already, down to where you're really targeting for 2025. Could you give us any sort of guidance where we should expect cost/income to move next year if we compare it to the 48, roughly this year?
I think it's a little too early to call that, Andreas. You know, we're all dealing with some uncertainty in relation to inflation. No, there's no uncertainty as to the existence of inflation, but we're about to enter into negotiations in relation to salary increases and other costs for the coming year. There's no question there is some pressure on those costs and that will, I think, feed through into the cost base. It's hard at the moment until those are concluded to give any clear guidance. That's something we'll come back to in Q4. The key message is that we do expect to see some pressure on the cost base from inflation.
Yeah. Perfect. Just a quick question just on commercial real estate. We saw that stage three loans fell in the quarter, but we don't see how stage two is developing. We saw that your provisions in stage two fell for commercial real estate. Could you tell us what was the movement in the CRE stage two?
I don't have that in front of me. Matti, if we don't have that.
I can take it with Matti later on. That's fine.
We'll take that afterwards. Yeah.
Yeah. Thank you.
Um.
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Thank you. Mats Hedal, SEB here. Some follow-ups on the corporate side, LC&I, was a huge deposit growth as well. If you can shed some light on whether that was driven by FX or dollars, or if it is companies actually preparing here pre-funding and preparing for tougher times. That is question number one. Then, two, if you could also give us some more insight to the loan losses in Denmark. Should we see this as a one-off adjustment due to the lowering house prices, or could we expect this to continue? Thank you.
Morning, Mats. Yes, the LC&I deposit effect was heavily influenced by deposits in companies in the energy sector, who are both you know, stocking up on liquidity, but also have seen strong cash inflows. Those deposits are held to cover amongst other things you know, increased margin calls on collateral, et cetera. There's a degree of both you know, general deposit growth and then a significant impact in relation to companies in the energy sector for the reasons I've described. An element of that is.
We would to some extent expect that to be with us for a while because energy companies you know do face those challenges around liquidity for the next sort of 12-18 months or so in relation to their forward commitments. In terms of the Danish fair value model valuation adjustment, very much front-end loaded. You know we've seen the negative development in house prices in Denmark over the last couple of quarters. We wouldn't expect to see much sensitivity to that going forward. We've taken that up front.
Okay. Thank you. Maybe one follow-up, returning to our favorite beloved slide here, slide 17 on the NII sensitivity. If I look into the rate path there, are you using your own macro team? Because I see there's no tilt. If I look at market expectations, we start to actually drop the interest rate in the end of 2023 so that we start to see lowering of interest rates or what is this based on? Is that the macro team, or how do you see it?
Yeah. That's the Nordea house view and as I guess as you've implied, you know, things are moving around quite a lot. Yeah, it's the Nordea house view.
Okay. Thank you.
If I may just add, they're not that different from the kind of general development. We have a terminal rate in Euroland 2.25%, Denmark 2.15% and Norway 3.25%. These are the assumptions that we base it on, and of course, they change on a daily or even weekly basis. We've given what we believe is the case.
Yeah. Okay, perfect. Thank you.
Thank you. We will take our next questions from our participant. Your line now has been opened. Please go ahead.
Yes. Hello. Thank you. This is Maria Semikhatova from Citi. A couple of questions first, again on slide 17. Thank you so much. That's quite useful. Just wanted to get a better understanding on your assumptions. First of all, what you assume as a pass-through on savings and transactional accounts, and maybe if you could remind us the split between these accounts as of the end of the third quarter. On contribution from central banks, I believe you held EUR 45 billion at the ECB. Just wanted to check, given the current debates on tiering, what is included in your assumptions on benefits from central bank, and if it's included in the Finnish part.
Outside of NII outlook, just would appreciate your thoughts on challenges that households are facing. I know you have a relatively small part of consumer loans, around 8% of your total book. Do you see any signs of stress across your portfolio? With regards to mortgage exposure, if you have received any requests to suspend amortization or any other kind of issues that you see from your own customers. Thank you.
Good morning, Maria. I'll deal with the questions on NII and hand to Frank on you know, the perspective of households at the moment. We're not giving our assumed pass-through here. It's you know, broadly based on how things have been to date. You know, our assumptions going forward are quite sensitive, I think, in terms of both sort of competitive views. We'll keep that to ourselves for the moment. It's a fairly balanced approach. In terms of just our split on deposits, you can work on sort of roughly 50/50 between transaction accounts and savings accounts at the moment.
Now, that profile may change, but that's how we look at it. In terms of our assumptions on you know what happens with money at central banks, and particularly ECB, we haven't baked in any assumptions or scenarios on reserve tiering or anything of that nature. You know, we're planning on the basis of current arrangements proceeding. I guess what I would point out is in relation to TLTRO, which is where a great deal of this sensitivity and speculation comes from, we were amongst the lowest users of TLTRO. There are many estimates out there of impact of TLTRO in the current environment. I think some published by your own house.
It's lowest impact for us if anything changes there, compared to some of our peers across Europe.
Good. Regarding a household side, it's a very strong portfolio we have and nothing has changed. There are no signs as of now of any weakening of the portfolio. Looking at the personal banking business of ours, the total lending is around EUR 170 billion, of which EUR 150 billion is mortgages. Mortgages is having in general a quite low LTV, stable and people pay their mortgage. That is how it has played out, you know, the many last years. That is also our clear assessment that it will happen this time. The last 20 or the last part of the portfolio is collateralized and non-collateralized. The total amount is EUR 20 million.
Out of the 170, 20 is, you can say, other lending. Around 14 as recorded, 14-15 of that 20 is collateralized lending. That would be mortgages booked in the banking book. It could be car financing, these sort of things. And then there are some EUR 5 billion-EUR 6 billion left within consumer lending, you can say non-collateralized. Could credit cards, it could be sort of top-up loans, these sort of things. There's no signs in these portfolios that points to a weakening credit quality as of now. I should say, we don't expect to see any major credit losses within the private portfolio.
Thank you so much. Just a quick follow-up on the transactional and savings account split. This is applicable for both business banking and private banking deposits.
You refer to total?
Yeah, it's a high level assumption, but it's reasonable.
Okay. Thank you very much.
Thank you. We will move to our next question from our participant. Your line will be open. Please go ahead.
Hey, it's Namita Samtani from Barclays. I've got three questions, please. Firstly, what percentage of your cost base is directly linked to inflation? Secondly, could you tell us what you're seeing with respect to household deposit movement in Sweden and Norway in particular? Are customers changing behavior and moving their deposits from transaction accounts to savings accounts? And also just on the corporate deposits, what is Nordea paying to corporate customers? And lastly, has the LTV on the commercial real estate book changed from last quarter? I think you said it was 55% in the second quarter. Thanks.
Good morning, Namita. Sorry. I mean, broadly speaking, our principal sensitivity on inflation is what happens with wages and salaries. You know, that's pretty clearly sort of 60 or 60-ish% of our cost base. You know, that is something that we will determine over the course of the next couple of months in terms of wage and salary settlements. The other items in there that have some sensitivity. Clearly, there is the general inflationary pressure on all costs at the moment. The one that feeds through immediately is lease agreements, property lease agreements with indexation clauses. That's actually relatively small in the cost base.
The main focus is on payroll. In terms of household deposits, we're not yet seeing a shift between transactions and savings account balances. I think the more relevant observation is customers taking much more interest in remunerated deposits and channeling savings that perhaps would otherwise have gone into fund investments into deposit accounts because, you know, we've got some good offers on those. Nothing in terms of movement between transactions and savings, but a real focus on remunerated deposit products as opposed to fund investments. On corporate deposits, off the top of my head, I don't have what we're paying on those, but Matti, can you add that?
Well, they're very much linked to the
Yeah.
Obviously the money market rates and also individual pricing. There is no price list on corporate deposits that we could give. Whereas for retail deposits, you can actually track them in on our local website. What do we pay on savings account? For example, in Sweden, we're paying 2.9% for two-year money at the moment, that is an important also kind of addition now, as Frank mentioned, to the savings offering on the retail side. Corporates, it's linked to money market rates and individual pricing.
Your last question just on LTV movements in commercial real estate. Nothing substantial there. We indicated back at Q2 that it was a bit above 50% LTV. Nothing substantial in terms of movement.
That's helpful. Thank you.
Thank you. We will move to our next participant. Your line now has been opened. Please go ahead.
Good morning. It's Omar Keenan at Credit Suisse. Thank you very much for taking the questions. Could I ask a follow-up question on the rate sensitivity? Thank you for the EUR 350 million-EUR 400 million. I was wondering if you could elaborate on the pass-through assumptions that are in that number. I wondered whether you could perhaps elaborate on the deposit hedging a little bit, and which geographies that impacts. Presumably, I guess that deflates some of the rate sensitivity down to EUR 350 million-EUR 400 million, and it means that there might be an ongoing margin benefit a couple of years out.
Secondly, I just wanted to ask your thoughts about lending margins and where you see front versus back book lending margin trends in key product segments and geographies. Thank you.
Sure. The first part of the question, Omar.
Pass-through.
Pass-through rates. Yes. Beg your pardon. Good morning, Omar. As I said before, we won't elaborate publicly on pass-through assumptions. Those are, you know, sensitive and are determined based on issues such as, you know, whatever is happening in the market at the time. You know, there is nothing unusual in expectations both on the lending and deposit side. Yes, you're right. The deposit hedging impact is a small headwind again in the NII sensitivity in the short term. As those hedges unwind, as the sort of caterpillar effect feeds through, that will start to diminish, particularly in 2024 and 2025. There will be a bit of margin pickup that comes from that.
In terms of lending margins and.
I can take that one.
Yeah.
Mortgage margins stable in Denmark. Stable a bit down in Finland, not much. Some pressure in Sweden and in Norway. Norway primarily due to basically the markets increased funding and a general competition. Sweden basically because the competition is hot, some are pricing very low and some are more, you know, slow in their pricing. We are, I should say, in the middle of the pack. Some pressure downwards, you should expect.
On corporate margins, you know, what we're hearing back from the business is, you know, it depends on mix, clearly. I said earlier that, you know, what we've seen in the quarter is a chunk of lending to very highly rated corporates. You know, we price accordingly. Generally speaking, across the board, though, if you leave that aside, we are seeing some margin widening on the corporate side because we are seeing some business opportunities there that have come from whether it be other banks or from bond markets being closed. You know, I think there's an opportunity for margin widening there.
Yeah. With the information we have as of now.
Right
It would be reasonable to expect that the margins will at least be stable, but probably upwards.
Yeah.
That's great. Could I ask just briefly on the deposit hedges? Can I ask what the size, the notional of that is, and can we assume it's fairly even between the currencies or is it focused in one particular area?
We haven't given detail on that before, Omar. Leave it with us. If it's something that we think is helpful to share, we'll do that widely.
Maybe you can, of course, assume that in the countries where their interest rates have been the most negative, their, the hedging is being needed, so.
Yeah
You don't hedge for positive rates.
Understood. Thank you very much.
Thank you. We will now move to our next questions from our participant. Your line now has been opened.
Hi. Thank you. Jacob from Autonomous. I had two questions. First, if you could comment on the CRE book. We got some disclosure from Handelsbanken yesterday. Could you talk at all about what kind of operating net income relative to loans you have on your property management company and what kind of interest coverage ratios you're currently seeing and if there are any sensitivities there? Secondly, on the NII sensitivity slide. I think in Q2 you commented that you felt consensus for the rest of the year was too low.
In this quarter with this slide, it seems to imply that if you add your sensitivity to current 2022 expectations, consensus has quite a bit of headwinds built in relative to where you get to if you just add that sensitivity. Is this your way of kind of repeating that you feel consensus outlook for NII is still too conservative? Or do you in fact see these major headwinds in addition to the rate positive rate dynamics? Thank you.
Morning, Jacob. On the CRE book, we haven't, you know, given those kinds of disclosures up till now. It's, as you know, a much smaller proportion of our credit portfolio, both in terms of overall, but also our exposure to Swedish real estate. I think it's not such a big conversation for us compared to others.
What is it, Matti? It's 3% of our group lending going to Swedish commercial real estate as we record it.
Yeah, slightly less.
It's slightly less. It's not really a big issue for us, Jacob, but I do understand the question. We are just having a different portfolio. It's not having the same, you can say, attention.
Yeah. In terms of our public disclosures, but you know, we're still very focused on it at a business level, as you can imagine.
Absolutely
In terms of net interest income, yeah, we did indicate it was we felt consensus was on the low side back in Q2. It still is. I can understand why. There are a lot of different moving parts involved here, and that's why, after careful thought, we tried to be helpful here with giving one of the components, but probably the most important component in terms of NII sensitivity. I guess that ought to help with you guys and your estimates going forward. Trying to be helpful here. You know, I'm not.
There are no significant headwinds in relation to NII development, other than the items that we've talked about in terms of, you know, wholesale funding costs, et cetera. A complex picture, difficult to estimate outside in. You know, there is a very powerful NII driver in our deposit base.
Great. Thank you very much.
Thank you. We will take our next questions from our participant. Your line has been opened. Please go ahead.
Yeah. Hi. Here is Sophie from JPMorgan. Sorry to go back to slide 17, but I was just wondering what has kind of changed between now and the second quarter, given that previously you said that the rate sensitivity guidance would be slightly above EUR 350 million from 50 basis points parallel shift in rates, and now it's EUR 350-EUR 400 million. If you could just elaborate what actually has changed. Then my second question would be on capital outlook. Are there any regulatory headwinds or tailwinds that we should be aware of? Could you just give us an update on the IRB model approvals? Thank you.
Okay. Morning, Sophie. In terms of what's changed, when we've talked about this in the past, we were always clear that the initial rate rises were helpful, but we had to get from negative into positive territory in Finland and Denmark. Of course, now we're there, and that is, you know, therefore all in more valuable. That's the key driver. That's what's changed in terms of the guidance, as well a little bit with deposit volumes that are stronger than, you know, when we were originally estimating guidance and sensitivity there. It's principally about all rates now being in positive territory.
Yeah, just related to that, may I just ask, should we expect that when rates move further into positive territory, that the rate sensitivity should decline, given that competition potentially and pass-through increases or should we expect this, the range of EUR 350 million-EUR 400 million kind of remain unchanged, assuming rates really go according to your and market expectation?
I think that this is a good rule of thumb. Look, it's an estimate, and going back to one of the earlier questions about, you know, why do we have an interval or a range? That's because circumstances can change. I think this is a good rule of thumb for measuring, you know, the gross impact of a 50 basis points increase in rates. I think it's a good tool for that. In terms of our capital position and what we see going forward, nothing that we haven't spoken to you about already. There is an important decision coming up in Finland in relation to reciprocation of the Norwegian systemic risk buffer.
Let's wait to see what that says, but we've always flagged that as something that was pending and given you an indication of the impact of that. Let's see what happens. In terms of IRB, we're still working with the ECB on their approval. I think we flagged last time around that that would be expected in the first half of 2023. No change there in terms of timing. We don't have anything new to add in terms of tailwinds or other things.
There is a new disclosure this time around that we've talked about before, but we have actually quantified now, which is that the implementation of IFRS 17 as of first of January this year will reduce equity by, as we say in the report, around EUR 500 million-EUR 700 million net of tax. You know, we've flagged that implementation would be a deduction from equity. This time we're quantifying it for the first time. That's something to, I guess, include in your thought process.
Thank you. That's very clear. Just on the Norwegian systemic risk buffer, so you expect the decision before end of the year from the Finnish authorities?
It's scheduled for delivery in Q4 this year.
Okay, great. Thank you.
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Morning, everyone. Nick Davey from BNP Paribas Exane. A few questions, please. The first one, sorry, I know we've done slide 17 to death, but the bit of it I can't understand is the wholesale funding cost reference. Could you just describe to us how you view that? Because I assume it's not the rate that you pay on funding costs. I presume that it's the spread. Either way, with the scale of funding that you have, that can do quite a lot of damage to the gross positives of rising rates by playing around with your funding costs. I just wanna make sure that I'm scaling the right thing there.
The second question, please, would be on risk-weighted assets where you're keeping up this amazing ability to keep RWAs below EUR 150 billion despite all the positive noise on loan growth. Could you just update us please on capital efficiency efforts that you're going through and how you're managing so effectively to keep RWAs down when I suppose volumes and maybe some risk migration I would expect to be putting some upward pressure on RWAs by now. Maybe just a final question. I think in the comments at the beginning, Frank, you mentioned some of the corporate lending demand has been liquidity facilities, particularly for energy companies.
I just wondered if you could flesh out at all the outlook on corporate borrowing, either near or medium term, if when things calm down, you expect a little bit of de-leveraging from some of these facilities or whether just the pipeline is strong enough to for this to be a sustainable positive. Thank you.
Good. Thank you. Let me take the last one, and then Ian, please take the two first one. On corporate lending, the picture is lending activity within the SME market is a bit slower than it has been in previous quarters. You know, it's the best estimate, of course, we can give, but I believe that it will continue to be a bit slower here in the coming quarters. The question, you know, connects to the LC&I, the large corporates. Yes, correct that we had high activity supporting the energy companies with margin calls and other things. I don't think that will be any big change in position in the coming quarters.
The activity level, at least, in the start of the quarter here has been quite high as well. What exactly, how exactly it will like play out the coming quarters is hard to say. We would expect a nice growth within LC&I the coming quarters as well. Again, you know, we don't have any, you know, concrete data that basically support it more than activity level in the market is high. Did that meet your expectations?
Yeah. Very helpful. Thank you.
Ian.
Hi, Nick. Yeah. Wholesale funding costs, it is in reference to spreads, and you need to also have regard to mix. You know, we're seeing higher levels this year. You know, in relative terms, the increase in impact, say in covered bond funding versus what we're seeing in senior unsecured or more sort of long-term issuance, is considerable. We have lower requirement for issuance in that space. Yeah, it's an impact, but it isn't something that to use your phrase will do a great deal of damage to the NII position. It's something that I think you know, wholesale funding markets have been quite difficult for certain issuers over the last few months.
We continue to be a leader in that respect. On risk-weighted assets. We do see some volume impact impacting the CET1 ratio this quarter. It's in there, but we're offsetting it, as you say, with other actions, and you know, continuing to work on capital efficiency. There are no big features in there. We're not seeing, you know, any particular step down in EC. It's just tackling a whole bunch of things on profitability. In terms of migration, we're not seeing any sort of rating migration at the moment. That could certainly be something that we see going forward.
In a number of our portfolios, we're currently well below the RWA floors, so in our mortgage book, in commercial real estate, in shipping. We have risk weight floors imposed there, and we have a fair bit of headroom to those floors at the moment if we do see some adverse migration. It isn't a concern in the short term. Yeah, so.
Very helpful. Thank you.
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Yes, good morning. Martin Leitgeb here from Goldman Sachs. Could I have two, please? The first one, just a broader one, on mortgages across your footprint. I was just wondering how you see the affordability of mortgages in the respective markets, just given the comparatively sharp increase in terms of rate expectations from here. Secondly, I was just wondering if anything has changed with regards to how you look at scope for capital returns. On one hand, macro uncertainty. I guess that's increased since the last reporting date.
On the other hand, Nordea keeps generating excess capital and, you know, given the increasingly improved rate outlook, and the comments on NII seem to suggest that, you know, this capital generation could continue to eventually improve. Is buyback in principle still a tool you could envisage over the near to medium term? Thank you.
Ian, if you take the last one, could I just ask for the first one? I didn't really get the question as the phone was active. Ian-
Yeah. Apologize for that. Yeah, I was just wondering, I mean, given the meaningful increase in interest rates, I was just wondering how you see the affordability of mortgage borrowers across the four home markets. Are you concerned in terms of potential affordability issue for parts of your mortgage book?
Yeah. The answer is we are not concerned. The reason for that is, first of all, we have. If you look at our portfolio, we are testing typically around 6% with an interest rate of around 6%. Customers should be able to cover, and if they are not able, then it's because they are spending more money than they did when they took the loan. The way I look at the portfolio is basically slicing it in three, you can say, different parts. You have the customers that has a strong cash flow, you know, that has liquidity that will be able to, without any problems, cover for the increased cost of living, including energy costs and increased interest rates.
They will probably still be concerned, and that will impact the spending, and then hitting broader society, but it will not be a problem for their repayment capacity. You have the ones that have the capacity but have increased spending, and they will have to reduce the spending, change a bit the habits. They will start to travel less. They will buy less goods. They will, you know, do things a bit different, buy cheaper food, and so on. They will have the ability to pay, and they will pay because the last thing you stop paying on that is your mortgage. Remember, in the Nordics, you can't get rid of a mortgage. It is for life, until you have repaid it.
If you go bankrupt, which you then don't do in the Nordics as a general rule. The last customer group, or you can say citizen, is the one that is having no assets. You live in a rented apartment, rented home, you don't have any assets that you can pledge, you don't have any liquidity, and you are a bit squeezed. From Nordea's perspective, it is not bringing any risk because we don't have any exposure to that customer group. If we have any, it's very, very limited. That is a social issue, right?
A societal issue that of course is problematic, and of course as we should be concerned, but from a bank's perspective, Nordea's perspective, it doesn't bring any losses because we are not exposed with any big number there. I should say no big concerns there. Activity of course is coming down in the market as people are, you know, sellers at the moment want a higher price, buyers want to have a decrease in the price, and then one day they will meet, and the activity will start to pick up again. Now we are sort of in a transition. Ian.
Yeah. Morning, Martin. So in terms of capital return, I'll maybe take you back to how we talked about this at Q2, which was, we announced our third, you know, substantial buyback program, and indicated there that we'd sort of dealt with the obvious excess capital. As you point out now, you know, it may be that as we continue, and we had an expectation that we would continue to generate capital and that we would use buybacks along with, you know, other tools, for managing the capital base going forward. Almost a, you know, into a business as usual, deployment of buybacks rather than, tackling these obvious excesses.
It may be that we will now see stronger capital generation as a result of the interest rate environment. I think we would still temper at this stage any expectation there with, you know, acknowledging that there's some uncertainty in the economy, and how that might impact our customers. Right now, I think we stick to our philosophy, which says that in getting down to a sort of 15.8% CET1, we've tackled a good deal of our excess capital. You'll see us use buybacks going forward, but alongside, you know, our dividend policy and perhaps deploying capital into growth or M&A opportunities. In a more sort of even way, I guess, between those different ways of using capital.
That being said, you know, the buyback program. The third buyback program is about sort of 40% of the way through. It'll keep us busy until Q1 next year, and that's probably a good time for us to just update you guys on the thought process going forward, and we may have a bit more clarity on economic developments and things like that by then as well.
Thank you.
Thank you. Now we will move to the next question. Your line now has been opened. Please go ahead.
Good morning, everybody. It's Riccardo here from Mediobanca. Just one quick follow-up on the NII slide. When you show in 2022 the EUR 300 million, EUR 400 million carryover effect, should we consider the starting point more or less the level that we have seen in, say, the first half of 2022, given that rates, the vast majority of the rate hike will have an effect in the second part of 2022. The other thing I wanted to better understand from you, when you say we should make our assumptions on lending margins, are you referring to competition that is hard at the moment for you to kind of understand where the competition is gonna go?
still related to that, do you have the feeling that the system is still flooded with a lot of liquidity, which may have an impact on deposit betas? I'm not asking you what you plug into that, into those numbers. You won't tell them. But in general, as a general rule, would you see the system as still flooding with the fairly low loan to deposit ratios and so on, impacting deposit betas? Thanks.
Morning, Riccardo. Just look, I think our 2022 sensitivity estimate here is a good illustration of how to use this. We show the gross impact annual on the full year of policy rates. In amongst that then, when we're thinking about what happens to NII, we've got other factors such as floor boosts and you know lagging in asset pricing, say for example, in Norway, where we've seen those successive rate increases with the lag on repricing assets versus liabilities. A bunch of different things.
It'll say that, you know, our all-in impact on NII needs to take into account some of those different things. The other important thing to understand is it's been a build through the year. Q4, you know, we've seen successively higher contributions, particularly from deposits as we've moved interest rates up. You should expect to see a really strong Q4 on the NII side from this impact. It's not even in that regard, and it'll probably be a similar picture as we go through 2023, although we have that cumulative effect of the rate rises in 2022 contributing.
In terms of lending margins as being affected by competition, I mean, there's no question that you know, one of the things that will impact NII development is the competitor response, and particularly in relation to a smaller mortgage market in the short term, that you know, let's see how the different players react in that regard. Our own view is we don't chase volume. You know, we think it's important to maintain discipline around the development of our mortgage book. Let's see if others have the same philosophy.
Yeah, also just a data point there. We haven't had the cheapest prices until now, right? We have been in, I should say, a bit above the average in the narrow corridor among peers and been outgrowing the market. Yeah, let's see. We are getting chosen not because we are the cheapest, but because we have a very good offering and being very easy to deal with and being available. I think that recipe will continue to be a good one.
Thanks. Thank you very much. If I may, just a quick follow-up. With U.S. Treasuries for 4.5%, whatever it is, with Bond rising too, in general, all sovereign yields rising, is that a problem for your asset management operations? Meaning, should we expect that fixed income funds, which represent a non-negligible part of your assets under management, will suffer on the back of these as those, let's say sovereigns could become kind of competitive products versus assets under management with lower cost and stuff like that?
Look, I think you might see some short-term impact on valuation for sure as those change, but then the running yield that you get in that fixed income portfolio has gotten a bit more attractive. I think it's hard to call the balance between those, but it isn't a concern at this stage.
Very clear. Thank you.
Thank you. It appears there are no further questions at this time. I'd like to turn the conference back to our host for any additional or closing remarks. Please go ahead.
Just say thank you, guys. Thank you for a good conversation and looking forward to speak again. If you have any questions, as always, then just call us any day. Thank you.