Good morning, welcome to Nordea's fourth quarter and full year 2022 result presentation. Present here today, we have our Group CEO, Frank Vang-Jensen, Group CFO, Ian Smith, and my name is Matti Haapakoski from Investor Relations. As usual, we'll start with a presentation by Frank, after that you will get a chance to ask questions. To ask a question, please register for the webcast. Now I leave the word to our CEO Frank Vang-Jensen.
Good morning. Today, we have published our fourth quarter and full year 22 results. If we look back on our results announcement last year and reflect on how we entered 22, the world then was quite different to the one we are facing today. At the beginning of last year, we were dealing with the last big wave of COVID restrictions in the western part of the world. At Nordea, we were introducing our updated strategy and our new financial target for 25. Little did we know 22 would turn out to be very different than expected. We witnessed Russia's invasion of Ukraine, causing significant human suffering and societal and financial uncertainty across Europe. We returned to a more normal interest rate environment after a decade of extremely expansive monetary policy, which has been one of the biggest financial experiments in many decades.
In the financial markets, we saw the worst combined returns across bond and equity markets since the late sixties as inflation and interest rates shifted material higher. Despite the changed environment, our direction and purpose as a bank have remained unchanged. We have stood by our customers, supported our Nordic societies, and delivered on our strategy. This has led to another strong year for Nordea. Last year, we once again showed that we have a resilient business model and that our business plan stands the test of time. Some of the highlights in 2022 were: our business volumes grew, and we gained market shares across the Nordics. Our mortgage lending grew by 3% and corporate lending by 9%. We continued to improve customer experiences in all channels. Our 2022 operating profit was EUR 5.4 billion, which is 9% higher than 2021, also a strong year.
Our return on equity was 13.5%, up from 11.2% in the previous year. Our credit quality remained strong, with low levels of net loan losses, and our capital strength continues to be among the best in Europe. A strong set of results driven by our employees' relentless focus towards our customers and our decisive actions to continuously improve business momentum. Looking at the fourth quarter results, we were able to continue to grow business volume despite higher economic uncertainty. Corporate lending was up 9% year-on-year, and mortgage volumes were up 3%. Net interest income was up 31%, driven by growth in lending and deposit volumes as well as deposit margins. Net commission income decreased by 12% due to continued lower capital markets activity and lower assets under management due to market turbulence.
Assets under management recovered and were up 5% quarter-on-quarter. We had very strong net fair value results. Net fair value was up 69%, supported by strong customer activity. Our return on equity was 15.9%, and the cost-to-income ratio improved to 45% from 48% a year ago. Reflecting our strong financial performance and the strength of our business, the board has proposed a dividend of EUR 0.80 per share. This will benefit our shareholders, consisting of more than 565,000 private individuals, pension funds, and other investors. It will also support society during difficult times. For our 2023 outlook, we aim to continue to improve our profitability and expect the return on equity to remain above 13%. I'll come back to the outlook at the end of the presentation.
Let's now look at the fourth quarter results in more detail. In the fourth quarter, we focused on providing proactive advice and driving high business activity. This led to solid business momentum, where we maintained volume growth and gained market shares across the Nordics. Net interest income grew by 31% year-on-year. The rising cost of living and greater economic uncertainty has cooled down the Nordic markets, leading to lower transaction volumes and lending margins. Despite this, we were able to keep a good activity level with mortgage lending up 3% year-on-year. Lending demand among our corporate customers remained high. Total corporate lending volumes grew by 9%. SME lending grew by 5%, while Large Corporate lending grew by 12%. We're well-positioned to adjust to the changing environment and capture the growth opportunities available.
Our deposit volumes also continued to increase, up 7% year-over-year. We offer comprehensive and competitive deposit product range to our customers. Our deposit margins have benefited from the return to a more normal interest rate environment after a decade of extremely expansive monetary policy and negative rates. Of course, the banking industry is experiencing some tailwind due to the normalization of interest rates following a highly unusual and prolonged period of negative rates. At the same time, we are facing headwind due to the uncertain environment. For the financial sector, the ultra-low rate environment has naturally posed some challenges when the deposit engine has not generated income in several years. As a broader question, the negative rates have caused an unhealthy situation for both individuals and for society at large.
While some have said the zero rate environment won't last forever, we believe there has not been a proper, realistic understanding of the cost of money during the past years. All in all, the return to more normal rates is a healthy and a needed adjustment to create a foundation for sustainable growth. We expect that our Net Interest Income will continue to benefit from the higher policy rates in 2023, even if we expect the rate hikes to slow down towards the end of the year. We saw a mixed picture for Net Commission and Fee Income in the fourth quarter. While payment and card fee income was clearly up, lending related NCI and savings and brokerage and advisory fees were down. Net Fee and Commission Income was therefore down 12% year-on-year.
Payment and card income increased by 12% year-on-year due to higher customer activity. Saving fees were down 1% quarter-on-quarter and down 13% year-on-year following the lower asset on the management. The strength of our franchise was visible. Even in a muted environment, we continue to have positive net flows from internal channels. Brokerage and advisory fees were up from the seasonal quiet third quarter. Challenging market conditions are still impacting customer activity. We expect this area to recover when the market confidence increases. Very high customer activity led to a very strong Net fair value result in the quarter. The contribution of the customer areas was substantial, and we achieved a 16% improvement compared with the same period a year ago. This was driven by high demand for FX and interest rate hedging products.
Treasury income increased by EUR 73 million. Market making operations were also up, driven by FX rates and equity trading. The net fair value result increased by 69%. Cost increased by 12% year on year, including one-off items such as cost related to the acquisition of Topdanmark Life. Underlying costs were up 3%. Higher inflation is leading to increased cost pressure in our businesses, similar to what our customers are experiencing. In addition, we made significant investments in selected areas, for example, in digital and other technology and risk management. In the fourth quarter, we invested EUR 50 million to increase our financial crime prevention capabilities and to make our IT infrastructure even more resilient.
In 2022, our income growth allowed us to make these selected investments to improve the resilience of our business even further while still improving our profitability. For 2023, our plan is to remain focused on maintaining strict cost control and growing revenues faster than costs, while continuing to invest to strengthen the bank even further. Our credit quality remains strong. We are well positioned to handle the continued economic uncertainty that will impact our customers. Net loan losses and similar net results amounted to EUR 59 million, or 7 basis points in the quarter, and 1 basis point in the full year 2022. Despite the economic slowdown, individual provisions and net loan losses remained low and amounted to EUR 40 million. We didn't see any particular industry concentration in the losses.
Following an assessment of the potential impact of higher cost and reduced consumer spending on our customers, the management adjustment buffer was increased by EUR 20 million to EUR 585 million. Our buffer continues to ensure a strong reserve to cover potential and expected loan losses. Our capital position continues to be among the strongest in Europe. Our CT1 ratio was 16.4%. That is 5.3 percentage points above the current requirement. Our continued capital generation enable us to support our customers and remain a leading bank in shareholder distributions. Reflecting our strong financial performance in 2022, our board has proposed a dividend of EUR 0.80 per share. Together with our share buybacks during 2022, the distribution to our shareholders will be approximately EUR 1.5 per share or 15% of the current market capitalization.
Dividends are important for our shareholders. For more than 565,000 private individuals, pension funds, and other investors, our dividend payments support economic activity, drive growth in the Nordic societies, and channel funding into innovation and education and other societal support. This is especially important in more challenging times. Let's now move to our business area results. Our business areas delivered strong performances in 2022 and continued on the same path in the fourth quarter. In Personal Banking, we maintained high levels of activity and continued to provide proactive advice and support to our customers during the financial market turbulence. Our approach helped us to gain market shares in mortgages across the Nordics, even in a muted environment. The overall cooling down of the mortgage market has slowed down the growth rates compared with the previous quarters.
In the fourth quarter, mortgage volumes increased by 2%, deposit volumes increased by 4% with improving margins. In turbulent times, customer investment activity and demand for new loan promises have decreased. Customer focus has shifted towards broader personal finances, which include deposit products. Our comprehensive offering and holistic expert advice help our customers manage their rising interest rates and high inflation. We also continue to build strong digital relationships with our customers and support them proactively. For instance, we saw a 50% increase in their interactions with personalized digital messages on our mobile app and net bank. We also continue to see an increase in the number of mobile users, up 6% year-on-year. The market environment impact the savings and investment income, which was partly offset by higher payment and card fees.
Even in a challenging savings market, the ESG share of gross inflows to funds reached an all-time high at 32%. The credit risk picture remained stable across the Nordics despite high inflation and rising interest rates. Total income was up 18%, driven by strong NII growth. Return on capital at risk improved to 23% compared with 17% a year ago, and the cost-to-income ratio improved to 47% from 51%. Business Banking ended the year as it started, delivering solid growth. Volumes increased by 5%, led by strong performance in Sweden and in Norway. Total income was up 21%. Net interest income increased by 34% year-over-year, driven by higher volumes and improved deposit margins. Equity and debt capital markets activity remained subdued. The credit quality continued to be stable. Loan losses were mainly driven by a small number of customers.
We maintained close dialogue with our customers to support them as they face the current macroeconomic challenges. We engaged with more than 50,000 meetings and continued to support them with their financing needs during the quarter. During the quarter, we also launched the new Nordea Business Net Bank in Norway. The Net Bank is now available in all markets, and the business mobile app in Denmark, Finland, and Sweden. This is an important milestone on our journey to become the leading digital bank for SMEs. We also saw a positive development in customer satisfaction in both the Net Bank and mobile app. Our focus on driving the transition to a more sustainable future continues. Our green loan portfolio more than doubled year-on-year. In October, we entered into a partnership with Normative, the carbon accounting software provider.
With our new Business Carbon Calculator, our customers can understand their emissions and identify climate transition opportunities. Return on capital at risk in Business Banking increased to 21% compared with 15% a year ago, and the cost-to-income ratio improved to 40% from 46%. Large Corporates & Institutions continued to focus on high customer activity. Our productivity and expertise led to high net interest income and Net fair value growth. Lending volumes increased by 12%, higher deposit margins contributed to 38% net interest income growth. Capital markets remained challenging, we saw somewhat improved sentiment during the quarter. Credit quality remains strong. Net fair value and others was up 94%, driven by high demand in our FX and rates products. Our market-leading service offering and expertise helped to capture the increased demand.
In the yearly Prospera customer satisfaction survey, we ranked as the best corporate bank in Denmark. In addition, our corporate banking scores continued to improve in the Nordics, reaching an all-time high. LC&I's contribution was critical to our delivery of EUR 58 billion worth of sustainable financing transactions in 2022, contributing to our 2025 target of more than EUR 200 billion. Despite increased lending, economic capital was stable year-over-year, supported by solid capital discipline. Return on capital at risk increased to 21% compared with 13% a year ago, and the cost-to-income ratio improved to 36% from 44%. In Asset & Wealth Management, we continued solid income delivery despite challenging market conditions. We maintained good business momentum and delivered growth in our private banking business, with especially strong results in Finland and in Sweden
We continued to attract new customers and increase lending and deposit volumes during the quarter. Net flows were positive in private banking. Equity and bond market sentiment continued to be challenging, total income decreased by 1%. Assets under management decreased by 13% year-over-year, in line with the overall market. During the fourth quarter, we saw signs of improvement with asset under management up 5% quarter-on-quarter. We also finalized the Topdanmark Life acquisition during the quarter, are now ready to offer attractive and competitive pension products and services in Denmark. The cost-to-income ratio was 45%, an increase due to the Topdanmark Life costs. Return on capital at risk improved to 38% compared with 31% a year ago. To sum up, 2022 was a strong year for Nordea, despite the uncertain environment.
I would like to thank our very skilled and dedicated employees for supporting our customers and making it possible to achieve these results. As we enter 2023, macroeconomic uncertainty remains high. We expect the challenging environment to continue during the coming quarters. We have a very resilient business model, and the Nordic societies are well-positioned to weather the challenging conditions. We are committed to delivering on our key priorities and our 25 financial target. We aim to continue to improve our profitability and expect the return on equity to remain above 13% in 2023. This is already in line with our financial target for 2025, and we plan to provide a target update by the year-end 2023 when the environment is hopefully more predictable.
In order to improve our performance further, we will continue to deliver on our three key priorities, creating the best omnichannel customer experience, driving focused and profitable growth, and increasing operational and capital efficiency. We're 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. Our key focus is, and always will be, to serve our customers to the best of our ability. We recognize that without the trust and loyalty of our customers, we would not be where we are today. I'd like to use the opportunity to thank all our customers, shareholders, and also stakeholders for your feedback and very good cooperation during the year. Our role in society is the same as it has been for 200 years. We are here to enable dreams and aspirations for greater good.
That is also our way forward to be the preferred partner for our customers in both good and challenging times. Thank you.
For the Q&A session now, please.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. Next question comes from Andreas Håkansson from Danske Bank. Go ahead.
Good morning, everyone. First question, that's what everyone has been focusing on for a while in the banks here. Look at in the presentation pack where you show the sensitivity for 2023 1-1.5. You have the arrows to the right showing what would also impact the NII in the year. I remember, I think, Ian, in Q3, you said that the red should more or less cancel each other out, so it should really be the rates that's going to drive the NII. Could you give us an update on how do you think those errors are going to weigh on the total NII, please?
Good morning, Andreas. I don't think we've got a different view now. There's always a number of factors that come in and out of this. I suspect that the most important sensitivity to the development of NII is deposit betas, which have been, you know, the banks have not passed on a great deal of rate increases so far. I think it's reasonable to expect that to change in 2023. It's, I think we still feel pretty good about the estimates we provided.
Yeah. Cool. Then on asset quality, you now have EUR 585 in your buffers, and I'm looking at consensus as EUR 565 in the provisions for 2023. I mean, how do you think should we? I mean, either consensus believe that you're going to write it back and provisions roughly underlying going to be double, or we don't believe that you're going to write back any of it. Could you tell us a little bit how long are you going to actually keep adding to it, and when are we actually going to start to release it from the EUR 585? Thanks.
Yeah, that's a good question, Andreas. I can't speak for how analysts are thinking about the development of provisions. From our own perspective, we've done a pretty thorough job of assessing where the risks lie, looking at sectors that might be impacted more than others in the current environment, and that's led to our assessment of EUR 585 as being the requirement. I think the key thing is to think about when should those losses manifest and when we might see them coming through. I think at the moment, given the strength in the portfolio and the leading indicators, that's something that feels like it's a little bit later in 2023 and perhaps into 2024. We would expect to use those additional provisions to offset losses that we see arising.
The, you know, the provisions are held for a very specific purpose. You know, I think it's always hard to estimate with precision where we might see losses coming through, but it feels like it's later in 23, and those additional provisions are there to absorb those losses.
Thanks. Just very quick. Sorry.
Just if they come, and Andreas, we see this as a prudent action, right? It's better to be prudent than the opposite, right?
Yeah. Frank, on that prudent comment, on the above 13% ROE for 2023. I mean, you were at 16% now in Q4, and you still have sensitivity to the rising rate. Should we basically ignore that above 30% because, you know, it's probably gonna be quite significant above 30%. You know, how should we really view that number?
Yeah. As a start point, of course, the floor would be above 13. I should say it's too early to comment on any details yet. Our internal environment has changed a lot since a year ago. There are positives and negatives. However, we aim to be the best bank in the Nordics, that should also be seen in our operational performance as well as our financial target. Let's see how the year will end, let's come back to the update discussion in the second half of the year.
I think, Andreas, you know, Q4 was a very strong performance for Nordea. It's still an environment in which we're seeing lower than even normal levels of loan losses, and other things. I think we do need to work through, as Frank says, a couple more quarters to see how things are tracking.
Okay. Thank you very much.
The next question comes from Magnus Andersson from ABGSC. Please go ahead.
Thank you. Just continuing on NII there. If I look at your NII bridge on page 8 in the fact book, the deposit margin impact is EUR 336 million quarter-on-quarter. I was just wondering if you could give us a feeling for the regional split there, which countries have contributed the most and what you see going forward. From the business area accounting, it clearly looks like Finland was the strongest performer followed by Sweden. If you could give us that regional split, it would be helpful.
Hi, Magnus. Yes, you're right. Finland has performed extremely well in Q4. You would expect that to be the case because we've moved into positive territory with ECB hiking. I think all, you know, three of our countries on the retail side are, you know, continuously improving their performance. As you know, we're working very hard, particularly in our retail business in Norway, where there's always a bit of a challenge with the notice periods and other things. We had indicated that 2023, we would expect to have worked through that hiking cycle and see a strengthening of performance in particularly in PB in Norway. I think that's the picture.
Okay. For example, if I just follow up there on Finland, you had EUR 26.5 billion in deposits. How much of those did you pay zero interest rate in Q4?
We've got a really strong market share of deposits in Finland, and that's what helps with our deposit income performance. We've said before that, you know, we're about sort of 50/50 across all of our countries. Finland's probably a bit higher than that in terms of transaction accounts.
Yeah. Okay. Was there any floor effect remaining at all in Q4? Any negative effect remaining as you had a quite significant one in Q3?
We did see some impact from floors. Estimate is probably around EUR 20 million. You know, I think we've now worked through that particular impact.
Okay. Thank you. Secondly, just on cost, you made some proactive investments in Q4 here on additional IT and risk management of EUR 50 million. I also note that, I mean, headcount is up around 600, of which 300 took Denmark, so it continues up also in underlying terms. Is this something we should expect also into 2003, given your strong income growth? If so, could you quantify those investments, please?
We're investing more in people and processes to further strengthen our risk management across the board. A couple of key areas are financial crime prevention, and IT resilience. That has involved hiring more people as you spotted. We do expect to continue to invest comfortably within cost expectations for 2023. We think it's the right thing to do to try to get ahead of the regulatory curve as best we can, particularly in some of those areas of high scrutiny, such as financial crime prevention. Yes, we've made those additional investments. We'll continue to invest there and also in areas where it's important to the development of our strategy, you know, within our cost envelope, I guess, for 2023.
Okay. Yeah. you're not willing to share any absolute number there of targeted investments within these areas?
It's just part of a range of different things for us. It isn't something.
Yeah. Okay.
... that needs to be called out especially.
Okay. Thank you very much.
The next question comes from Namita Samtani from Barclays. Please go ahead.
Hi, thanks. I've got two questions, please. Firstly, for 2023, are you reiterating the 3%-4% cost growth, which I think Matti spoke about on the pre-close call? Secondly, just on deposit betas, why do you think they're much lower in Denmark versus, say, Sweden or Norway? Do you think it's a matter of catch-up because rates are further behind, or do you think there's some sort of structural difference? Thanks.
Uh.
Deposit betas in Denmark.
Yeah, please. Good morning, Namita. Our expectation for 2023 costs is probably around 5% cost growth. A combination of inflationary pressures, which are still quite intense and our commitment to invest in our business. Probably a wee bit higher than the 3%-4% that we've been talking about up until now. Still expecting, you know, strong positive jaws, and a strong ROE performance, but I think around 5% feels about right. In terms of deposit betas, in Denmark, I mean, I think the market is just a little bit slower. We when rates started to move, we were among the leaders in offering really market-leading savings products.
Transaction accounts have been pretty stable. I think the market is just moving a little bit slower.
Perfect. Thanks very much.
The next question comes from Maria Semikhatova from Citi. Please go ahead.
Yes. Hello. Thank you for the presentation. A couple of questions. First of all, on your NII sensitivity. Compared to your previous guidance, you revised slightly down by EUR 50 million. I see that this change is coming from a lower impact expected in Sweden and in Denmark. Just wanted to check with you why you lowered the sensitivity in these two countries and why you feel confident that you can deliver the same sensitivity for the future hikes in Finland? That's the first question.
Yes. Good morning, Maria. I think the key thing to understand here is that our NII expectations remain strong for 2023. You know, the benefits that we highlighted at the end of Q3 in terms of seeing the rate rises in the Eurozone and Denmark starting to come through are gonna be a very positive development for our business. Our sense on, you know, trimming back slightly the sort of level of sensitivity for a 50 basis points rise, it's exactly that we might expect to see, for example, Sweden, which is quite far ahead in the hiking cycle, start to increase pass-through rates on rate rises on deposits.
In Denmark, again, I think we might see some competitive elements lead to higher pass-through rates. It's really a small adjustment to the thinking, but the overall picture here is an expectation of a strong development of NII in 2023.
Thank you. I appreciate your comments. Then the second question is on capital development. If you could confirm that you still expect IRB model approval in the first half of this year. If there is any impact that you can share with us and kind of general thinking on buyback outlook, because I believe the current one is gonna be completed before the end of this quarter.
I think we all need to be patient on the IRB model approvals. I think it's taking longer than expected, but, you know, we continue to work with the ECB on that. In terms of buybacks, you know what, the Nordea capital efficiency and capital return story continues. We are still in the middle of our or we're nearing the end of our third buyback program that, as I've said before, should keep us going through Q1. We're thinking about, you know, what we do for the next buyback. You know, it will continue that sort of capital efficiency and getting down to our 15% target range is still very much front of mind for us.
No change there.
Just to clarify. Aside from IFRS 17 impact of roughly 20 basis points, you don't expect any headwinds coming this year?
Sorry, Maria, could you repeat?
Yes. Just to confirm on capital headwinds, aside from IFRS 17 impact, which you provided of 23 basis points, there is nothing else to flag.
Certainly nothing at the moment. You know, there are plenty of future developments out there. We're aware of, for example, things like countercyclical buffer increases and other things, but these are all factored into our guidance.
Thank you.
The next question comes from Omar Keenan from Credit Suisse. Please go ahead.
Thank you very much for taking the questions. So I just had a question on the CET1 target and getting down to 15%. Can I ask if you will look to get down to 15% as rapidly as possible? And the reason I'm asking that is I just wanted to size the likely buyback to be announced within 2023. Or, you know, are there any other potential uses or optionality that Nordea would like to keep that means that, you know, the board may not want to pay down to 15% immediately in the very near term? And the second question I had was just on the lending growth outlook.
Clearly Nordea have had a very nice market share story, which I would expect you think continues. If you think about system level lending growth in your different geographies, could you help us think about your views on, lending growth in household and corporate in the four key markets? Thank you.
Morning, Omar. I'll take the first question and then Frank will talk about the outlook on lending. First of all, I want to be clear, we don't have a CET1 target as such. The target that we have is ROE, and we've highlighted both for 2023 and 2025 our expectations there. What we've always said is that where we think we should be, depending on a whole bunch of regulatory developments and other things, is around about 15%, and that remains our position. And we've always sought to balance, you know, pace in getting there, with all of the, you know, the different things that we would have to deal with in our business.
Again, that doesn't change. Our view is that the long-term level is 15%. If we're seeing opportunities or other things that might cause us to vary the pace of getting there, we'll consider them. At the moment, you know, we're pleased with our progress on capital efficiency. We're also extremely pleased with our capital strength, which is our CET1 ratio is up 60 basis points quarter on quarter, as you can see. But we're not driven by any sort of particular thoughts on pace. We will come back, as previously flagged, in Q1 to talk about where we go next on buybacks.
We still have an excess capital position that we'll seek to manage down. I think what we said back in Q3 very clearly was we've dealt with the obvious excess, and we now have, you know, a comfortable sort of excess to our target that we would think about whether we deploy it for growth, whether we deploy it for other opportunities or we work through with buybacks. Buybacks are still a big part of what we believe in.
Good. When it comes to lending growth, let's start with the overall level within the different baskets. When it comes to mortgages, which as you know is like the majority of our household lending, it is super hard to say exact number. The activity has clearly come down significantly across the board. Highest increases did we see in Sweden and least increase in the market in Denmark, and then the other two in between. My best guess, and it will be a guess only, would be 1%-2% market growth in the mortgage market for this year.
I can't see any reasons for why we should not keep on taking our share and perhaps a little bit extra. There's not really any super big differences between the countries. This is just what usually happens. Uncertainty leads to customers to being cautious. When customers are cautious, they start to look at the prices. The seller want to sell to an old price. The buyer want to have a discount to a new price. It takes time before it meet. When it will meet, activity levels start slowly to come up again. We are not there yet, but it is developing. This year will be sort of like an in-between year, I should say. Let's see how it will play out. My best guess, 1%-2%.
On the corporate side, it's a bit tricky because the large corporates are in good shape. Most of them are hungry. They want to invest, they want to look into sustainability investments, and they want to look into, for example, supply chains investments. There is actually a very, very high activity. Parallel, we are having a dysfunctional bond and partly also equity market. Of course that creates an opportunity for us to help where we can and we are doing so. Large corporates lending, I would, you know, assess to being pretty positive during this year as well. Let's see how it play out finally. You have the SME, that's twofold.
It looks like the mid-size corporates still are active. They are looking a bit like the large corporates, and I would expect to see a continued lending growth within that area. Then we have the small businesses. Remember, many of these are impacted by the lower consumer confidence and the less spending, and will be impacted, I think through the entire year. There, I expect to see very, very low growth. When you combine that, hard to say a number, but clearly more positive than the household market.
Thank you very much.
You're welcome.
The next question comes from Mats Liljedahl from SEB. Please go ahead.
Good morning. Thank you. A slightly detailed question then on the AUM coming from Topdanmark. If you could comment on that. Is that margin accretive or is it a lower margin than the back book of the average AUM? Then, secondly, I mean, do you dare to put out the cost-income ratio or target for 2023 as well, as you will have a positive jaw, and you ended 2022 at a very low level, or below the 2025 target? Thank you.
Good morning, Mats. The EUR 11 billion or so that came in from Topdanmark is neither high nor low. It isn't. I would think of it as being just consistent with our average margin now. In terms of cost-to-income ratio, we are firm believers in delivering the best ROE among European banks. Our focus is on all of the levers that contribute to ROE. We gave cost-to-income ratio guidance last year because of the developments such as additional regulatory fees coming from Swedish bank tax and other things. We think now our cost picture is well understood. Consensus indicates that.
We've chosen deliberately to go to our primary focus, which is on ROE of greater than 13% next year.
We expect positive jaws.
Okay. Thank you.
Also just to add, we expect positive jaws for 2023 as well. I think you have most components then without having a clear guidance.
Yeah. Okay. Thank you.
The next question comes from Riccardo Rovere from Mediobanca. Please go ahead.
Thanks, thanks for taking my questions. If I get back one second to slide 17, where you provide the outlook for 2023. When you talk about EUR 1.1 billion-EUR 1.5 billion NII carryovers back in 2023, should I read this number in connection with the chart where you show the policy rate path expectations, so to go down at some point in a euro area and then in Sweden, in Sweden too? Still related to that, when you say actual pass-through will vary between accounts types and countries, does it mean that you expect that, let's say the EUR 1.1-EUR 1.5 is built with the assumptions that deposit betas will go up or what we have seen so far?
The other quick question I have is on the cost. Ian before mentioned kind of 5% maybe. I would imagine this 5% should exclude or should be on an, let's say, an underlying basis, excluding some of the one-offs that you had in 2022 and in Q4 probably. I have a curiosity rather than a question. Do you see any pressure from ESG investors to improve the remuneration of your deposits as this would help households in a way they're in and facing ultra inflations in the various Nordic countries? Just a curiosity, which I honestly do not know.
Okay. Hi, Riccardo. I'll take the first couple of questions and Frank will come back on, you know, the picture on deposit rates. Yes, you should read the NII estimates of policy rates alongside the graph of policy rate expectations. You know, you'll see that we've upgraded the estimate of net interest income impact given the expected development of policy rates since Q3. You know, subject of course to the things that we've talked about that can impact it, we think it's a pretty good estimate. What's included there is our assumptions around pass-through rates.
As we've indicated, in certain jurisdictions, we might expect those pass-through rates to increase beyond what we've seen in 2022. I think we've been pretty helpful there. Hopefully that works. On costs, we're very straightforward here at Nordea. We're not cute at all. When I say that we can expect cost growth next year of around 5%, it's on our total 2022 number rather than any additions and deductions. There are still a number of things that remain to be settled within that. You know, we're still negotiating pay settlements with, you know, collective pay agreements with unions and others. A slightly moving picture driven by inflation and all of those complexities.
You also should look to our track record in managing costs. You know, when we say around 5%, that's based on our total cost outturn for 2022.
In regards to the ESG question you posed at, it is our purpose to enable dreams and aspirations for greater good. We have been here for 200 years. Our customers and the society in which we operate should see us as very predictable in Nordea, very strong, very stable, and being there to supporting our customers also in tough times. That is actually what we are doing. That's why it's so important to have a capital planning that is long term, to have a prudent approach advising our customers to be resilient and predictable. I can't say enough how important it is for societies to have strong banks. We are super strong in the Nordics.
When it comes to pricing, then it's a matter of competition, right? The competition is high. It's high on mortgages, it's high on lending to corporates, and the margins are coming down, deposits margins are coming up. What we have seen in regards to deposits, that is we came from negative margins, then we were building a neutral margin, and then we have increased the interest rates on deposits while we at the same time have built a margin. We have established the third engine, which has always been crucial to running a bank, lending, deposit, and fee engine. The third one now is being established. That's the way we assess it, I think that's the way it should be assessed and is assessed by basically all banks.
There's no pressure, there's no anything else from investors or authorities as we believe, and I believe that they believe that the way it should be done and why that is to have healthy and strong banks to support the societies and our customers.
Thanks. Thanks for sharing those thoughts. Thanks.
The next question comes from Martin Leitgeb from Goldman Sachs. Please go ahead.
Good morning. Thank you. Thank you for taking my questions. I would just like to follow up on this three-engine comment in terms of profitability mix or split between lending and deposits, and that obviously historically having been heavily skewed towards the lending and fee side. Do you see the risk that some of the lending economics transition more into the deposit engine here in a way that, you know, mortgage margin, as an example, could be lower from here as banks reassess the balance between the three engines? Or do you see some of the weakness we currently see in certain markets in terms of mortgage pricing to be more transitional in terms of nature?
secondly, I was just wondering, in terms of the deposit split 50/60, mentioned earlier, have you seen any discernible change so far in terms of the rate path, in terms of customer shifting funds from transaction into savings? Where would you kind of expect the steady-state balance to be between those two going forward and, you know, if rates stabilize at a higher level? Thank you.
Yeah. I'll deal with this question on sort of the balance and deposits.
Yes.
I guess your question on mortgage margins as well. On deposits and deposit mix, we are seeing over the past few quarters, and particularly the last couple of quarters, a move into savings deposit products. That is I think it's certainly driven by customers looking at some very attractive rates now. That is natural. We definitely see a substitution, I guess, in customer conversations between, say, market-based investment products and deposits because of current conditions. That's natural.
The shift of balance from transactions to savings accounts, it's happening in a small way, and you can expect that to continue, but probably not to a significant structural change because customers have always been pretty good at managing the level of balances on transaction accounts versus where they might put their money to earn some return. We're seeing a small shift between transactions and savings, but not marked. It'll continue, I think, but again, not something we're concerned about. The more interesting conversation is customers looking at deposits and savings products as an attractive alternative to perhaps putting something into into funds or something like that. I think we're in really good shape there.
We've got market leading deposit products, savings products in all of our countries. I think we will win market share as a result. On the lending margin, you know, we've seen. You can see through the numbers that the contribution from deposits, the gross contribution was offset by a reduction in lending margin. That's natural. I think different dynamics there. Some of it is a bit competition related, particularly in a muted mortgage market. Also to a certain extent where, you know, we're catching up with passing on cost of funds increases through lending rates and other things.
Certainly our base case is perhaps continued lower contribution from lending margin, which is more than substituted by what we see on the deposit side. Our base case for 2023 is some continued net interest margin expansion.
Thank you. Could I have one more follow-up, please? Just on the structural hedge. Just looking at the strong NII progression quarter on quarter, it seems like the hedge is comparatively small. I was just wondering if you could give us any view in terms of, you know, how big it is and in which country currency it might be. Thank you.
The size of our structural hedge has been pretty stable throughout, you know, the last few years. No changes there. We are seeing, you know, it's one of the, I guess, headwinds in the net interest income picture. We're seeing such strong performance on deposits that it isn't a particular feature.
Thank you.
The next question comes from Nick Davey from Exane. Please go ahead.
Morning, everyone. Just a couple of questions, please. The first one, can I tempt you into guessing when peak net interest income will appear in your P&L? The reason I ask is just going back to your famous slide 17. I mean, if I annualize your Q4 net interest income, you'd be running around EUR 900 million higher in 2023 versus 2022 already. This sort of EUR 1.1 billion-EUR 1.5 billion guidance for the increase in 2023, it seems like at this pace of momentum, you would sort of hit that peak quite soon, which maybe surprises me a little bit based on where rates were in Q4 and where you're expecting them to be in the middle of the year. Any comments on timing would be helpful.
The second question, please, just on deposit balances. I can see across Personal Banking, lots of Business Banking and Large Corporates, you've had some deposit contraction in local currency in most markets. Is that seasonal patterns and typical? Do you think there's anything more structural going on there? Maybe if you can just develop any thoughts on deposit strategy from here. Ian, I think you just made a comment about taking market share from here. I think we've all been accustomed in recent years to focusing on lending market share. I just wondered whether you felt as optimistic about being able to take deposit share, without sacrificing on price using some of this Nordea secret sauce you found, as successfully as you've done on the lending side. Any comments there would be helpful. Thank you.
Morning, Nick. Matti, do you wanna take the question about peak NII, and then I'll come back on some of the deposit stuff?
Sure. Hi, Nick. You should compare the full year 2022, so i.e. the EUR 5.6 billion, not Q4 annualized. That's a short answer for the first question.
In terms of deposit balances, probably a couple of influences there. Yeah, I mean, I think in our PB and business banking business areas, there's no discernible trend. I think it is seasonal flows. Indeed, on average balances, you know, we're continuing to see some growth there. In LC&I, it can be a bit lumpier. At the end of Q3, we saw a significant jump in LC&I deposits driven by companies in the energy sector. The reduction that we've seen in Q4 is also those energy companies kind of regularizing their cash flow and cash flow position. It's just some special lumpiness rather than anything else.
In terms of deposits and market share ambitions and other things, you know, one of the areas where we've focused on seeking to, I guess, recapture market share has been in Norway. You know, we've done that with some special product offerings, and I think we've been managing our way through that without having to give away too much on pricing. I think that's, you know, building up that deposit, capability, that muscle, has been an important thing to do for us.
In other markets where we're much more strongly established in terms of transaction accounts and other things, and I would say more in balance, we feel pretty good about our ability to capture market share in deposits because of our relevance in terms of product offering, in terms of our focus on customers and others. Yeah, we, I guess it'll be something that we talk about a bit more than we have in previous years because of the focus on deposits now. You know, we feel like we should be able to do well there.
Just to add, the start point of us is that we are a relationship bank, and that means that when we work with the customers, we're covering every part of their business, right? You are not experiencing us to start to compete on price going, you know, broad and be a monoliner. But you are seeing an Nordea that is even more disciplined and structured, also covering the deposit part of the customer's business in a more like firm way than we have done before. The reason for that is that for customers, it has not been a product of attention in some of our markets.
Now, of course, it is due to its actually carrier interest rates, and it's a very, very good product for some customers to reduce risk, for example, to park money or to be an alternative while you're waiting to re-enter sort of mutual funds and whatnot. Therefore, we have put it into basically all conversations with customers. Just doing our work, and bringing the deposit market share up to our natural market share would lead to a market increase, a market share increase on the front book.
That's really helpful. Thank you. Can I just pick up on the net interest income question just 1 more time? I take the point that slide 17 is a full-year on full-year effect. I think my point is if we just start with the Q4 base that you're running with into next year, if that was the run rate, already that would be enough to give you EUR 900 million of this EUR 1.1 billion of annual increase. If I take the low end of your guidance for 2023, it would involve something like EUR 50 million more rate benefit to come in Q1 and then the fun's over.
I'm just a bit puzzled really why the low end of the range sort of still exists in a way, or whether you really think net interest income starts to cap out that quickly in the coming few quarters of 2023.
Look, Nick, I think it's a broad range. I think it's reasonable given uncertainties around competition, all of those other things that we give that breadth on the range. I think you can expect us to perform strongly in 2023.
Okay, thank you.
Last question now. Operator, please.
The next question comes from Piers Brown from HSBC. Please go ahead.
Good morning. Thanks for taking the question. Just one question, actually. It's on slide 19 and regarding the decline in your Stage 2 loan balances. We've seen some of your competitors starting to prudently lower some of the credit ratings across their corporate portfolios. I'm just interested in that context to see that your Stage 2 balances are still declining. I'm just wondering if you could give us any color in terms of the composition of that number and whether there's particular corporate sectors where you're starting to see negative ratings migration, and particular corporate sectors that you're putting on to increased monitoring at this point. Thanks.
Hi, Piers. Yeah, we have a watchlist in the same way as exactly as you'd expect us to do. That isn't growing at this stage, but it's somewhere where we stay vigilant. The positive development in Stage 2 and Stage 3 is, I mean, it's not particularly sector concentrated, with perhaps one exception. We continue to work with some restructuring cases in oil, gas, and offshore, and we've delivered significant improvements in that particular sector over the last few quarters. Otherwise, it's across the board. We're not seeing yet negative rating migration, even as we update our assessment of customers.
It's something that we're sensitive to going through 2023, but I think this is just an indication of portfolio strength at this stage.
Okay. Thank you very much.
All right. I think that's the end of the session. Thank you, everyone for the call. As always, just call us if you have further questions. Thank you so much, and see you soon.