I'm delighted to welcome Ian Smith, the CFO of Nordea. Welcome, Ian.
Thanks from me, too. Great to be here.
If we just get right into it, the first question: bank taxes. They've been at the forefront of debate within European banks. From what we know, there's going to be an increase in the Swedish bank tax in 2026. Do you foresee any pressure for a bank tax or political pressure in the other Nordic countries?
There are no indications of it so far. I mean, I know it's a big topic in places like Poland and the U.K. We already have, as you said, a bank tax or a levy in Sweden. In Denmark and Norway, corporate taxes are paid at a higher rate by banks on profits in those countries. There's no indication of any serious intent to add to those. That might reflect slightly different politics, better fiscal positions, who knows? No indication so far.
That's perfect. Getting another short-term question out of the way: 2025 targets. Do you still feel comfortable to reach that above 15% ROE and the 44%- 46% cost-income ratio?
We feel very comfortable that we'll meet our targets. It's a big part of who we are at Nordea . We do what we say, so as indicated consistently, we'll make our targets this year.
Moving on to some of the P&L and the drivers. Net interest income. Nordea has dealt very well with rate cuts so far. Do you believe we are approaching the trough on net interest income in the next couple of quarters?
I'm really pleased with how resilient our net interest margin has been through the rate cutting cycle. I'd say up to a point. Now we're kind of around the 2% level. That's where we think rates should bottom out and be stable for the next couple of years, at least. That's a reasonable level on which we can still make, we can still earn income on deposits. Further rate cuts from here would be more damaging. On our way down, we've been supported by our hedge, which is something that many of our peers in the Nordics don't benefit from. I think also good management of deposit rates and other things. It's been relatively resilient so far and good to see.
That makes sense. Just continuing on net interest income again, do you foresee Nordea outperforming the market in terms of loan and deposit growth going forward across the Nordic countries? Do you believe this could be at the expense of lending margins or having to pay up on deposits?
There's strong competition out there for new lending business. That does feed through into both pressure on margins, but also we see some banks loosening in terms of conditions and things like that. That's on the corporate side. It's a much thinner market on the household side. I'm pleased to see that we're taking market share in Sweden. We've got a bit of work to do in a couple of other countries, but performing well so far. I think we can take market share. We've demonstrated on the household side that we can do that, and we can do that without having to give up on price. It's a competitive space on the corporate side. Where we need to, we think it's smart to defend business. I'm sure our business folks will do that. It might mean a couple of basis points on margin, but we'll keep growing.
That makes sense. A question on customer behavior, because term account deposit rates are still very attractive in the Nordic countries. Do you see appetite for term deposits, or has the appetite for mutual funds become more apparent as rates have come down?
We've seen deposits generally come up across the region over the last few quarters. I think that's a combination of things that drive that. First is that I think customers are in good shape. Secondly, in the absence of property transactions and other things, it's been very much a savings focus. As rates have come down towards 2%, we have seen more interest, more demand, higher flows into asset management products. That being said, we still maintain our balance between transaction accounts and savings account balances on the deposit side. I think that indicates that customers have a more nuanced choice to make these days than they did, say, three or four years ago, where deposits were not remunerative. I think it'll be a bit of a balance. We are seeing now some more appetite come back into market-based savings products.
Balance between equities and, say, lower-risk bond products, which shows that customers are still a little bit wary about what's going on in the outside world. A balance between those and savings deposits, so a little bit different to, say, four years ago. Just to finish that point, Namita, I think sometimes people don't yet cotton on to the value of deposit net interest income. I think going forward with rate stability at these levels, that'll be an important driver of NII.
That makes sense. Just to wrap up the net interest income theme, you mentioned the structural hedge Nordea has, which has helped to offset the rate cuts this year. Is there an opportunity to increase the size of the structural hedge?
It's not something we think about every day. Our structural hedge is primarily a risk management tool. It's smaller than you see at other European banks, not least because our proportion of rate-insensitive deposits is also smaller than you see at other European banks. It's done its job in terms of helping us dampen the NII attrition on the way down compared to our peers that don't hedge. Occasionally, we've seen opportunities because of some mispricing in forward rates or something like that to add to the hedge. It's not something that we actively manage in order to actively manage NII. It's a risk management tool, first and foremost.
That makes sense. Just moving on to fees, it's very clear that stock markets have rebounded since Liberation Day, which should help Nordea's assets under management and also asset management revenues. However, could we better understand how you see the capital markets pipeline within fees and also cards and payments?
Some of the policy positions with the new U.S. administration this year did send some shockwaves through markets, whether that be around defense and security or tariffs. That did make savings fees a bit more choppy, I guess, during the first half of the year. It has been more stable since, and that should be helpful for savings fees going forward. It's also had a profound impact on activity levels, particularly corporate finance activity and other things. Remarkably, in two months of this year, February around the defense and security concerns, and in April/May around tariffs, we saw just a collapse in corporate activity. Our customers were sitting on their hands trying to make sense of the new reality and then eventually coming to terms with it. Liberation Day followed the stuff earlier in the year.
Corporate bankers will always tell you that they've got a really strong pipeline, and ours are no different. We've looked at it closely, and I think there are plenty of things waiting to be done. If we get a bit of stability, I'm pretty confident we'll see a stronger finish to the year on the advisory side. On cards and payments, that's pretty steady. We're up on last year. Activity levels are a bit higher than last year, and that shows consumers are still willing to spend on day-to-day consumption. The bigger ticket stuff, not so much, but day-to-day consumption is still there. The key for us to sort of get that fee line moving is seeing corporate activity levels come back.
Would that help the lending fees on the asset management?
Yeah, no question. I mean, it definitely has a bit of a virtuous circle going there. Higher activity levels, higher demand for credit, those kinds of things. We're all back from summer breaks and things like that now. It did feel quiet as it normally does, but there's a real sense of sort of pushing forwards to the end of this year now.
Perfect. Leaving revenues and moving on to costs, it's very clear Nordea's IT expense has been elevated versus peers, and it's been growing over the past few years. Could you first explain why that has been the case?
We've invested heavily, and I don't quite recognize the picture you paint versus peers because I think they've also invested in technology and risk management, and those have been two key topics for us, whether it be on the technology sides in resilience, either on business continuity or cyber defenses, and then on the risk management side, particularly in the area of financial crime prevention. I think that's been that cost growth, that reinvestment, I guess, of the higher net interest income over the last three years, has been common across the Nordics. We thought it was the right thing to do to use some of that additional income to continue to strengthen our business. We signaled quite clearly at the beginning of this year that we thought we'd reached a level beyond which we didn't need to invest more.
We talked about flat investment for this year versus last, and therefore capping cost growth at 2% to 2.5% for 2025. We're on track to deliver that. I think we're kind of at that, certainly in the short term, next couple of years, equilibrium in terms of investment levels. The focus is on efficiencies. We're committed to improving our cost-income ratio from here once we meet our target for 2025. We'll talk a bit more about how we plan to do that at our capital markets day in November.
The IT investment done over the past few years, could that mean there's less need for FDs going forward?
I think you've always got to be thoughtful about how you express that. We definitely see that investment in technology, some of the things we're exploring quite actively in terms of the use of AI and others, and general cost discipline, we will see our number of full-time employees coming down over the next few years. There's no question about that. We'll do that in a sensitive and thoughtful way, but that's definitely the direction of travel.
Perfect. I just want to focus on the financial crime FT because obviously those have grown quite a bit over the past few years due to regulatory requirements. At what pace can these employees be replaced with automated solutions?
Many banks across Europe, in response to tightening regulation, had to throw people at it. We were no exception. We went from around 1,700 people, say, three years ago in financial crime prevention to 3,200 today. We see no reason why, with the smart use of technology, we can't go back to where we were in terms of number of people focused on it, with better automated solutions. That's probably our foremost AI use case at the moment, and it's progressing well. I'm optimistic we'll be able to reduce the number of people focused on that area over the next couple of years.
Perfect. Just to round up on costs, can we assume that we shouldn't expect the type of cost inflation Nordea has seen over the past few years to continue going forward?
If you look at commitment to managed cost growth in 2025, that's how we're thinking about things. We said that in 2025, we would keep cost growth at 2% to 2.5% year on year. I think that's a good way to think about it.
That makes sense. Does anyone in the audience have any questions, or I can continue? OK, I'll continue. Asset quality. It's been robust. Nordea has even been releasing the management buffer. Are there any parts of the book that you feel worried by today?
There are always sort of spots that you focus on a little bit more. During the rate hiking environment, the obvious areas of construction and supply to the construction industry and other things were a focus area alongside retail, particularly where there might have been higher levels of leverage. That's dissipated now. We don't have sort of major areas of focus. Indeed, the whole of the portfolio, as you allude to, is performing pretty well in terms of low incidence of specific provisions. Our models tell us that we need fewer provisions looking forward. I think pretty robust portfolio performance with no areas of concern right now.
For example, does the Novo Nordisk issue in Denmark, does that concern you?
The Novo Nordisk issue is one of, you know, it's still a world-class company that makes world-class products for which there is strong demand. It's fallen out of favor a little bit in terms of stock price, but it's still a powerful business that, notwithstanding the focus on pharmaceuticals business when it comes to tariffs, also carries out a big chunk of its manufacturing operations in the U.S. There's a share price issue, which I don't know much about, and then there's what the company is doing. The pharmaceuticals sector in Denmark is still in pretty good shape.
That makes sense. Moving on to a potential concern for investors, there is the Danish AML court case, which is ongoing. Whilst I'm not going to ask you what you think a potential resolution is, what's the expected timeline of finding something out of what happens from that?
I mean, that's a very important case for us and one where we thought long and hard about going to court, not least because of the high stakes involved. We thought it was critical on behalf of our shareholders to defend that action, but also because it will take some time. The case started in court in the middle of May this year. It's expected to run almost a year. I mean, so far, nothing has emerged that causes us a concern, but it's got a long way to go. We maintain our position, which says that we think we're adequately provided for our exposure, and we'll continue with the court process. It's hard to know when we'll get a resolution, but this first phase will at least go into the start of next year.
Yeah, we're looking at 2020.
Yes, it's hard to see that it can be resolved quicker than that.
Perfect. Moving on to capital, capital returns, and the M&A strategy, Nordea typically does one bolt-on every single year, or that's been the case for the past few years. We haven't seen Nordea announce an acquisition this year. Is there still appetite to do Nordic bolt-on acquisitions? Are there attractive assets in the Nordic countries, or is returning excess capital the priorities for shareholders?
We like to add to our portfolio with well-judged acquisitions. We were really pleased, for example, with the portfolio we acquired from Danske Bank in Norway that migrated over to us last November. That's gone really well. It was right in the sweet spot of 30- 40 basis points of CET1 absorption. That's pretty much what we generate in a quarter or two, and it's of a scale that we can absorb and integrate quite easily. Definitely in the sweet spot. We are still very much interested in good opportunities. It's in the space of banking portfolios, life and pensions, longer-term savings business, and perhaps asset finance. There are some opportunities available. There's not a long list, and you can't always control the timing of these things because somebody needs to want to sell. We're still very much interested, and it's a good part of our portfolio.
Absent that, our thought process continues to be of those 25- 30 basis points of net capital generation each quarter. Can we deploy it in the business? If not, our instinct is to return it to shareholders through buybacks.
That makes sense. Just another question on capital. We had the retail IRB models, and we can put that behind us. We're still waiting for a potential update on the corporate IRB models. What's your latest thinking on that in terms of potential impact and also timing?
There is one thing about developing models and getting them approved by the ECB; it is not a short process. Even with the retail models, as you say, we implemented them last year and we move on. We still have opportunities there to reduce capital requirements. We have identified $4 billion- $6 billion of potential RWA reductions from improvements in those models, and we are working on those. We expect to deliver that over the next couple of years. It is a constant process. On the corporate side, we submitted our models for approval earlier this year in Q2. We do not expect approval or implementation much before 2027.
What we said to investors is, while we can see a clear case for lower risk weights on certain portfolios, it will need to be taken in the round with what the ECB thinks of our models and processes and what they might impose upon us. A good planning assumption is that it is capital neutral. We will do all we can to make it as capital efficient as possible. A good planning assumption is no impact on capital, but there are some clear areas where we expect to be able to demonstrate lower capital requirements.
That makes sense. Just to round off on RWAs , you've talked about the $4 billion- $6 billion relief. Any other tailwinds or headwinds we should think about on RWA ?
There's nothing major. We continue to chip away at the portfolio with cleaning up and improving things. Where we might see dislocation between what the regulator thinks about capital requirements and what the market thinks about them, we might consider SRTs or other things. You know our track record. We've used that tool in the past, so continue to chip away. Nothing major beyond what we've talked about.
That makes sense. I have to ask about the CMD because that's upcoming, and we're looking forward to it in November. I'm not going to ask you too much, but I just wondered if we could expect an update on financial targets such as ROE, cost-income out to 2028.
Yeah. We're looking forward to the CMD as well. It's a great opportunity to connect with investors and remind them of the Nordea story. I think sometimes we get a bit lost in all the excitement of other banks finally dealing with capital return and other things. That's understandable. It's a great opportunity to remind investors what Nordea is good at: consistency, low volatility, profitability, those kinds of things. Our focus is going to be on, over the next few years, where do we think we can deliver growth that's different from what you might just expect from the market? We think we've got two or three spaces where we'll concentrate and expect to deliver good business growth. There's the issue of cost effectiveness.
We'll seek to demonstrate how our scale across the Nordic region is a source of competitive advantage, but also a way to deliver structural cost efficiencies, whether that be about rationalization of processes, simplification of technology, a bunch of things, none of them individually as sort of Hail Mary or silver bullet, but taken together, I think gives us an opportunity to improve our cost-income ratio from here.
That makes sense. Can we put the ARS questions on?
Back to you.
Are they on? No, they are or they're not. Can you put the ARS questions on, please?
We can edit this bit out, right?
What?
We can edit this bit out.
It's recorded, which they're on. I thought I had them on my phone. Yes. In terms of market share gains, where are you seeing that across Nordea's different business elements?
I think our strongest performance at the moment is in Sweden, where both on the household side, even though it's still quite a thin market for new business, but the household side and SME, we are clearly head and shoulders above the peer group. Work to do on the large corporate side, but I think performing very strongly there. I think Finland is doing well. We sort of lost a little bit of ground last year, but we're very much focused on that. Norway is also very energized. We've seen really strong deposit growth because we've focused on that. We're keeping up with the market on the lending side. I think that's good. The space where we're very focused on improvement is in Denmark, where we've seen a little bit of lost ground. That's the influence of some aggressive competitors. It's quite a crowded banking market in Denmark.
A few of our competitors are using price to capture business. I'd admit that we've lost a bit of focus there. One of the things that makes us do so well in Sweden is brilliant service and availability. I think we've kind of fallen back a bit on that in Denmark. There are an awful lot of eyes on Denmark at the moment from inside Nordea. We're determined to return to growth in that space.
How do you think you can fix the issue? Is it hiring more people?
I think we can get out of our own way in some respect. I think we've introduced some complexity to our processes and other things that we need to deal with. I'll also admit that we may come under some margin pressure. As I said, competitors are using price quite a lot in Denmark. We'll have a look at that. Longer term, I think customer focus and being absolutely brutal in terms of ensuring that we've got efficient and effective processes is a big part of it. That's something we've been successful at elsewhere. We just need to apply that in Denmark.
That makes sense. It feels like Nykredit in Denmark is taking a lot of the pie and causing an issue. It's a non-listed player. Do you see the same type of effect in Finland, for example, with OP?
It's less prominent there. I mean, I think that Nykredit has a different market position and a different approach. We're not feeling it the same way in other markets.
Is it working? OK. Does anyone else have a question?
I was a bit far from Denmark about this question. I'm not going to Denmark for it. You're either asking for it. Give me a bit of clarity, that capital versus bolt-on, it very much. Thank you. Just following up on the capital return versus bolt-on acquisition point earlier. You're also saying that Denmark is clearly a focus point for the group. Would you consider moving beyond a bolt-on kind of consideration if it was to address the Denmark issue in a faster way than you organically may be able to?
I think one possible answer in Denmark is acquisition. We'd never rule that out. We have quite high market shares in certain of our businesses in Denmark, so we'd have to be sensitive to that. There's nothing for sale at the moment, and that's also an important consideration. M&A is definitely, and the acquisition of scale, as we found in Norway, is a helpful way of driving stronger business performance. I wouldn't rule that out.
Any more questions? Are the ARS questions ready?
All right, team's on. Should we wrap it up?
Pardon?
Should we wrap it up?
Give them one minute more. There we go. What would cause you to become more positive on Nordea shares? Better NII, stronger fees, non-interest income, better cost control, better asset quality, greater capital return, scaling down the corporate business?
Where did number six come from?
I think it's one for all the European banks. Don't worry. It's better NII and fully in your control for the lending and deposits. The next one: What are you most concerned about at Nordea? Weaker earnings, weaker capital, lower distributions, regulatory/legal risk, political risk, M&A risk.
Yeah.
How do you expect Nordea's ROE to develop over the next couple of years, e.g., by 2027 relative to 2025? Firstly, significantly higher. Secondly, modestly higher. Thirdly, in line. Fourthly, modestly lower. Lastly, significantly lower. Any thoughts?
I would say that we've always said that a good bank should deliver mid-teens, aren't we?
OK.
That is where we are. I think in the current rate environment with rate expectations, I see no reason we can't sustain our level of profitability.
Yeah.
You have work to do and a choice to make around how much you try and push profitability further or invest in growth. I think that's a difficult balance, but we always, always want to be sustainably the highest return on equity bank in our peer group, which is where we are today.
Thank you very much, Ian, for an interesting chat.
My pleasure. Thank you. Good to see you.