Good evening, everyone. Thanks for joining us this session. My name is Gulnara Saitkulova , and I'm very pleased to be joined by Ian Smith, the CFO of Nordea. Many thanks for taking the time.
My pleasure to see you, Gulnara.
Before we start, let's kick off our polling questions. What do you think is the most important for Nordea's share price performance over the next 12 months? Resilience in the top-line momentum, diversification of revenue streams towards higher compositional fees, announcing a new buyback, delivery on ROE targets, delivery on cost control for both M&A-specific market segments. Resilience in the top-line momentum, in line with what we saw in the different sessions across the banks. So, Ian, there are a lot of things happening at the moment, including the negotiations of potential peace in Ukraine, Germany announcing the $1 trillion package. What is your view on that, and how do you see this impacting the business of Nordea?
I think the first thing to observe is how quickly things change. There's been quite a seesaw in sentiment over the last couple of months that depends on these various political or geopolitical developments. I think there's no question that a resolution to the conflict in Ukraine and some stability and clarity for Germany, as the biggest economy in Europe, is, I think, potentially positive developments. In particular, if Europe can galvanize around the current requirement to stand on its own two feet in relation to defense, technology, infrastructure, those kinds of things, without the strong support of the U.S., if we execute on that, then I think that can be quite positive for Europe in general and the banks that support it.
When you think about this year, what are the key strategic priorities for the management, and what are the key challenges that keep you up at night?
I sleep very well. But we're very focused that this is the concluding year of our strategy period. We committed to delivering a return on equity above 15%. That remains the plan. And I think it's also, if you like, the finish line of a few years of hard work. So, we need to continue to deliver loan growth where that's possible. We need to continue to drive our income performance, manage our costs effectively. We've made a lot of progress on capital efficiency, but the work continues there. So, we're managing a bunch of different levers or pulling a bunch of different levers to deliver that ROE. And if we choose, when we do so, we expect to be one of the top-performing banks in Europe as a result. But there's a lot of execution in there, but we feel very confident about it.
Looking at the past year, the capital was under close attention. We saw a number of sizable headwinds flowing through, including the retail model updates and acquisition of Norwegian personal customer business, high capital requirements in Finland and Norway. Can you tell us more about the capital efficiency measures that you are taking to partly offset these risk-weighted assets increases? How should we think about your capital evolution and the key drivers of capital generation going forward? Here, maybe you can touch also on your stance on securitization.
Sure. That's a big question. So, Nordea is subject to among the highest capital requirements in Europe. And principally because, on top of what we're required to hold by the ECB for macroprudential purposes, our home regulators in the Nordic markets have the highest levels of macro buffers in Europe. So, we deliver our strong returns, notwithstanding those very high capital requirements. We have had to deal with a number of moving parts over the last few years, as you've alluded to, not only, say, in 2024, in terms of implementation of new retail models that increased our REA. I think the positive deployment of around 40 basis points of CET1 into the acquisition of a portfolio of mortgage and private banking customers in Norway, but also in years before that, substantial share buybacks and everything that goes with that.
We're very comfortable in that space of managing our capital actively. We've done a number of securitization or SRT transactions over the years, and we're, I guess, one of the pioneers in Nordic markets for those. We think they have a part to play. They're part of the capital management toolkit, but not a strategic priority for us, particularly. And so, we have around $5 billion of REA relief from SRTs over the years. I don't expect that to climb particularly going forward, but it's a very useful tool to have in the toolkit, particularly if we were to see an acceleration of demand for credit. It does help with balance sheet velocity. And therefore, having the capability to do that and sort of tried and tested markets and counterparties, then it's useful. But it's part of the toolkit and nothing more than that.
Touching on the capital distribution, what is your thinking when you decide on the mix between the dividends and the buybacks? You have a dividend payout also of 60%-70%, and you have been repeatedly saying that you still see the buybacks as a tool, but it will be more frequent and smaller-sized buybacks. When it comes to the dividend, do you think the semi-annual frequency of the dividends would be well-suited for Nordea? What is the best frequency of the buybacks in your view?
I think that there's no question that Nordea's shareholders really value our dividend. We're the strongest dividend payer in the sector. When we generate capital, we look to deploy that in our business to deliver profitable growth. And then, to the extent we have excess, we distribute. Now, that excess capital at the moment runs, or excess capital generation, is around 30 basis points of CET1 every quarter, so 120-150 basis points per annum. That's after allowing for dividend. And at 60%-70% payout ratio, that's a very strong dividend. With that excess capital, we're faced with a choice as to whether we deploy that into growth, organic or inorganic. And if we can't find profitable uses for that, we don't plan to sit on capital. As far as buybacks are concerned, we moved quite quickly after the removal of COVID restrictions.
We were one of the first banks out of the gate in terms of undertaking buybacks. We dealt quite quickly with what we called our spot excess capital. That was clearly excess to requirements, and we've returned that to shareholders. Going forward, it's very much about generate, deploy, and then trim any excess capital through the use of buybacks after that deployment. You can expect that Nordea will continue to use buybacks, but, as you said, sort of smaller scale, a little more frequently, I guess, than larger programs. An important part of the toolkit, but not as substantial as we've seen in previous years.
When it comes to the dividends, would you consider to do it semi-annually?
I think that's an interesting idea. And we have discussed with shareholders from time to time about whether more frequent dividend payments would be useful. So, we definitely keep that under consideration.
Let's now talk about your P&L and mainly NII. Looking at the past few years, momentum has been very solid. Even over the past year, despite the rate cuts, it was in a positive trajectory. How do you think about the forward-looking NII momentum for Nordea after such a strong performance and the key drivers for 2025? How should we think about the NII in the first half of the year versus the second half of the year? Which regions do you think are best positioned?
Yeah, so we have shown good resilience in net interest income, and we were always very clear with the market about why we expected that to be the case. The first is that certainly, in the early stages of the hiking cycle, that was delivered much stronger net interest margin expansion than we saw in the later stages because of higher pass-throughs, and so we expect to follow a similar pattern on the way down, so with the early cuts, they have had less of an impact on net interest margin than perhaps people expected. In addition to that, what we've seen, unlike many of our peers, we hedge a portion of our deposit base, and we hedge the interest rate risk there. That was something of a headwind in the hiking cycle, and so you saw some of our peers grow net interest income more strongly.
It's now proving the opposite and providing a dampening effect in the rate reductions. So, I think the impact of the hedge in 2025 and 2026, as we see rates come down, will be a positive for Nordea. Alongside that, we have the impact of the $10 billion mortgage portfolio that we acquired from Danske that will provide a benefit to Nordea's net interest income during 2025. And then, it's about volumes and margins. And I guess our expectation has been for modest volume growth, certainly during the first half of 2025. And as we see consumer confidence and therefore consumer spending and investment pickup, stronger growth towards the end of this year on the mortgage side. Corporate lending, credit demand has been fairly steady, but probably about the same level as we ended last year, so relatively slow.
But again, I think as the economy strengthens, we can expect to see increased demand for credit. So, I think prospects towards the end of the year, stronger. And your question was about how we expected NII to progress through 2025. I think we will see the trough in absolute NII probably in the second half of this year. And then, it's about volumes and margins that will drive the development thereafter.
Zooming on volumes, what are your key observations when it comes to the customer behavior? Where do you see most opportunities to grow organically across your markets?
Consistently over the last three or four years, the strongest markets for us in terms of loan growth have been Sweden and Norway, and we expect that to continue to be the case. First of all, given the scale and potential of the Swedish economy and also the strength of the Norwegian economy, so those have been good growth areas for us, and we have space to grow in those areas. Our market shares are higher in Denmark and Finland, so plenty of room to grow in Sweden and Norway, and receiving plenty of focus from us.
And what are you hearing from the corporate clients? What are the corporate clients most worried about at the moment? And what are you seeing from the perspective of their underlying business trends?
I think the things that are important to our corporate clients are, first of all, domestic consumption. And I think a lot of what we expect to see in terms of pickup in growth and in housing market activity and other things depends on that consumer confidence. That will be delivered by lower rates and also by, we hope, greater political stability. I think our customers need to feel good about or feel better about the world before making substantial investments in properties or other assets. So, consumer confidence is key. And that's definitely what a lot of our corporate clients are looking for. So, let's trust that that's on the way. And then, the second part of it is, in the Nordics, we have open export-focused economies. Some of our bigger trading partners are elsewhere in the EU.
So, for example, if we see greater stability and recovery in Germany, that's important for us because it's a strong export market. And I think greater political stability in general is going to be helpful for corporates. So, they definitely want to see that.
Touching on the competition, which has been intense in the Nordics, how do you describe the evolution of the competitive environment across your markets? Do you see any changes what we saw versus the last year at this time? Which levers are there in your portfolio to keep up with the competition?
So, I think anything. Our markets are characterized by well-run banks that generally behave quite sensibly, rationally. And so, any changes to the competitive environment, which has been fierce for many years, are at the margin. And so, what we've seen over the last few years has been, for example, SBAB in Sweden has priced quite aggressively in both the mortgage and savings markets over the last couple of years. And they've taken some market share as a result, not significant, but noticeable. You also see, alongside the listed banks, mutuals that are less focused on shareholder value and shareholder return than the listed banks, as you would expect, and who will be more generous in their pricing, more aggressive in their pricing.
We've had to deal with that also for quite some time, but I think it's stepped up a little bit in Denmark over the last year or so, and the way you deal with that, the way you combat that, is just first-class products, first-class service for your customers, whether that be digital or through advisors or any other channel, so that's what we're focused on, first-class products and first-class customer service.
Let's now speak about the fee income. Which categories of the fee income do you think will be the key for operating momentum for this year? Which initiatives you are undertaking on fees? Maybe where you can improve your product penetration and the market presence.
Yeah. So, we saw a good sort of year-on-year pickup in fee income in Q4, and we expected that to continue over into this year, not least because there are two things that drive our fee income. First is our savings business, which is the dominant part of our fee income. It's around 55%-60% of our fee income line, and then, the second is activity levels that drive what we see in either corporate activity or payments and cards. What we've seen, and we had good reasons to be optimistic about the development this year, and they still hold on both of those. Customers are now facing much more of a choice between deposit products and market-based investments than they were before, and opting for those market-based investments, and that really helps drive our savings business.
Our expectation was for better levels of activity in 2025, given a return to economic growth. What we've seen is a slow start to the year. You can see that through the sort of Dealogic data in Europe. M&A, ECM, DCM are all down on last year. Now, 2024 started very, very strongly, particularly on the DCM side. That's the area that's probably most meaningful for us. Those are all down on last year. You can probably understand why in an environment of perhaps less stability than customers had expected. A slow start. We think that the year will work out fine in terms of levels of activity on that side. It'll probably grow as we proceed through the year. On the savings side, two things that drive that. First is flows. We continue to do really well.
We had a very strong Q4 in terms of flows, both on the sort of Nordic customer base, which is around 86% of our assets under management, so really good levels of flow there on the retail, life and pensions, and private banking side, and we saw something of a recovery in terms of inflows on the institutional side. There's still work to be done there. It's 15% of our assets under management where we deal with parties outside the Nordics, so we've seen some signs of recovery, but work still to be done. The other part is market performance, and I think what we've seen even in the first quarter of this year is markets performed really well through February, and then most indices are down in March, so let's see where we end the quarter, but performance also plays a part in that.
We saw that the net flows in international channels turned positive in Q4, and the flows in the Nordic channels are very solid. Would you expect this to continue? What is your outlook on that?
I said we've got work to do, and part of that is because a lot of what has driven those outflows has been our product suite is in less demand than it was in the past, so we don't change that overnight, so we're continuing to work on that and to make sure that our product suite is as attractive to our international customers as it can be, so work continues there, but we did see in Q4 a number of significant mandates that we won around the world getting funded, and that's what helped to drive those flows. We'll continue to work at that.
Net-net, we saw the fees growing 4.5% in 2024. Taking everything into consideration, do you think this year could deliver similar or potentially higher results?
I think, bearing in mind, I said that markets have started slower than last year. I think over the year, I would expect to see us deliver at least that, so.
Let's turn to the costs. So, you are targeting 44%-46% cost-to-income ratio. How should we think about the key moving parts of your cost base? And can you please remind us what is your strategy and key priorities when it comes to the technology investments?
Sure. So, we stepped up our investment in both technology and risk management in 2023 and 2024. So, the areas that we prioritized were on the risk management side, capital model development, and financial crime prevention. So, for example, in order to deal with higher requirements from AML and sanctions regulations, we more than doubled the number of people working in financial crime prevention. So, a substantial investment there. At the same time, we invested more heavily in IT resilience. So, business continuity, cybersecurity, and other areas. And we think it's really important to do that. It's a critical area for us. And we saw that increased investment reached a peak, particularly in the second half of 2024. We don't expect to increase the levels there. We'll continue to invest, but not increase further.
Of course, what that means is, as we come into this year, we've guided for 2%-2.5% cost growth over 2024. What you would expect to see over, say, the four quarters of 2025 is still relatively high cost growth year over year in the first half of the year, and then a significant leveling off in the second half to deliver that 2%-2.5%. And that's simply because we ramped up so strongly in the second half of 2024. And what we're doing in technology, as I said, is very, in addition to investing in those areas that promote growth, be it digital or payment systems or those kinds of things, also in IT resilience. And that's a heavy focus for us.
You may recall that in the fall of last year, Nordea and several other institutions, both banks, telcos, other important infrastructure providers, if you like, came under unprecedented attack in terms of DDoS. And that was really an attack on Nordic societies, well-funded, well-organized, with significant capability behind it. We were very focused on doing what we needed to deal with those. And that's an example of where we're investing to improve our IT resilience.
Touching on the asset quality, asset quality has proven to be resilient. If you look at the cost of risk in the recent years, it has been below the normalized level of 10 basis points. Would you expect an increase in the provisions going forward? Which areas of your loan book you are watching more closely?
So, our loan book remains very well provided. And in addition to the sort of normal levels of provisions, if you like, we carry an additional stock of what we call our management judgment buffer of just over EUR 400 million. That was created to deal with risks relating to COVID and then repurposed for some of the macro environment issues that we saw in the rate hiking cycle. It's been encouraging to see that we haven't needed to spend that. And at the moment, the loan portfolio remains resilient. We are not seeing any areas where we think we might need to increase provisions. Some people have asked us about the impact of tariffs and other things. It remains to be seen what might happen in that regard.
But I think that our customer base is in good shape and our portfolio is in good shape, not least because of the diversification and the avoidance of concentrations that we focused on as we built the portfolio. So, no need for additional provisions at the moment. And we still have that management buffer and reserve should it be required.
If we look at this management buffer as a proportion of your loan book, it's actually 11 basis points, which is higher than your normalized cost of risk. Would you expect this to be released in the next couple of years? Or do you think, given that there is still some geopolitical uncertainty, you will still hold on some of this for longer?
So, I think there's two forces at work here. The first is you go, the world continues to be a difficult place. It's good to have reserves. But as we model the performance of the portfolio, you find yourself having to work quite hard to justify holding those additional provisions. It's good to have them. We've always been very clear that those additional provisions will either be used because we need them or released because we no longer need them. I wouldn't expect them to be around in a couple of years' time.
So, we spoke about the NII, costs and the asset quality. And you are aiming for about 15% ROE this year. So, what are the other key levers that we should consider when we think about your ROE? Because you ended 2024 with ROE close to 17%. If we look at Q4, it was 14.3%. And how should we think about your ROE beyond 2025?
So, I mean, our quarterly ROE is subject to a number of different factors. When we get towards the end of the year, we're carrying higher levels of equity because of accumulated profits, etc. So, I think we need to sort of look at it over the year. So, 16.7% versus above 15% for this year. And when we decided that our financial target should be ROE and to have that focus, it was because you deliver on the three things that drive that. You're focusing on everything you need to do. So, first of all is your cost income ratio. Second of all is your cost of risk. And third is your capital efficiency. And we work on all three of those levers alongside revenue growth to deliver on the ROE. We're confident we'll deliver on our commitment for this year.
I think that we need to make sure we execute on all three of those lines, but we will do so.
Let's touch on the bolt-on acquisitions and M&A. You have proven over the years to be able to pursue M&A opportunities as long as they become available. We saw a strong track record with SG Finans, with Topdanmark Liv, and most recently the Norwegian personal customer business. What is your way of thinking when it comes to M&A going forward?
So, what drives us, first of all, is to understand what we're good at and where we have a right to win. And so, that says that we focus on our home markets. So, very much a sort of Nordic boundary in terms of our appetite for M&A, certainly for the foreseeable future. We think there are a number of opportunities there to fill in market share gaps, capability gaps, geography, those things. And that's consistent with what we've done successfully over the last two to three years. There's not a long list of potential targets, but we're very comfortable absorbing one or two every year to keep moving on that. We deliberately talk about bolt-on acquisitions. We think of that in terms of that they can be easily absorbed from a capital perspective, from an integration perspective. And we also look very much at cultural fit also.
So, a bunch of things that we think about. We're not bound by saying that it has to be 30, 40 basis points, which is what it's been over the last little while. That's convenient. But where there are good opportunities, we think M&A works for us.
Let's see if the audience have any questions. Marc? Over there.
Yes, thank you. Marc from BDL. Just a question on capital distribution, specifically on the buyback. Maybe I'm not paying close enough attention, but I'm just questioning why you're not willing to be more sort of concrete or precise about what will trigger the buybacks, what size they'll be. We've had other banks saying, "We want to get to 12.5% CET1 by 2027," or what have you. Why not go down that route? That seems to be the trend in the sector.
I mean, Mark, that's what we did back in early 2022. And of course, there's a crystal ball here because we've got moving parts in terms of capital requirements and other things. And the enthusiasm for adding new capital requirements by Nordic regulators has been considerable over the past little while. But we drew a picture that said that we thought that our long-term or our medium-term sort of capital level was somewhere around 15%-15.5%. And we moved fairly quickly to get there. So, at the end of last quarter, we're at 15.8% versus a requirement of 15.1%.
We have had some people go, "Why don't you just take it all the way down to 15.1%?" We may well do that over time, but we're kind of beyond what those other banks have been talking about because we set our stall out there quite some time ago and executed on it. So, right now, while we carry a little bit of excess to what we think is our sort of normal operating requirement, we are very much in that mode of generate around 30 basis points a quarter and then decide what to do with it.
Any more? Ian, can you give us an update on the integration of Danske Norwegian personal customer business? How it's going and how much of synergies you are planning to extract?
Sure. So, I guess the first thing to say is a portfolio deal. So, our integration was finished before we actually got the customers over. So, what we spent the best part of 15 months doing was preparing the ground to receive those customers. It turned out to be a slightly smaller portfolio than we'd anticipated. There was a higher level of churn. And that turned out to have something of a silver lining. Some of the mortgage business that departed was very low margin, originated under the Academic Union distribution agreement, and single-product customers. We held on to the deposit base pretty much in its entirety. And what we have now is a smaller but more profitable portfolio and still a substantial market share increment in Norway and 235,000 new customers.
We were really pleased that among the private banking customers, we saw more AUM come across than we'd expected. And we're now starting to see those customers be more active. We're only three months in. So, for us, the synergies, if you like, are all about taking a portfolio of customers that has quite a high proportion of single-product mortgage-only customers and deploying the full Nordea product range into that customer base. And it's a customer base that Danske was, for the most part, not permitted to sell to because they had been originated under distribution agreements that forbid them from doing that. So, we have the opportunity now to deploy the full Nordea product suite into that customer base. And we intend to do so.
You've had the capital markets thing coming in Q4. Maybe you can give us a hint which aspects of your business and which strategic priorities will be in the key focus?
Yeah. So, I don't want to front-run too much what we want to say then, but I think two key areas, and this is something that Frank talked very briefly about in our Q4 results, but two of the key areas that we intend to focus on is how we deliver growth, which markets, and what some of the key initiatives will be, and that's really important. We understand that growth is a key differentiator, so we'll talk about how we improve the penetration of ancillary products. We'll talk about how we deliver growth in private banking, wealth management, life, and pensions, the long-term savings that are so critical to our business. And we'll also talk about the advantage that we think we can deliver from having unique scale across the Nordic markets.
So, as the only bank with a significant presence in each of the four markets, how do we demonstrate that that can be a real competitive advantage, both from a growth point of view? We have more customers. We think we can do more with those customers. But secondly, from a cost efficiency perspective. And that cost efficiency comes from, first of all, deduplication and simplification in the technology landscape. So, not substantial technology investment, but actually, as I say, deduplication and simplification. And something similar in terms of our processes. There's no reason for us to have, as we do today, four different savings value chains. We can ensure that what we deliver to our customers is appropriately tailored for that market. But what happens behind the scenes can be done on a common basis.
We think that's the key to demonstrating a real advantage in cost efficiency terms from having unique Nordic scale.
Can we touch more broadly on the regulatory front? Because your capital requirements are now higher because we saw increases in the Finnish and Norwegian systemic risk buffers last year. There will be also an increase of another 10 basis points from Finnish FSA reciprocation of specific sector, Danish SRB. Maybe can you share what are the key debates that you're having with the regulators? What are the key concerns of the ECB and the local regulators? Because before, it was CRE. Is it now loan growth or cybersecurity? What are the key agendas?
I think that the ECB's current focus is, first of all, on they think that generally banks across Europe are insufficiently focused on adverse developments. And maybe this is them just ensuring that banks and their management teams don't become complacent. But there's been a real focus on geopolitical and macroeconomic downsides and banks' resilience and ability to withstand those. So, that's one of their first areas of preoccupation, alongside things such as climate change requirements and others. But it is this focus on resilience. And I think we screen pretty well in terms of both business model, but also capital and funding resilience. And so, we're happy to stand up to that scrutiny. On capital requirements, that's a bit of a vexed question because Nordea is objectively one of the most profitable and lower-risk banks in Europe, yet we're subject to higher capital requirements.
Both parties that contribute to those, the ECB and the home regulators, will go, "Well, we care about our bit. And we're very keen to see a more holistic view of capital and capital requirements deployed across Europe to make sure we've got a level playing field." Because we compete against banks that are subject to different capital regimes, whether that be in our markets with our Nordic peers or in relation to other European banks that will compete for large corporate business across the Nordics, as an example. A level playing field is absolutely key and we'll continue to push very hard for that.
I would place one last question. Looking at your backbook mortgage market share in Sweden, you have managed to preserve the mortgage market share at 14%. If we compare to the bigger players, they saw some attrition to the smaller entrants, like SBAB. Could you please talk about what are the key levers of strength of Nordea in Sweden? Maybe you can also touch on your competitive positioning in the mortgages in the other markets?
So, Sweden's been a particular area of focus. It's our biggest market and actually with some of our stronger competitors. But we think it's really important to win in Sweden. And so, it's received some pretty intense focus over the last few years from the management team. In mortgages, what's been key has been service and fulfillment. You don't find us slipping down the list price tables and those sorts of things. We're usually top quartile. And so, it's been about service and fulfillment. Now, we need to make sure that we can maintain that when the market picks up and when volumes are higher. But we were doing that back in the COVID days when volumes were pretty strong anyway. So, I think we'll be able to maintain that.
And I think we've done also extremely well on the business banking side in Sweden, where, again, we've seen positive market share development versus the peers. And again, that's about just focus and service, as I said to you earlier in the conversation, first-class products, first-class service. So, that continues to be our focus. And we won the award for best bank in Sweden last year. And I think that was a real testament to our efforts and our success there. In the other markets, slightly different dynamics. We have to deal with a big mutual in Denmark that prices very aggressively. Again, you've got to be absolutely brilliant on service in order to deal with that. Norway, I think competition is a bit more even and we hold our own there. And in Finland, we defend the strongest market share in the market. So, different dynamics in different countries.
Interesting. Thank you very much, Ian, for joining us today.
My pleasure. Thank you for having me.