Good morning, welcome to Nordea's 2nd quarter 2023 result presentation. Here in Helsinki, we have our CEO, Frank Vang-Jensen, our CFO, Ian Smith, and my name is Matti Ahokas from Investor Relations. As usual, we'll start with a presentation by Frank, and after that, you will have a chance to ask questions. To ask a question, please remember to dial into the teleconference. With those words, I leave the floor to our CEO, Frank Vang-Jensen.
Good morning! Today, we have published our half year and second quarter results for 2023. During the first half of the year, the geopolitical landscape has remained fragile. Moreover, macroeconomic uncertainty and persistently high inflation have put pressure on both private individuals and corporates. We have also seen turbulence in the financial markets. In this challenging environment, banks are expected to be solid and trustworthy corporate citizens in society. Nordea is one of the most stable and profitable banks in Europe. Our role and aim are the same as always. We are here to support our customers while delivering stable and predictable financial performance. Our franchise is resilient. We are the only Nordic bank with a very well-diversified pan-Nordic business model, and we have a sound financial risk position and a strong balance sheet. On top of that, the Nordic region is a very stable and profitable banking market.
All this gives us a unique position and makes us a safe and strong partner for customers, shareholders, and broader society. Over the past four years, we have consistently improved our performance and are pleased to report yet another strong set of results in the second quarter. We continued to drive high levels of customer activity and strong results. This led to a return on equity of 18.4%. Let me go through some other highlights in Q2. Total income increased by 22%, mainly driven by a 40% increase in net interest income, despite significant negative effects from the weaker Norwegian and Swedish currencies. Net fee and commission income decreased by 6%, mainly due to subdued capital markets activity and lower savings income. Net fair value result and net insurance result were up 14% and 28%, respectively.
Costs are developing according to plan, and the cost-to-income ratio improved to 40% from 46%. Operating profit was up 26% year-on-year. The economic slowdown and interest rate increases have had a negative impact on business volumes, mainly on mortgages, which were stable year-on-year. Corporate lending was up 4% and continues to be the main lending growth driver of 2023. Retail deposits grew by 1% year-on-year, and corporate deposit decreased due to seasonal effects from dividend payouts and the normalization of deposit levels in some sectors, such as the energy sector. Assets under management were up 2%. All four of our divisions and all 18 of our business units delivered a good performance and positive jaws. The overall performance shows the strength of our franchise. It is evident that the backbone of our business is strong.
Our credit quality remains solid, with low net loan losses. Also, our capital position continues to be among the best in Europe. Building on our current performance and assessing the business development for the rest of the year, we have upgraded our outlook for the full year. We are expecting return on equity to be comfortable above 15% this year, compared with the earlier outlook of above 13%. I will get back to the target update at the end of the presentation. Let's now look at the second quarter results in more detail, starting with the income lines. Net interest income was the main growth driver in the second quarter. The NII result reflects both the macroeconomic development and changes in customer behavior. Net interest income increased by 40% year-on-year.
Monetary policy rate hikes are resulting in improved deposit margins across business areas and countries, creating a tailwind for net interest income. Retail deposits grew by 1%, and corporate deposits decreased by 7% year-on-year. While the deposit margins are supporting the result, it is clear that the economic slowdown and interest rate increases have had a negative impact on business volumes. Higher living costs and lower consumer confidence have been reflected in lower demand for housing loans and investment products. Mortgage lending remained stable year-on-year. Despite the economic slowdown, our corporate lending volumes have continued to grow, particularly in Norway and Sweden. Corporate lending grew by 4% and continues to be the main lending growth driver of 2023. Lending margins have come down, mainly driven by lower mortgage margins, particular in Sweden.
It is also worth noting that the weaker Norwegian and Swedish currencies had an impact of approximately EUR 145 million on our net interest income. Rising rates are understandable, putting pressure on our customers. However, I am glad to see that our customers have, in general, adapted well to the new interest rate environment. We have maintained proactive support for our customers and have delivered relevant advice and services. We have also further developed our deposit offering for both retail and corporate customers. The picture for net fee and commission income was mixed during the first half of the year. Net fee and commission income was down 6% year-on-year. Payment and card income increased by 2% in local currencies year-on-year, due to higher customer activity.
Brokerage and advisory fee income was impacted by lower customer activity in a subdued market and was flat. However, we are seeing signs of recovery in this area. As management fee income slightly improved quarter-on-quarter, total net flows turned positive in Q2, with a continued strong inflow from internal channels. Also, we have seen a positive development with regard to our pension offering, as such products are being prioritized in these rather volatile markets. Net fair value results were supported by continued high levels of customer activity. We continued to support our Nordic customers in meeting their financing and risk management needs in a volatile environment. FX and interest rate hedging products remained in solid demand. Market making operations were up during the quarter, and treasury result supported the NFV development. Overall, net fair value result increased by 14%.
The high inflation continues to affect our customers and society in general. Our cost increased by 7% year-on-year as we continued to manage strong inflationary pressure, while at the same time making further additional investments. These investments are related to protecting us and our customers against financial crime, strengthening cybersecurity, and enhancing our technological capabilities even further. All this is in line with our plan. In the second quarter, we improved our cost-to-income ratio to 40% from 46%. Our risk position is strong and credit quality remains solid. Our pan-Nordic loan portfolio is well diversified and spread evenly across the Nordic region and across different sectors. This is a unique structural advantage, which enables us to avoid larger concentrations. We see no signs of stress in any parts of our portfolio.
For instance, in the commercial real estate segment, we have a high-quality portfolio with relatively low levels of risk exposure and no concentration in any specific country. Naturally, we are following the impact of macro developments on all our customers very closely. In the second quarter, individual net loan losses remained low at EUR 25 million or 3 basis points, despite the Nordic economy's slowing. Overall, net loan losses and similar net results for the second quarter was EUR 32 million or 4 basis points. The increase compared with previous quarters is explained by lower reversals rather than increasing new provisions. We have kept our management judgement buffer unchanged in local currencies, which translates to EUR 572 million. In this way, we continue to ensure a strong reserve to cover potential future loan losses in the continued uncertain environment.
Our capital position is among the best in Europe, and we continue to deliver market-leading returns for our shareholders. Our CET1 ratio increased to 16% from 15.7% during the quarter. This is 4 percentage points higher than the current regulatory requirement. Our capital position demonstrates our strong capacity to support customers and society. We also remain focused on capital excellency in accordance with our strategy. As a part of this, we launched our fourth share buyback program of EUR 1 billion at the end of April. Let's now move on to our business area results. During first half of the year, in all our divisions, income grew faster than costs, and our aim is to continue to deliver positive jaws.
In Personal Banking, we grew our business volumes in line with the market and continued to build strong digital relationships with our customers. We are clearly being impacted by the economic slowdown and rate increases, mainly in terms of mortgage business volumes. Mortgage volume growth followed the slowing housing market. Total lending volumes were stable in local currencies year-on-year, while deposit volumes increased by 1% due to savings deposit growth across the countries. Customer investment activity and demand for new loan promises remained lower than a year ago. We continued to see increased interest in deposits and further expanded our deposit product offering across the markets. For example, customers in Sweden can now make recurring transfers into both savings deposits and investment funds through digital channels.
Meeting activity and traffic to our customer advisors remained at high levels, driven by high customer demand for advice related to personal finances. Digital customer activity further increased, with private mobile app users up 7% and logins up 9% year-on-year. In Sweden, we drove a 21% year-on-year increase in digitally generated leads for markets and savings advisors, supporting our continued market share growth. By consistently adding new products and services and increasing our use of data analytics and automation, we have attracted 1.2 billion logins to our mobile bank in the past year alone. We also continued to expand our sustainability product offering. The SG share of gross inflows into funds remained high at 31%. Total income was up 29%, driven by strong NII growth.
Return on capital at risk improved to 27%, the cost-to-income ratio improved to 45% from 51%. In Business Banking, we maintained the solid business momentum and continued to grow our volumes. Total income was up 25%. Lending volumes increased by 4% in local currencies year-on-year. We grew our SME lending volumes, especially in Norway and Sweden. This clearly demonstrates our relevance and strengthened position in the SME segment across the Nordics. Net interest income was up 41%, driven by lending volumes and higher deposit margins. The quality of the loan book is sound. Net loan losses of EUR 37 million were driven by a small number of customers, mainly in the construction and retail sectors. Customer satisfaction improved during the quarter. We increased our proactive support for customers to help them tackle the current macroeconomic challenges.
To support our aim to be the leading digital bank for SMEs, we continued to develop the Nordea Business Netbank and mobile app. The digital customer experience is getting a positive response from our customers. For example, customer feedback on the Netbank improved, and mobile bank ratings averaged above 4.4 out of 5 for the quarter. We are committed to accelerating the transition to a more sustainable economy. In May, we introduced a new Sustainability Guarantee, which makes it easier for customers to obtain financing for sustainable investments, such as solar panels and energy renovations. Return on capital at risk in Business Banking increased to 23%, compared with 19% a year ago, and the cost-to-income ratio improved to 37% from 43%. In Large Corporates & Institutions, we made further progress with our strategy execution.
We grew lending volumes by 3% year on year, excluding FX impacts. We are seeing solid demand for credit along among large corporates customers, and with our strong balance sheet, we are able to meet the demand. Deposit returned to more normal levels following the dividend season and the exceptional events in the first quarter. In debt capital markets, the activity level normalized, but in equity capital markets and mergers and acquisitions, the uncertainty remained. Activity levels somewhat improved, and our deal pipeline strengthened during the quarter. Credit quality continued to be very strong, and we saw net reversals during the quarter. Global Finance Magazine named us the best bank for sustainable finance in Denmark, in Finland, and in Norway. We remain a leading platform for sustainable advisory services and are on track to facilitate EUR 200 billion in sustainable financing by 2025.
Return on capital at risk increased to 19% in the quarter. In Asset & Wealth Management, we were able to remain on the growth track, even in challenging markets. Total income was up 14% year-on-year. We maintained strong momentum in private banking and continued to support our customers with high-quality investment advice. In line with our growth plans, we attracted further new customers and secured positive net flows of EUR 1.8 billion. In life and pension, we continued to execute our growth plans. Gross written premium in the quarter amounted to EUR 2.2 billion, up from EUR 1.4 billion a year ago. The strength of our franchise is visible in the positive net flows of EUR 2.6 billion from our internal channels. Assets under management were up 2% year-on-year.
The net total inflow was also slightly positive during the quarter. Our long-standing focus on ESG was recognized by the 2023 Responsible Investment Brand Index, which awarded us a top ranking in the Nordics. To support our strategic objective to be a digital leader, we launched several enhanced functionalities for savings and investments in the mobile app. We also introduced features to facilitate closer customer advisor interaction and reduce time to market. Return on capital at risk was 60%, the cost-to-income ratio improved to 39% from 40%. To sum up, the first half of the year has been strong for Nordea. The second quarter was actually the 10th quarter in a row for which we are able to grow our analyzed operating profit.
Since we launched the repositioning of the bank in 2019, we have consistently improved our business performance in different economic circumstances. We have established a new, sustainable, higher level of profitability and are now among the best-performing banks in Europe. Let me emphasize that all our four business areas across the countries are performing very well and contributing to the strong group result. With a unique business mix, we are running 18 well-performing business units, and we will continue to improve on this journey. Our pan-Nordic business model is resilient and enable us to support and advise our customers and perform well in the current macroeconomic uncertainty and volatile financial markets. Our assessment is that we will continue in this direction during the second half of the year. To reflect this, we have upgraded our outlook for the full year.
We expect return on equity to be comfortable above 15% in 2023. In addition, we are reassessing our long-term financial target for 2025. We will provide a target update in connection with the release of our fourth quarter report. Building a successful business is a marathon rather than a sprint. That is also our mindset. At the same time, we are consistently striving to improve our performance further. We remain committed to delivering the best omnichannel customer experience, driving focused and profitable growth, improving operational and capital efficiency, and maintaining positive jaws. Most importantly, we aim for nothing less than to serve our customers to the best of our ability and be the preferred partner for them now and in the future. Thank you.
Thank you, operator. We're now ready for the questions.
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. The next question comes from Magnus Andersson from ABG SC. Please go ahead.
Yes, good morning. First of all, on NII, since you are the only truly pan-Nordic bank, if you could tell us about the main differences now between the underlying NII dynamics in between the Nordic countries. Primarily thinking about lending margins, deposit margins, but also perhaps migration from transaction to savings accounts, and how you're thinking about paying a deposit rate on transaction accounts in Sweden. That's the first one.
All right. Hi, Magnus, it's Frank. Thank you for the question. Of course, a bit difficult to exactly say how it will play out, but at least some flavor.
Yep.
Looking at the mortgage market, which of course is a big driver, Denmark, stable. Norway, quite stable. Finland, a bit down, but we are holding up and don't see any reasons for why that should not happen also in the future, and quite much pressure on the Swedish market. Total, it will lead to a pressure somewhat down on the mortgage margins. When it comes to corporate lending, there's no big signs of any sort of the deterioration of the market, of the margins, and I should say that goes for all four countries.
Of course, at the end of the day, it depends about where, you know, how much growth there is in the market, and the tendency always, if you see, you know, growth of a certain size, then it will support margins. If you really start to see very slow growth, then the competition will increase even further, and price will be a parameter. There are no such signs at the moment. On deposit side, it's... I think, you know, all people, corporate societies are now starting to, or starting, they are adjusting to positive rates, and we all are learning to live with new rates.
That goes also on sort of like how to get the right offering in place, but also as customers, how you sort of like use the offering that we offer the customers. The trend is that the usage of savings account and time deposit is increasing, leading to a lower share of amount being on the or share being on the deposit or the transaction account. Where that will sort of find its balance is difficult to say. There will always be a significant amount on transaction accounts as it's a very small numbers. For the individual, it's very low. It doesn't mean anything.
Of course, when you have 7 million customers, it will of course add up. I should say that that's where it is. If you add it all together, and then would ask the question: What would that mean to the NII? I would say that is very difficult to say, but it might be that it still will come up a bit, but very difficult to say.
Okay, thank you. If I might follow up then, you mentioned Swedish mortgages, where obviously we see quite fierce competitive pressure on the three-month margin in particular. Do you think it will be possible to increase that margin by lowering the discount? Because it's pretty close to record high levels from a historic perspective. Secondly, just if you could update us again on what share you have on transaction accounts now in your Personal Banking and Business Banking operations so that we can compare to Q1. Thanks.
Take the first one on the mortgage margins. You can always reduce sort of that discounts. The problem is by that is, then you also send a clear signal, and you will defend something, but you will be losing market share over time. What happens now is we have seen this so many times before, so the market is quite compressed when it comes to pricing, that's for sure, and the growth is very slow in the market. We have chosen to be as active as we have been all the time. We're not using price as a lever. We are having a sort of like a little bit above average market price, I should say, but still we are gaining market share. The recipe works.
As it is a commodity to some extent, then our intention is just to keep up going. Over time, when the growth in the market will slowly start to come back, the prices will adjust, but it might take some time.
Mm-hmm. Mm. Transaction accounts in Sweden, are clients asking for it? Because I haven't seen you, introducing a rate on those, at least not yet.
If we start with the offering, the key question is: Do banks and we, as us, we are talking about, do we have an offering that is attractive to our clients? And the answer is clearly yes. If you are choosing a savings deposit account without any sort of binding, you'll probably get a 1.7%-2.0% interest rate on your deposit. If you take it with three months sort of like binding, you'll get it about 3.5%, and if you take 12 months, it's probably at around 3.9%, something in that area.
You get a very, very good offering, and that is what we, what we tell our customers, and we ask them to do. What is left on the transaction account is actually quite limited, and for most people, it means absolutely nothing, whether there were an interest rate or not on that account. Our opinion is that, you know, there are so many costs related to having a transaction account, and the alternative would to be starting to get paid for the account as such. Remember, we have 3,000 people working with nothing else in transaction monitoring, for example. That, of course, brings a lot of cost, just an example.
It's very clear that the customers are not asking for it. The customers are asking for alternatives that will enable them to have a good return, which we have. Over to you, Ian, please.
Yeah. Hi, Magnus. You asked about the proportion on savings versus transaction. On average, across our markets, it's around about 60% on savings deposits. Varies from country to country. A higher proportion of savings accounts in Sweden and Norway versus Finland and Denmark. In terms of how that's moved over the last 12 months or so, probably a couple of percentage points tilted in favor of savings accounts, which is understandable, given, as Frank just outlined, the quality of the products on offer.
Yep. Okay, thank you. Just a second on asset quality, brief. I mean, if you assume that there would be a severe recession or a significantly larger downturn that currently is in the consensus expectations, where do you think loan losses would come from? Because when I look at your slide 20, it looks like the theory segment should be quite resilient.
I agree. It's clearly not the household side. Then, of course, there will be sort of like individual corporates that would be exposed, I should say, within different sectors, right? Right now, it's a construction sector that is getting a little bit headwind here and also some of the retail. We do see no stress in our portfolio at all. When it comes to the commercial real estate, we could take that, you know, immediately, as you touched it. We have a very small portfolio, and I think that there is a lot of, like, confusion, sort of like in the market about it, in general, how big the different banks are. Our portfolio is a very well-diversified pan-Nordic portfolio.
Of our total group lending, EUR 24 billion is for commercial real estates. That corresponds to less than 8% of the total group lending. Looking at the Swedish share, it's correspond to roughly a little bit less than EUR 8 billion. That translates to 2% of our group lending. Two percent of our group lending is to Swedish commercial real estate. It's very small numbers compared to some of our peers and also compared to our size. I am not concerned in any way of the exposure we have within the Swedish commercial real estates. We do see no stress within our sort of like own portfolio right now. Of course, there will probably come some credit losses over time, as it always will, but it's nothing that can shake us in any way.
That's for sure.
Okay, and what would be the trigger here to utilize? You have EUR 572 million of management overlay, and you mentioned construction, that's less than 3% of your portfolio. I mean, how should we think about loan losses? They are close to zero now, moving into 2023, if you 2024, if you look at the consensus GDP scenario, I mean, where should your net loan or should there be any net loan losses, really, with the huge reserve you already have in place?
I think you just, you know, having learned from the past, right, and the different sort of, like, economic cycles, then, you will always face, you know, provisions and sometimes also realize loan losses, and it could come from different angles. It could come from sort of like all sectors, and we just need to be prepared for that. I think we are well prepared, as you said. We have a management buffer of EUR 570 million. This quarter, actually, it is not sort of like we have a bit higher, very small, but a bit higher than previous years, credit losses. That is not due to higher gross losses, that is due to lower reversals.
I think what is happening now is that it becomes more difficult to sort of like solve the weak cases. It become more difficult to sort of like find a new home for them, find a new bank. That's probably gonna, you know, continue to be the case for at least some quarters into the future, and let's see what will happen. I'm quite sure that we will start to see more credit losses in general in the banking industry, but there's no signs of something very dramatic happening. That's for sure. To get a bit higher number would be just very natural.
Okay. Thank you very much.
Magnus, just a follow-up in terms of, you know, you highlighted the conservative management judgement buffer that we carry.
Yeah.
Those are really... I mean, in the same, I guess there's an analogy to... how we talked about it with COVID, which was where we would either expect to see losses come through, and we would deploy that against that buffer against those losses, or if we didn't see them coming through, we would release. I think we're in a similar position now. We do a number of stress tests that look at where, you know, where things might turn out if the world gets a little bit worse. We're very comfortable that we can handle the impact of those stresses with that buffer.
Oh, clear. Thank you. Thanks.
The next question comes from Nicolas McBeath from DNB. Please go ahead.
Good morning. A couple questions on costs. We see now that cost growth is accelerating a bit, and the FTEs are up, I think, 7% year-over-year. Could you say something about if you expect FTEs to keep increasing at a similar pace over the next few quarters? More broadly, if you view the improved revenue conditions as having changed your kind of cost budgeting, if you're willing to accept new projects and investments to a greater extent into the likes of tech and risk, as you mentioned, these were cost drivers in Q2.
Hi, Nicolas. Yes, you do see higher than historical cost growth. Partly that's because we're comparing with a lower run rate in the previous year. As you know, towards the end of last year, we stepped up our investment in IT and risk management. Our Q4 full costs in 2022 were higher than you'd seen before. That sort of accelerated growth you saw in the first half of this year will iron out over the course of the full year. You know, we remain committed to our guidance for the year of around 5% cost growth. In terms of FTE increases, there's two sources there.
The first is, as I said, our investments in IT and risk management means that we've hired people, and certainly on the risk management side, in the area of financial crime, where we have to respond very quickly to changes in rules. The way we have to do that is to hire people in order to undertake more transaction monitoring before we can, you know, systematize or automate anything there. I would say that we got quite far ahead in the hiring cycle over the last few quarters, and so you shouldn't expect to see substantial increases in FTE from here. In addition, one of the drivers of the FTE increase was the acquisition of Topdanmark, that brought in around 400 people. But the key message you should take away is, we don't expect to see big step-ups in FTE from here.
In terms of the revenue environment being, I guess, more enabling of further investment, I think it's still quite delicate. I mean, our culture here, we've said quite often, is that it's a very high bar to spend money. That continues. I think in some of our areas, we, as I said, in terms of things like IT, risk management, and new product development, we are investing, but I think we're quite cautious because of the uncertainty going forward.
Okay, thank you. Another question related to cost. If you have any update to provide on when you expect to stop paying the resolution fund fee?
We've had a clear expectation that the 2024 resolution fund fee should be lower. Where that ends up, I think is, we're in the hands of the authorities. Nothing to suggest that we won't see a reduction next year. And I'm hoping that given that they have made good progress on filling the resolution fund, that it should be a good deal lower next year.
Okay. Thank you. That's all for me.
The next question comes from Andreas Håkansson from Danske Bank. Please go ahead.
Morning, everyone. Back a little bit to the NII and to the now famous slide 17. You talk now about the hedge, which is interesting, and you show the sensitivity in the coming years. I'm just wondering: could you tell us a little bit more about the hedge impact? I mean, we've seen now rates going from -50 to 350, so you have a lot of tailwind going into the next couple of years. Could you tell us, in a way, what's the accumulated impact that we should see from the hedge over the next couple of years? If we start with that.
Morning, Andreas. What we've tried to do with our disclosures now is give a sense of the combined impact, if you like, when we see rate increases. As principle about rate increases, I guess, it should also work in the other direction. What we've given this time, as you see, is, first of all, the dampening effect of the deposit hedge we have in place as rates rise. Then there are two components, and what we're trying to show here is that there is a sort of an enduring effect, I guess, from these interest rate dynamics in NII, rather than there being a cliff edge.
The first piece that we show is that we do have in our loan book loans that reprice on a three, six, and 12-month basis. We see a spillover of NII improvement in the year following because of those effects. As you point out, as we then start to roll over our hedges, as we do every month with higher priced hedges, the dampening effect reverses. What we see in the second subsequent year after the rate increase, is the benefit of those higher hedges coming on, those higher rated hedges coming on stream.
There's a couple of dynamics at play there, and we're trying to be helpful in just explaining, almost like the sort of roll-through effects after the immediate impact of a rate rise.
That's interesting. I was listening to the JPMorgan conference call the other day, and Jamie sounded like the net interest income his view was gonna be, I can't remember if he said materially or significantly lower in a couple of years out compared to today. What's the outlook when you look at NII, let's say, 2025 compared to a 2023? Roughly, of course, not an exact guidance.
As we see rates plateau and then start to fall, which I think is the general expectation, I think just where the market's been struggling to predict is the timing of that. But that we should expect to see something like that. Of course, a bank like Nordea, that undertakes deposit hedging, will see the impact of those lower rates softened, I guess, because of the benefit.
Mm.
of the hedges. You know, I suspect that general pattern is reasonable to expect, but we'll see, a bit of underpinning from the hedge impact, that others that don't hedge won't benefit from.
Yeah. Thanks for that. Just a question on Norway. We know that there's another Nordic bank that said they're gonna sell its Norwegian retail business. I think, Frank, in the past, you've been saying that retail Norway is something that you could be interested in adding to. Have you looked at, what's for sale at the moment? Do you have any comments on that?
Not more than that we have a good franchise, a strong franchise in Norway, and our main focus is growing organically. Of course, if a target is for sale and the price is reasonable, and we feel that it will fit well, then we of course, are interested in looking into it. No further comments, and nothing to the concrete target that you're talking about.
Yeah. Fair enough. Thanks. That's it from me.
The next question comes from Namita Samtani from Barclays. Please go ahead.
Good morning, thanks for taking my questions. I've got three, please. On the NII sensitivity on page 17, the deposit hedge, why didn't you increase the size of the deposit hedge now if you're expecting rate cuts in 2024? Is that not possible? Is it safe to assume the hedge is sort of invested in 5-year euro swaps? Secondly, how does the LTV on real estate management lending stay flat at 53% over the year? We can see companies such as Entra and Castellum, which you lend to, speaking about valuation declines of around 8.5% and 10% in their portfolio since peak levels. Is there some sort of time lag effect for the LTV here?
Lastly, just on the fees and commissions, I find it a tiny bit disappointing this quarter, especially related to asset management. Net flows were flat quarter-on-quarter, granted, driven by wholesale distribution. Are we going to see any improvement here, or are the lack of inflows the new normal now? Thanks.
Should I take the last question first, then, Ian, then you can take all the other ones, please. As the management, I actually think we have a strong quarter on inflow within the internal channels, and that is a main source of ours, as you know. 2 point, I think it was 2.8 billion EUR in the quarter. That is not bad. Would we like it to be higher? Of course, but it's clearly progressing. That's one. Where we are struggling is within, as you said, wholesale. That's the business that is external to Nordea, that goes to other banks and similar partners outside the Nordics, primarily.
The reason for why we have an outflow here is that we have had for six years, or something like that, a quite big product with the low duration covered bonds. That has been attractive as we had no interest rates and even negative interest rates in the environment. The investors have plenty of options to park their money on deposits and whatnot. That's the main reason for the outflow. What it's about is that the guys are coming up with new products that can fuel sort of like growth, and of course, we would like to do so and are working on it.
The core business of ours, which is internal channels, is actually looking quite good, when it comes to the progress. Over to you, Ian. Yeah.
On the NII sensors. Hi, Namita. Sorry, I should say good morning. On the NII sensitivity, I mean, we look at a number of things when you try to estimate behaviors in something like the deposits, and we then make a judgment about duration on hedging. I think we prefer to focus on what we think the duration is, manage the scope of it, rather than be opportunistic in expanding the scope and scale of it. We have tweaked it a little bit over the last couple of quarters, but it isn't a sort of key area of focus for us.
We think it's important to track the behavior of the customers there, rather than thinking about being opportunistic, as I say. In terms of what it's invested in, it's a range of durations from three to seven years. The average is a bit over 3, because that reflects the risk in the portfolio. With the LTV flat point, I understand intuitively you would think that you would expect to see those LTVs increase. There's a bunch of different things in the portfolio. The average changes slowly because of those different moving parts, but we update each of the components quite regularly, and I think it just shows the diversification in the portfolio.
That's helpful. Thanks very much.
The next question comes from Sofie Peterzens from JP Morgan. Please go ahead.
Yeah, hi. Here is Sofie from JP Morgan. Just to follow up on the hedging, please, would you be able to share with us what the size of your hedges and also kind of what the backbook yields on this book is? Also if everything is invested in EUR. My second question would be on the LCI deposits. They fell 21% quarter-on-quarter. You said it was dividends and some exceptional items in Q1, but it looks quite broad-based across the countries, apart from Sweden. If you could just elaborate a little bit more here. Kind of just a follow-up question on the CRE. You mentioned that 2% of your CRE book is the kind of the risk, high-risk customers. How do you define high risk?
Would a junk-rated counterparty be defined as high risk, or would it be defined as low risk or something medium risk? If you could just elaborate on how you define high risk. Just a very quick final question. What if your Nordic peers had some Polish FX mortgages, given that you used to have operations in Poland in the past? Could you just confirm that you have no FX mortgages in Poland? Thank you.
Sure. Thanks, Sofie, and good morning. That's a big list you've got there. The easy one first, nothing in Poland. On NII, we tried to be helpful with disclosure, particularly around how it impacts, around the hedge, particularly how it impacts the broader NII dynamics. I'm not going to give any more than we have at the moment here, so, I'm afraid I can't be more helpful to you there. LCI deposits. I think we need to take a bit of a step back, and what we've seen in our large corporate business is over the last few quarters, we saw some quite strong, unusually strong growth in LCI deposits.
That came particularly in Q3 and Q4 last year from companies in the energy sector. It's a combination of both those companies being more profitable, but also building stocks of liquidity. What we're seeing now is that normalize. So, we've seen large energy companies have to meet big tax bills and pay large dividends, for example. So that is part of the dynamic that we see, particularly moving from Q1 into Q2 as those payments have been made. Nothing more than the, I suppose, the reversal of what we saw in the second half of last year, and certainly nothing that indicates a secular trend.
There are always, at the margin, some large corporates that are very price sensitive, and we do see some things move in and out with those, large European corporates, depending on, where the treasurer is able to get, best pricing. You know, that sometimes comes into play. The main impact here is those energy companies and the reduction in deposits from them, and, on a sort of broad basis, the LCI deposit base is pretty stable.
Yes. Just to add, we could increase it tomorrow if we wanted. It's just a price issue. There are so much money out there that floats around. It's just a matter if you want to pay for it or not.
Your question on the definition of high risk, we'll get investor relations to clarify that afterwards.
Okay, thank you. Could I just then ask, one more question? You, you mentioned earlier that you have got, a little bit more transaction accounts in Finland, and Denmark compared to Sweden and Norway. In Finland, it seems that you're still paying very little in general on kind of savings and term deposit accounts. How, how do you see the competitive environment for kind of potentially more competition on the deposit side in Finland? Or do you think it will be more benign in Finland compared to the other countries? I think you only have the 2.4%, flexible, savings or term deposits, that you offer in Finland, but it seems that the rates in Finland are pretty low on the deposit accounts. If you could just elaborate, please.
All the countries, as you said, are different, like in practices, also how much are the customers distributing to investment products and how much is on the savings account. That, of course, also leads to how much is on the transaction account. In Finland, we are competitive and the product that you mentioned, the savings product, is one of the, you know, the blockbusters. We have a good position, I should say. There's nothing that as of for now, looks as it should change in Finland. Of course, we are following very carefully, thinking about cost and thinking about the market competition.
Great. That's very helpful. Thank you.
The next question comes from Jacob Hesslevik from SEB. Please go ahead.
Yeah. Hi, good morning. Thank you. I have a question on CRE lending as well. I mean, you have very low exposure in Sweden, as you've mentioned before, but, I mean, what is your view here? Do you want to grow it? I mean, Nordea has ample capacity to take market shares in this market, or are you more just helping your existing customers?
It's Frank. The latter, I should say. Of course, as you say, we have a very low share, first of all, of CRE in the total group lending. That's for sure, and I think there are some that sometimes forget that. That is a strategic choice. Then secondly, when it comes to sort of like the Swedish market, there's a lot of buzz about Swedish market right now, we have very limited size. If we would, we could increase, and probably also without increasing the risk or the average risk of the bank. We don't have such intentions, but we, of course, want to help our customers as long as it's not too risky, and we can get a...
get comfortable about the sort of like the stickiness of the cash flow. It's all about cash flow lending we are doing, and then with the pledge and the collateral in the property within a low LTV. There will be business opportunities, but it's not sort of like a tactical area, it's more like to support our customers.
We have done.
Yeah
... over the last, the last two quarters, where we've had some really high-quality companies come to us, and we've been able to help them out, and it's been good business for us. Yeah.
All right. That sounds good. Just a follow-up. I mean, you're saying you want to help your existing customers, but I was just wondering, how many good properties are still out there that you're comfortable to take collateral in?
It's not about the property, to be honest. It's about the company. It's about how it's run. It's about the contracts. It's about sort of like the comfort in the stickiness of the cash flow from the company. Of course, at the end of the day, we will have to ensure that we have a property, that if it should go wrong one day, then we would have a very nice property that just could very easily find a new home. That's the way we think. There, you know, in all crises, and if we consider we are having some sort of crisis right now in the economies around the world, then the properties will shift hand.
Wealth will shift hand in these sorts of crises, and commercial real estate is always playing a role. I think that's what you're seeing in Sweden right now. There are well-run companies that are, and there are companies that are a little bit too leveraged, and there are companies that has had holding companies that are way too leveraged, and then there are companies that have way too much dependency on the bond market. That just changed the fact that there are still well-run companies with fine properties, in which you could take a pledge and then have a very low risk.
When we sort of like have customers having these, and they want to expand with us, then we will have a positive view, but we are not gonna change or increase the risk level of the bank, for sure.
All right. That sounds very comforting. One may, one last question, if I may. You mentioned, you will come back with updated targets in connection with the Q4 report. Should we expect the same metrics but a higher guidance, or can you say anything about adding or removing certain targets?
Jacob, we've got one target for 2025, which currently is ROE above 13%, so that's what we'll upgrade. Of course, we'll explain what contributes to that, but that's the target that we're going to revisit.
... Yeah, we should not expect you to add a cost income target or anything else for 2025?
That will be more support factor as we have as of now, and we probably will look into that as well, but the target is the return on equity, and that return on equity, in our view, consolidate is all. Here, we just have to remember that we have established ourself on a quite much higher level, profitability-wise, than we were back in the days in Nordea. That's why we also feel comfortable about about increasing the the the the 23 full year target and basically stating that we expect to be comfortable above 15%. At the end of the day, we want to be best in Europe, including the Nordics.
When we set the target for the coming period, we will have that in mind, but no further comments at the moment. We'll come back to that, if that's okay with you.
Of course. Thank you so much for taking my questions.
The next question comes from Nick Davey from Exane. Please go ahead.
Morning, everyone. Two questions, please. We've covered both topics, but if we just come back on CRE, I understand the fascination with Swedish CRE risk. But just looking at your slide 20, and excluding things happening sort of outside of your bank, if you just look at your own loan book, is your Swedish CRE book any higher risk than the other Nordic geographies? If so, it's obviously not clear in LTV or interest coverage, multiple terms, so what is it that makes it higher risk? Is it interconnectedness or debt bond finance reliance? Just any other color on that would be helpful. Second question on NII, going back to this famous slide 17. I'm struggling to reconcile kind of the top half of the slide with the bottom half.
I mean, the bottom half is seems to be saying that pretty much Q2 is the run rate for 2023. I mean, that gets me off the top end of the 2023 guidance and gets me pretty close to the 2024 range. The bottom half of the slide seems to say, let's take Q2 as the run rate. When I listen to you talk about the kind of fixed part of the loan book or what's implied by the top half of the slide, with a lot of these swaps underwater, it would imply to me that there's quite a lot of the asset side which will yield more. How do I connect the two? Are you allowing something to get quite a lot worse here in terms of deposit mix, deposit pricing? Is it conservatism?
If you can just help me to kind of connect the two, that would be helpful. Thank you.
Sure. Morning, Nick. On Swedish commercial real estate, as you say, the metrics that we display are relatively consistent between markets. What I think has been a particular feature of Sweden has been the use of bond markets to finance substantial commercial real estate activity, and then the closure of those bond markets that has led to principally refinancing risk, rather than anything in relation to the quality of the property or occupancy rates or anything like that. I think that's where some of the concern and commentary has come from. I think that's a distinguishing feature where we've seen, for example, you know, strong real estate markets in Norway, those have been funded through the banks rather than looking to bond markets.
I think that's where the key distinction comes. It's refinancing risk, and then, what real estate operators have had to do is address that either through asset sales or, you know, rescheduling debt or those kinds of things. I think that's the key focus in Sweden. On NII, you know, the bottom left of the of slide 17, is first of all, is focused purely on the impact of policy rates. As you know, there's a whole bunch of other things that come into play in terms of asset pricing, and volumes, and funding costs, and those things that can then impact the NII outcome.
Certainly in terms of how we look at it now versus how we looked at it a quarter ago, because there are a couple of little changes in there. The rate path expectation is has improved for or has increased, I guess, for Norway and Sweden towards the end of this year. You know, the 2023 impact of expected higher rates isn't coming through in a particular upgrade on the 2023 numbers. I think that there's the... We can't give every piece of the jigsaw here, so that's part of the uncertainty, and as we change the rate expectations, really, the impact is not that much into 2023 and a bit more into 2024. I hope that helps.
It does. Thanks. Can I just get a quick follow-up on? I take the point about the refinancing risk of the bond-financed part of the Swedish CRE system, if I look at your the leverage of your counterparts as represented by LTV, it doesn't seem that different. I understand what's sort of fueling the frenzy of the market debate, but I come back to your own loan book and ask the question whether your Swedish CRE counterparts are more leveraged via bond market financing than the other Nordic geographies in which you operate?
I can answer. I don't think so. The interesting part, it's not funny, it's interesting, that when you look at sort of like the problems or the perceived problems in the Swedish commercial real estate market, I think we tend to forget that in general, the commercial real estate companies in Sweden, in my opinion, is well-run. Or are well-run. There are some outliers, and some outliers that has got too much leverage, that has gotten too much dependent on the bond market. Also have leveraged sort of like the holding company, and that is a bad combination.
When it comes to the more general concern on commercial real estate, that's not a Swedish issue, that's a global issue. Try to look sort of like from one of the skyscrapers in U.S., or New York, and look at sort of like how much light there is in all the or not in the different towers. That goes for London as well. I should say, there we actually are in a better position than the Nordics, as we don't have these big distances to the main cities. I would say that's not a Swedish issue, that is a global issue.
this is about refinancing, and dependency on bond market, and then it is about a handful or so that has become way too leveraged and also have leveraged the holding company, and that's a bad combination, in my opinion.
Thank you. Briefly, just to follow up on the NII question on slide 17. Thanks for this point about the different jigsaw pieces, which I guess are your colored arrows on the right-hand side. I think you used to say these were kind of net neutral to slightly positive. My feeling with the new disclosure on the top of the slide is that this sort of unrealized benefit to come from the swaps is bigger than some of us had appreciated. Is it fair to say that the sum total of these other pieces is comfortably positive in the next couple of years, or is that pushing it?
I think that's reasonable, Nick. I guess particularly in relation to how we've explained the deposit hedge benefit coming through, and also just the timing on some of the loan resets. I guess the watch-out is probably competition, and pressure on lending margins. I think net-net, you know, this is a solid position.
Brilliant. Thank you.
The next question comes from Jens Hallén from Carnegie Investment Bank. Please go ahead.
Good morning, it's Jens here from Carnegie. I have two clarifications on asset quality. Firstly, I mean, you sound very confident when talking about asset quality, and I can understand that when I see the numbers. Like, given, the management judgement buffer that you hold, which, I mean, at some point, as you say, will either be used or released, do you see even coming close to your normalized 10 basis points in H2 or 2024?
That's a difficult question, but of course, a highly relevant question. I should say that whether we are going to need the buffer or not, that's a difficult question, and I'm not sure, to be honest. We have it for prudent reasons, and if we're not gonna use it, then we're gonna reverse it. I clearly believe that the provisions within the banking industry will increase, and it has to come either by models or by sort of like increased, sort of like realized loan losses. It will be unlikely that the adjustment to a new, completely new interest rate that is much higher than we had a year ago, and with the impact on growth and the uncertainty in the...
I should say, in the world in general. There, we just have to remember that the Nordics are all small open economies. We are very dependent on, or sort of also on trade with abroad. That will lead to a higher loan losses. Will it increase to above the 10, the normalized 10 basis points in our view? Very hard to say. What do you say, Ian?
I think yes. To your point, Frank, it's reasonable that we would expect to see higher loan loss gross charges coming through in the second half of this year. I mean, we've all been wrong on timing so far that we haven't seen this before now, but I think that's reasonable. I think then the where we settle on a net basis will depend on the scale of those losses and whether they relate to some of the sectors that we're concerned about, and therefore would look to utilize provisions. I think it's hard to say what the net outcome is going to be. I think this year on loan losses, as we've seen, the first half has been much more benign than everyone expected.
I think we'll see a bit more in H2.
Okay. Yeah, just another clarification. I mean, I understand on the, on the gross level, I think, it's hard to stay at close to zero for forever. If they are, if your sort of forecasting and projections are correct, presumably then you will be trying to use some other management buffers rather than having a buffer on a, on a buffer. Are you taking new provisions for something you anticipated, and then still keeping a management overlay on top of that?
I think that's a reasonable start point, Jens, but we'll have to see how things develop.
Okay. Then I have a question on ICR on slide 20. I just want to make sure I got it correct. Are you saying that in the ICR stress, you refinance all balance sheet, bank loans, and wholesale funding through regardless of maturity and current hedging at the current swap rate, and you still only have less than 1% of the portfolio with an ICR below one? Then the second part of that question: presumably, you haven't then included sort of CPI-linked rent hikes, et cetera, in the operating revenue for these companies. The picture is probably even stronger in reality. Is that the correct assumption from how you've done the stress?
Yes, you've understood it correctly, Jens. It's a bit of a blunt instrument. We simply assume, all outstanding debt refinanced at today's rates, ignore hedging, ignore the benefits of, potential rent increases, et cetera. I think it demonstrates the resilience of the portfolio.
Okay. Perfect. Thank you.
The final question now.
The next question comes from Riccardo Rovere from Mediobanca. Please go ahead.
Thanks, thanks for taking my question. Just a couple, if I may. Sorry to get back on the edges again. In general, as a conceptual question, basically, you are giving away the benefit of the rate hike that have been occurring or will continue to occur over the second part of 2023, and they would have had an effect in 2024, because EUR 100 million or EUR 200 million is a very small amount. Let's say swap this with, say, lack of negatives in case rates had to behave like on the fourth chart on slide 17. If rates had to go down to, say, 3% over the course of the period, trying to stabilize NII, maybe not at the highest possible level that you could achieve without this, but at a fairly elevated one.
Is that a right way of understanding the logic you are working with? This is my first question. The second question I add is on corporate loan growth, which has been fairly okay, fairly robust, I would say. Do you think it can go on like that for still a long period of time or for some time more? Or do you think this would come to, will come suddenly to a halt? If rates had to go down, do you think in general terms, higher volumes might eventually, say, kind of compensate for lower margins? Forget the edges, of course, for on this, on the stock. Thanks.
All right. Thank you for the question. Let me take the last part first, and then, Ian, please take the hedges. On the corporate lending, at least we don't... We have a lot of activity going on, and that was the case in Q2, it is the case now, and we don't have any signs of the sort of like the speed will come down during at least the third quarter. The interesting part is that it's driven by a lot of activities within sustainability, green transition, supply chains. The geopolitical situation is clearly playing a role here, so more concentration in the western part of the world.
Then there are a very large number of customers that are seeking or looking for growth, and that comes with investments as well. I should say that a general, broad-based demand, which I, at least as of now, would expect to continue for the remaining part of the year. You know, whether a rate decrease will fuel even more growth, it's very difficult to say. Currently, corporate look quite strong.
Hi, Riccardo. We're running out of time, so if I haven't understood your question properly, please feel free to come back to IR. I think what you asked me is, are we foregoing the benefit of rate increases at the moment through deposit hedging? The short answer is, yes, we are. We look at hedging our zero rate deposits through the cycle. We saw benefits in the low rate environment. As rates have increased, we have, because of that hedging activity, given up some of the benefits of that increase.
As we see, those hedges roll over, and particularly as we then look into a flattening and then perhaps falling environment, we'll also see some benefits of that hedging come through. We look at this on a through-the-cycle basis, and we're content to give up a bit of that rate benefit today to deliver that through the cycle benefit. So.
If I may, sorry, you're running out of time. If rates did not go down, had not to go down, can you change the hedges?
yes, we can. Obviously, the impact then flows through over time, but yes, we can. We can if we chose to.
Yeah. Okay. Thanks. Thanks, Ian. Thank you a lot. Thank you.
All right. Thank you all for participating, for some good questions. We are running out of time, so thank you. Have a nice summer, and if we can do anything for you, as usual, then it's just to reach out to you. Thank you.