Welcome, everyone. I am Rebecca Kin, the current Nordic bank analyst for Bank of America. I am very delighted to be joined by CFO of Nordea, Ian Smith. Welcome.
Oh, hi, everyone.
Shall we kick start with a broader question, given you are a genuinely pan-Nordic bank? I am just wondering, what do you see as some unique growth opportunities in Nordic compared with rest of Europe?
Yeah, I think we start with understanding that the growth prospects in each of our four Nordic countries have historically been. Growth has been higher than elsewhere in Europe. Generally speaking, the projections and forecasts are for that to continue. I think it's a feature of a strong export-led corporate sector, vibrant SMEs, and consumers that are willing to invest, drive savings, and then a strong fiscal safety net. I think all of those things, along with political stability, makes it a great place to do business.
Absolutely. Now, let's move on to the details of the business. Very topical Swedish retail banking. I think you, in general, have prided yourself in your speed and service, and as such, your consistent market share gain in Swedish retail lending, especially mortgage, despite it being such a very competitive market. My question will be, as the rest of the incumbents are catching up and investing and looking to revamp their process and invest more resources into the business, do you worry about getting caught up, or do you think you can stay ahead by continue to invest?
We're never complacent, Rebecca, so I'd certainly never dismiss our competitors. We have had a very strong run in Sweden, particularly on the household side, and it's also really good to see that success now replicated in our corporate businesses also. On the retail side, genuinely, when doing mortgage business, customers value much more than 20 basis points on the price or something of that nature. Exactly as you say, speed, availability, certainty. We've been able to deliver those really, really well over the last few years. The secret to that success has been, I think, fundamentally, a really strong digital foundation. We invested heavily and early in that, long before I was involved with the business, and I think that's paid off in spades. It paid off in COVID, when our customers were able to do much more on their phones than with other banks.
I think that has helped us to maintain an edge. Of course, there are other things that can contribute to those key features. It can be the way you organize yourself, and those kinds of things. But I think it's harder to close the gap when you've made such a substantial investment in digital technology. I think it's a good place to be, but we have to keep investing. We have to keep ensuring that we're there for our customers, that we have as strong a reputation as we do with the real estate brokers for getting things done. That's why consistently we've been among the higher priced banks, but we have also then consistently been at the top of the league in terms of market share. No, we're very proud of that, and we're determined to keep that advantage.
Absolutely. Now, in a hypothetical scenario of Swedish election result leading SBAB as a vehicle to further lower mortgage margin and compress price, as you said, you don't compete in pricing. You're not among the lowest priced. You're probably among the higher priced. Do you see yourself less exposed to such competition risk? Because would you see as a different competing strategy versus someone who is very price-driven?
Mm. Well, we should start by acknowledging that we don't know what the new government's policies will be. There were a couple of proposals discussed before the election that were quite vague, in relation to bank taxes, but also how SBAB, which is a mortgage and savings bank, but has a transaction account capability as well, or should get that relatively quickly, and how that would be deployed. We have had SBAB as a meaningful competitor in the Swedish market for quite some time. In particular, during the rate hiking cycle, they were among the most generous in terms of deposit offerings, and they did take some share with that, but it didn't prove to be a significant market disruption. So it depends what happens. It may have some distortive impact on the Swedish market. But of course, Nordea is about much more than Sweden.
Yeah, of course.
We operate in three other orderly and competitive markets successfully. It'll be another thing to deal with if it manifests, but not something that we spend a lot of time thinking about.
Sure. If I just sum up the questions I asked before on Swedish retail, the durable competitive advantage you see Nordea has in Swedish retail would be just IT infrastructure, cumulative investments in past, and speed and service that you are very proud of?
It is having digital leadership. It is not necessarily about technology foundations or other things like that. We have digital leadership, which is about how you make yourself easy to do business with. That has been important in banking from time immemorial, and we have been able to deliver it through digital leadership. I think that is the key foundation. Other banks in our markets have invested in digital, but I think they have not yet been successful in closing that gap. Because we keep investing also, we will do our best, as I say, we will do our best to maintain it. But right at the heart of it is digital leadership. Then along with I talk to our people who run the business in Sweden, and there is also very much a challenger mindset. I think that is also really valuable. It is that passion for serving customers.
It is about that passion for winning that I think permeates all of our business in Sweden, and it is palpable. I think that also helps. It can sometimes feel a bit intangible, but there is no question it helps.
Sure. Very clear. Now moving on to your Norway strategy. You have talked about Grow Norway as a key priority, and knowing that Norway today, especially after the scaling up of savings banks and a very competitive space, both in mortgage and in deposit, and you are continuing to invest, gaining deposit market share, what is the ideal level of margin you are looking to achieve in Norway? What are the key milestones you are looking to achieve on the lending and deposit side?
Well, we'd certainly like the margin to be higher than it is today. There's no question about that. But look, Norway's important to us, and we made a big commitment to Norway when we acquired Danske's retail portfolio. 250,000 customers, with which we believed we could do an awful lot in terms of broadening the product offering. Danske was somewhat restricted in what they could do with those customers under their distribution agreements. We're not restricted in any way. So Grow Norway is one of our six key growth initiatives under our strategy for 2030. The first thing I say, it's not Grow Norway at all costs. It's strategically important, but we will approach it in the smartest way possible.
When we put our Norwegian retail business, and this is primarily a conversation around our personal banking or retail business, when we put that up against our other four retail businesses, it's very clear that the two things that we need to improve in Norway are deposits and the proportion of ancillary income. When we compare our business in Norway with other retail banking business in Norway, similar conclusion. We don't have a cost problem. We don't have any of those sorts of things. Our credit quality is pristine. So it is about those two initiatives, and we're very focused on delivering those alongside measured mortgage growth. What we're doing on the deposit side is investing a little bit of our margin into offering more attractive prices, working with those customers then to, Frank often talks about dressing the customer.
Every kind of item of apparel that the customer might need, we're ready to provide. The more you dress up the customer, the more you can engage them with what Nordea has to offer, the longer they'll stay with you. So that's been a key area of focus for us. Then driving ancillary income. Our focus on savings business, private banking, and life and pensions in particular, are a very big part of how we drive that ancillary income. If we look at the results at the end of Q2 this year, we grew lending by 2%. We grew our deposits by 7%. So we've already got those proportions working in the right way. Our fee income growth was 15%, and savings within that was 24%. So I think we're off to a really good start, but it's a long game.
We're there for the long term in Norway. We're investing, and we're very patiently building out what I think is a business with deliver improved profitability.
Absolutely. Probably just to dig a bit deeper into what you say, dressing up customers in Norway retail. You've apparently gained new customer relationship by acquiring Danske Bank Norway, and you are also growing organically your customer portfolio there. I suppose there must be low-hanging fruit, the products you can easily cross-sell to those customers. On the other hand, fintechs like Nordnet and Avanza Bank, they're also offering very attractive value-for-money products. Would you see any competition front from them?
We've always had fierce competition in Nordic markets, so there's nothing new there, and Nordnet has been successful in many of the Nordic markets, Avanza Bank in Sweden. We also see, if we want to bring it back to Norway, there are plenty of other players out there that compete successfully. I think they are generally orderly markets, but there is fierce competition, and we've learned to thrive in that kind of environment. So it doesn't really concern us. If we take our savings business, and I think that's something that we're especially proud of in terms of our efforts to grow ancillary income, as I said, 24% up year-on-year in terms of income. We've got a fantastic product set, and that comes from the biggest and arguably the best-performing asset manager in the Nordics. A fantastic range of products, and well-suited to different kinds of customer needs.
I think that's an enormous advantage for us, and it comes as a result of our Nordic Scale Program. It is that scale that allows us to develop and offer such a broad range of products. We continue to refresh and enhance that. In the private banking space, for example, we're adding private credit offerings, alternative investments, those kinds of things that are much more accessible to a broader range of customers. I think that's key to it. It's scale that allows us to invest, develop, and then deploy those products right across all four countries.
Absolutely. Now moving on to your pan-Nordic corporate lending business, where you have been gaining market share, especially in Sweden, and as you probably mentioned before, doing very well in large corporate institutions and also in business banking. Just focusing on Sweden, which is also increasingly competitive in the corporate lending space, where else do you see the growth opportunities now that you've gained more share and the base is getting higher as well? Will the growth momentum continue? On the side, DNB Bank ASA also just bought Carnegie and looking to use this relationship to cross-sell their lending capabilities.
Yep. So, again, I sound like a broken record, but fierce competition is nothing new. We will be in there slugging it out with Danske, with SEB. I guess we will see more of DNB through their Carnegie acquisition. We have also had foreign banks, non-Nordic banks, that have found the Swedish market especially attractive. Again, nothing new there. I think that what we are very proud of our corporate businesses in Sweden, and if I start with business banking, which is our SME business, I think we have consistently outperformed our peers over the last couple of years in terms of being able to deliver consistent, steady lending growth. As we have seen the cycle evolve, we have seen some of that come from the public sector, some of it is in real estate, some of it is just broader corporate.
But we are a really strong SME bank, and that is just been a consistent and profitable growth engine for us, and the profitable part of it is absolutely crucial. We are very judicious about capital deployment and capital efficiency in that regard. On the large corporate side, we lost a bit of momentum. We made some leadership changes. We brought a much greater intensity and focus. I think started to build more confidence in that team in terms of what they could do. I think that has paid off. We have also benefited from a growing momentum in that cycle of investment that we are seeing at the moment in what are quite sort of defensive sectors, and that is pure defense and defense-related, energy transition, infrastructure, technology, a bit of AI, those kinds of things.
I think we have very much caught that wave. I think there is a good degree of sustainability to it. Things are so fragile in the world right now, we do not take that for granted, but I think momentum continues because Europe has, certainly in those areas, understood that something needs to be done. We are definitely seeing the fruits of that. So I think broadly that constructive environment is going to continue. I think we have opportunities with these areas where we have driven lending growth is to go back to a theme that is really important to us, is also to deliver ancillary business. Back in 2019, when Frank Vang-Jensen became the CEO, one of the key initiatives was to improve the profitability, turn around the profitability of our corporate business.
That was from every angle in terms of looking at margins, looking at the kinds of business we are doing with customers, capital efficiency, all of those kinds of things. We significantly improved our profitability, and that was hard-won. That discipline has come from being realistic about taking lending decisions with an understanding of what else you can do with that customer. So I trust our business leaders in Sweden. I trust our business leaders across Nordea, but we are talking about Sweden. I trust them to deliver on that full range of services with these corporate customers. It has been somewhat lending-led initially. That is a natural thing. I am pretty confident that we will start to see some of the other services come in, cash management, some of the event-driven stuff where we will support customers on M&A and those other things, and cross-selling then into other parts of our business.
When in SME, I am really proud of our ability to, when there is a liquidity event in SME, we generally pick up the private banking needs of those beneficiaries. I think there is a great sort of symbiosis between our businesses in Nordea that we will exploit further.
Now probably beyond Sweden, apparently you are also doing very well in Norway and in your two larger markets, Finland and Denmark. Do you see growth opportunities there in the corporate lending aspect, or fee opportunities for further growth?
If we start with Finland, for some time Finland had seen less growth and a less dynamic business environment than perhaps in our other markets. We definitely see a change there. We are now seeing stronger growth, corporate led, more activity levels, and I think quite frankly, a greater degree of confidence in Finland because Finnish business has understood what it can offer. That growth that we are seeing is largely export led. It is in defense and technology. It has, as we have talked about before, has therefore allowed companies like Google to commit investment to the country. I think Finland is moving from a period of sort of lackluster growth into something much more positive. That is great for us. We are the market leader in Finland. We want to continue to be the winner in that part of our home markets.
We are very focused on how we do that. I think we have been building a strong pipeline of opportunities. I am very optimistic about Finland, and it is good to see that after some time not so. Denmark is strong. I think the broad economic environment there is conducive to growth. We have got relative political stability in Denmark. We saw a new government, which is not as new as you might think. It is very similar to the old one. When we contrast the Nordic countries to the rest of Europe and the degree of political stability we see there that allows people to take longer term views, I think that is pretty healthy. We feel good about Finland and the difference there, and I think Denmark will continue to be a strong market for us, albeit very competitive.
Sure. Now moving on to your very importantly Nordic Scale Program in 2030. You've talked about your economy of scale, which is apparent for the same percentage of cost income ratio because of a larger scale, you have more budget spent and that builds up over time. I guess one benefit is product factory. I'm just wondering what in your view, do you see yourself as leading in main products in respective markets? What are the product areas you think you need to work on a bit more?
Scale is, as you've indicated, scale is important because it does give us the capacity to invest. I talked a little bit earlier about Nordea Asset Management and what we've been able to do with that business because it is much larger than other businesses in the region and with greater capacity to invest to develop new products and other things. We have that in a number of different areas. I think it would be probably unrealistic to claim that we have a massive differentiation in terms of product range or other capabilities versus our peers. They're all good banks. I think we have that capacity to invest that stood us in good stead when developing digital, that allows us a broader range in areas like asset management.
I think as we continue to think about what some of the significant changes that we're all confronting in our industry, whether it be AI driven, whether it be the impact of new entrants and challenges and those kinds of things. I think having scale and capacity to invest is a big part of setting yourself up to win. With Nordic Scale, and I'm sure we'll come to this, we often get questions around, well, when will we start to see a real competitive advantage from it? I think we'd acknowledge that our scale is undeniable, but our track record in delivering the benefits of that scale, we've got a bit of work to do in certain areas.
That's why our current strategy is very much about delivering, over the period to 2030, consistent improvements in our efficiency, our cost income ratio, and demonstrating that we can deliver the benefits of Nordic Scale. It's one thing being the biggest, it's another thing to show you're the best.
Absolutely. You talked about, because of the scale and because of many years of investing in the digital infrastructure, Nordea today you see as the digital leader in the industry. I guess just on that front, nowadays with everyone emphasizing on automation, AI, where do you think you are ahead in terms of digital infrastructure?
It is that core capability that people have on their phones. The technology is broadly common, but the experience, the customer experience, the ease of use, the capability, that's where you can differentiate. I think in terms of delivery of core banking products, we are consistently voted as a digital leader. I think we've got to look at areas where we don't always achieve that grade, if you like. One area we've talked about consistently is in our savings business, where I think that Nordea has lagged behind some of the savings platforms in terms of, again, customer experience, engagement. The product set is not vastly different, but the way people use it and the way people engage with it is different. We're determined to put a lot of effort, energy, and resources behind addressing that.
That's one of the key areas we're focused on right now, and we're determined we'll deliver it. With our scale, we should be able to do so. I think that's, having acknowledged something we're proud of, I think it's also something that we need to focus on going forward. We also set out our stall at our capital markets day that we would be the go-to bank for small businesses. One of the reasons we find small businesses so attractive, or a couple of the reasons we find them so attractive, is that building that relationship early enough, and as businesses grow with you, then they provide greater opportunities. They're also a brilliant source of deposits.
We're also focused on, and those principles that I've talked about in terms of our digital foundation in retail, which is about speed, availability, and being easy to deal with, that's what small businesses want as well. We're applying those same principles in developing our proposition there. We're really excited about it, and I think it's going to resonate really well with small business customers, which is an important bit of the market for us where, again, we'd like to do better.
Absolutely. I'm probably just getting to the numbers of Nordic Scale a bit more, because you talked about EUR 800 million benefit, but with EUR 350 million investment required to achieve EUR 250 million of net benefit. In that investing, you sized the areas savings, payments, mortgages, and corporate lending. That's on the investment side. When it comes to potential savings in the future, where do you see as the biggest opportunity for cost savings?
What you've described there is our focus on the four biggest and most important customer value chains. I think each makes a different contribution. If we were simply to rank it by scale, I think the opportunity in our savings business is the greatest. It's our biggest revenue generator in terms of fee income. It's one where we think we can differentiate positively. It's also one that is pretty fragmented, and delivering the benefits of Nordic Scale is about tackling that fragmentation, making processes consistent, delivering less friction when we need to make changes, those kinds of things. If I was to rank in terms of what it might deliver, I'd definitely say it's savings.
If we were to think about something that is really important and a bit boring, but at the core of a corporate customer relationship, it's payments. Harmonizing onto common payment platforms and making those just an embedded part of what our customers want to use and work with on a daily basis is absolutely at the heart of a successful and, dare I say, permanent customer relationship. Payments is not as big as savings, but boy, is it important. I like to think that we give equal focus to them in terms of how we manage those, but they contribute in different ways.
Sure. Very clear. Thank you. Just moving on to the cost income ratio guidance you've given. You've mentioned, or in the past, you've done very well. You've cut cost income ratio by around 10 percentage points in the past five years, so that was amazing. Now you still have a very large group function, for example, compared with peers, and you are guiding ex regulatory 44%-45% of cost income ratio, a revision down versus previously, which is on the right track. What are the reasons why you can't approach low 40s or even 40% faster?
Yeah. When we launched the strategy, our cost income ratio was 45%, and our commitment was to get it to somewhere between 40% and 42% by 2030. Of course, this is an environment where you are investing in growth. You are investing in being safe and trusted, making customers feel secure, and you are dealing with substantial inflationary pressures. What we talked about at our capital markets day was when people think about inflation, they default to what a CPI measure is and everything like this. No. Inflation for us is 60% of our cost base, starts every year with a 4% hill to climb in terms of wage settlements and other things. The next biggest cost category is technology, which has experienced, certainly in the last few years, occasionally double-digit inflation.
Those are the things that we need to manage, and our formula in just general productivity and efficiency, offsetting some of those inflationary pressures every single year, and then taking structural cost out. It requires some investment, including in growth areas, and then those benefits start to come through. So a good example would be we decided to undertake a significant restructuring people exercise that we announced at the start of this year. So we are going through the process of union consultation, the complexities of reshaping that workforce. But that will all be delivered, or most of that will be delivered through the course of this year. But we will not see the benefits coming through until next year. So there is, of necessity, just a process by which we invest upfront and we see the benefits coming through. And we are here for the long term.
We are very clear that investment remains a priority for us. It helps to deliver growth. It helps to deliver all of the things that make Nordea what it is today. So we are not afraid to make those investments and to be confident in our ability to deliver the benefits. So we will head towards 40%-42% cost income ratio in 2030 with a degree of confidence. We will deliver gradually along the way because we think that is the best way to combine investment and efficiency and structural cost out. And you will see us among the best in market when we get there.
Sure. Very clear. Thank you. Now moving on to asset quality. You have done very well in terms of growth in more than one business category, and so my question would be, can you name two area where you see more risk mounting?
It's hard to identify areas of concern, and that's because, overall, and as you see with our track record over many years, a low cost of risk in Nordea, I think in Nordic banks in general. There are a number of things that contribute to that. It's the resilience of the customer base that has been tested on a fairly regular basis over the last few years. It is the way we underwrite credit, and it is the sort of broad fiscal stability and strength that we've got in the Nordic economies that particularly supports customers in the event of unemployment and other things of that nature. Now, we're not complacent. We've got a very strong credit performance. We're paranoid about maintaining that, and so the areas in which we grow, we don't compromise on underwriting standards.
There is very little exposure in the Nordic economies to some of the areas that have become a worry in recent years, whether that be private credit, whether that be the AI boom, those kinds of things. I think that's a real strength of how we do business in the Nordics. So I think it's very hard to identify areas of concern at the moment, but it doesn't mean we don't look every day.
Sure. Thank you. Now, a question on capital. In Q2, you talked about capital benefit coming in Finland and in Denmark. It seems directionally the capital burden is going down. Do you see more tailwinds to come in the four major countries you operate in?
I think it's a pretty balanced picture. We've sought to be as efficient as we can in managing our capital base, and indeed, in terms of capital allocation. We're having some tough conversations at the moment in areas where perhaps some of the competitive pressures puts pressure on profitability, and it's a high hurdle to deploy capital into those spaces. So a live conversation, one that we look at constantly. But there's nothing on the horizon in terms of looking at changes in macroprudential buffers or anything of that nature that I think we can look to, so.
Sure. We are about one minute to finish. Is there any question from the floor? If not, we will call it a day here, and thank you so much for joining.
Great. Thank you. Thank you.