Nordea Bank Abp

Good morning and welcome to Nordea's first quarter 2023 result presentation. Here in Helsinki, we have our CEO, Frank van Jensen, our CFO, Ian Smith, and my name is Matti August from Investor Relations. As usual, we'll start with a presentation by Frank, and after that, you will get a chance to ask questions. To ask a question, please remember to dial into the teleconference. And with that, I'll leave the floor to our CEO, Frank Van Jensen.

Good morning. Today, we have published our first quarter result for 2023. In the quarter, we witnessed turbulence in the financial markets, and continued high macroeconomic uncertainty. Recent developments, including problems faced by a few specific banks in other countries, have reminded us all of the importance of a safe and trusted banking sector. Nordea is one of the most stable and profitable banks in Europe. A resilient and diversified business model, sound financial risk position, strong balance sheet and high profitability makes us a safe and trusted partner for customers, employees, shareholders and broader society. Despite the weaker economic environment, we are pleased to report yet another strong set of results in the first quarter. We continued to drive a solid business performance underpinned by our financial strength. Our position of strength is evident in the trust and confidence our Nordic customers continue to show in us. This trust and confidence has been reflected in improved external customer ratings, higher market shares in prioritized segments, and increased deposits in particular. Some of the highlights in Q1. Operating profit was up 34% year-on-year despite negative exchange rate effects. Our return on equity improved to 17.1% from 12.6%. This was the highest return on equity since 2007. Due to the weaker economic environment, lending growth slowed, but continued to develop positively. Corporate lending was up 5%, and mortgage volumes were up 1%. Deposits were up 5% year-on-year, and asset management slightly improved, increasing by 1% quarter-on-quarter. Net interest income increased, supported by deposits in particular. NII was up 35% year-on-year. Net commission income decreased by 8%, mainly due to lower lending activity, subdued capital markets activity, and lower savings income. Net fair value result and net insurance result were up 27% and 31% respectively. The cost-to-income ratio, including regulatory fees, improved to 40% from 45%. In all our businesses, income has grown faster than costs. Our aim is to continue to deliver these positive jobs. Let's now look at the first quarter results in more detail, starting with the income lines. Net interest income development reflects current trends when it comes to both customer behavior and the macro economy. On the one hand, monetary policy hikes are resulting in improved deposit margins, creating a tailwind for NRI growth. As I said previously, this is a healthy normalization of the highly unusual prolonged period of negative rates. On the other hand, We are facing a headwind due to the uncertain environment. In addition, the high interest rates and slowdown in economic activity have caused our lending growth to slow. This development is visible across the Nordic countries. We are naturally pleased to see that our Nordic customers continue to show trust and confidence at us at a time when some banks elsewhere were facing problems. This was visible in our deposit growth in particular. Deposits grew by 5% year-on-year, with strong growth in corporate deposits in particular. As mentioned, lending growth has decreased following the slowdown in economic activity. However, our productivity towards our customers has helped to drive positive business volume growth. Corporate lending grew by 5% and mortgage lending by 1%. The depreciations of the Swedish and Norwegian krona had a clear negative impact on the figures during the quarter. Deposit volumes and margins increased. This increase was partly offset by lower lending margins driven by higher funding costs. Overall, net interest income increased by 35%. The picture for net fee and commission income remained mixed in the first quarter following weaker markets. Net fee and commission income was down 8% year-on-year. Payment and card income increased by 3% year-on-year due to higher transaction volumes. Brokerhood and advisory fee income remained muted due to lower customer activity in a subdued market. We expect this area to recover when market confidence increases. Our savings fee income continued to decrease following a 7% decrease in asset under management. Net flows from internal challenges remained positive, demonstrating the strength of our franchise. We continue to support our Nordic customers in meeting their financing and risk management needs in turbulent markets. This activity led to a strong net fair value result in the quarter. Growth in customer areas amounted to 21% year-on-year, a substantial contribution. FX and interest rate hedging products continued to be in high demand, Market making operations were also up, driven by FX and rates trading. Net fair value result increased by 27%. The higher inflation affecting our customers and society in general is leading to increased cost pressure in our business. We also continue to make substantial investments in strategically prioritized areas such as digital, technology, and risk management to strengthen our business and resilience even further. Costs, excluding regulatory fees, increased by 6% in the first quarter. This is in line with our plan. When it comes to cost, our approach is unchanged. We remain focused on maintaining strict cost control and growing revenues faster than costs. We aim to continue to improve our profitability while investing to strengthen the bank even further in the long term. Our credit quality is strong and realized net loan losses remain low. We have a well-diversified loan portfolio across the countries and sectors. Net loan losses and similar net result for the first quarter was 19 million euro, or two basis points. Despite the continued economic uncertainty, we had relatively few new individual and collective provisions in the quarter. These amounted to 21 million euro in total. The management judgment buffer was kept unchanged at €585 million. In this way, we continue to ensure a strong reserve to cover potential loan losses. Looking ahead, macroeconomic uncertainty remains high. We expect the challenging environment with lower consumption and lower growth tightened financial conditions, continued higher inflation and higher interest rates to persist in the coming quarters. However, our risk position is sound. The Nordic economies are strong and well positioned to better the challenging conditions. And our customers are in good shape overall with solid financial positions. Our capital position is among the best in Europe. The quarter-end CET1 ratio was 15.7%. This is four percentage points above the current regulatory requirement. With our high profitability and strong capital generation, we have been able to deliver market-leading shareholder returns. It's a result of a successful implementation of our strategy. At the beginning of March, we received regulatory approval for our fourth share-by-back program. Our Board has decided to launch the €1 billion program, which will commence tomorrow, 28 April, or as soon as possible thereafter. In addition, our Annual General Meeting in March approved a dividend of €2.9 billion or €80 per share for 2022. This is up 16% compared with 2021. It is a pleasure to see our dividend payments to our 560,000 shareholders supporting economic activity, driving growth and challenging funding towards innovation, education, healthcare and other forms of support for society. Let's now move on to our business area results. All our business areas delivered solid performances once again. In personal banking, we grew volumes in line with the market and continued to build strong relationships with our customers. In the tougher economic environment, investment activity and demand for new loan promises remained lower than a year ago. Mortgage lending slowed and stood at 1%. Deposit growth contributed positively to our net interest income development. Deposit volumes grew by 2% in this quarter. We continue to support our customers proactively and draw a 32% year-on-year increase in personalized interactions in our digital bank. In Sweden, leads generated for mortgage and saving advisors through our digital channels increased by 38% year-on-year. Digital customer engagement remains high with private mobile app users and logins up 7% and 8% respectively year on year. In February, we were rated the best digital performer among European retail banks by the well-known rating agency D-Rating. The income was up 22%, driven by strong NRI growth. Return on capital at risk improved to 25% compared with 18% a year ago, and the cost-to-income ratio improved to 44% from 50%. In business banking, the strong business momentum and volume growth continued. Total income in the first quarter increased by 20% year-on-year, driven by higher lending and deposit volumes, improved deposit margins and higher net result from items at fair value. We grew lending volumes by 4% in local currencies year-on-year. The increase was primarily driven by Sweden and Norway. Deposit volumes increased by 3% year-on-year, with strong growth in fixed-term deposits. We maintained close dialogues with our customers, increased our proactive engagement, and delivered strong sales in risk management products. The risk picture remained very stable, with net loan losses amounting to two basis points. We continue to stay close to our customers and monitor the situation, especially in sectors under significant pressure from inflation and higher interest rates. Reflecting our proactive customer approach, Swiss SMEs, for the first time ever, ranked us highest for both small and mid-corp banking in the annual Prospera survey. In addition, we also ranked first for cash management in the Nordics in the annual Prosperous Transaction Banking Survey. To fulfill our ambition to be the leading digital bank for SMEs, we continue to develop the Nordea Business NetBank and mobile app. We added new products to our product store, which is currently available to customers in Denmark, in Finland and Sweden. Customer service ratings further improved for both the NetBank and mobile app. We also remain focused on driving the transition to a more sustainable future. During the quarter, our sustainable financing portfolio increased to 9% of total lending, and our green business loans, granted under the European Investment Fund framework, exceeded €100 million. Return on capital risk in business banking increased to 23% compared with 18% a year ago. And the cost-to-income ratio improved to 38% from 33%. In large corporates and institutions, the strong income development continued. We advised and supported customers on their financing and risk management needs in the turbulent markets. Total income was up 23% year-on-year, driven by strong growth in net interest income and net result from items at fair value. We grew lending volumes by 1% in euro year-on-year. In local currency, the lending growth was 8%. Our pan-Nordic diversification, high credit quality, and market-leading position enabled us to grow our deposit volumes by 4% during the quarter. Net interest income increased by 29% year-on-year. Net fee and commission income was down 9% due to continued weak capital markets as investor risk appetite remained low. Net interest or net result from items at fair value increased by 41% due to high custom activity and strong risk management. Credit quality continued to be very strong, and we actually saw some net reversals during the quarter. Our capital discipline resulted in economic capital remaining stable year-on-year and return on capital at risk increased to 25% compared with 19% a year ago. The cost-to-income ratio improved to 33% from 38%. In assets and wealth management, we were able to achieve solid income even in weaker markets. Operating profit increased by 29% and total income was up 19% year-on-year. We maintained strong momentum in our private banking business and continued to generate positive net flows from internal channels, €1.3 billion in this quarter. We attracted high numbers of new customers across the Nordics and increased lending and deposit volumes by 4% and 11% respectively. Deposit margins also continued to improve. Asset management increased by 1% quarter and quarter to €362 billion. Looking at sustainability, net sales of sustainability-linked products continued to follow the positive monthly trend of the past two years. Approximately 66% of total AUM were in ESG products at the end of the quarter. In life and pension, we are progressing as planned with the integration after Denmark Life and we have now launched our first product under the new Nordea pension name. Return on capital at risk was 53% and the cost to income ratio improved to 39% from 44%. To sum up, The first quarter of the year was strong for Nordea. We were able to drive profitability or profitable growth in our uncertain environment. Against this backdrop, we remain committed to delivering on our key priorities and 25 financial targets. We aim to continue improving our profitability and expect return on equity to remain above 13% in 2023. This is already in line with our financial target for 2025. We plan to provide a target update by the end of 2023, when the economic environment will hopefully be clear. Meeting our financial target requires us to keep delivering on our three key priorities, creating the best omnichannel customer experience, driving focused and profitable growth, and increasing operational and capital efficiency. In an uncertain environment, safety and trustworthiness are features that are highly appreciated from various businesses. not leased banks. A strong and profitable bank like Nordea promotes stability and predictability. We are able to support and deliver attractive services to customers and society. And that is also how we are going to continue in both good and challenging times. Thank you.

Operator, we're now ready for the Q&A session. Thanks. The next question comes from Magnus Anderson from ABGSC. Please go ahead.

Yes, good morning. Starting with NII and your deposit margin development, we can see on page 8 in your factbook that it was up 190 million quarter-on-quarter. And if you could give us some flavor of the regional development so far and what you expect. When I look at personal banking, for example, at page 13, I can see that it was a flat margin. Development quarter on quarter in Sweden in local currencies and quite small improvement in Denmark, which leaves Finland and Norway as the main explanation as it looks. And related to that, I guess that this deposit hedge you've been talking about might have had something to do with those developments. If you can give us any indication of how that has impacted in terms of magnitude. That's the first question. Thanks.

Good morning Magnus, thanks for the question. So we've seen good development in deposit margins across the board. As you know, the pace of change in rates has been quicker and earlier in Sweden, and we're seeing Finland and Denmark coming through in the last few quarters. That continues, and we would, given the expectation on interest rates for the next few quarters, we would expect to make further progress there as well. The deposit hedge has had a dampening impact on NII development, but it's still outweighed by the benefits of, first of all, continuing to show good progress in deposit volumes, but also managing carefully the pass-through rate. So I don't have a particular feature to call out in any of our proposals, In any of our countries, I think we continue to make good progress. And as I say, the deposit hedge has a dampening effect. The other thing that I guess impacts us in headline terms versus some of our peers is obviously the impact of foreign exchange on NII development and with the The depreciation of SEC and NOC over the last few quarters, that moves the headlines a little bit. But we continue to make really good progress in all of our businesses.

If I follow up there on Sweden, if I look at page 13, I mean, it's flat. And I sat there in personal banking quarter on quarter in local banks. according to the column there, while rates are obviously up quite significantly in average terms. So what's driving that? Is it partly migration into higher deposit rate products, et cetera, if you have anything there?

So we have seen, first of all, some pressure on mortgage margins, and that has a dampening effect on net interest income development. There is some customer preference for savings accounts. We have very attractive rates in all of our markets. And there's been a small movement, I guess, in terms of proportion of deposits from transaction accounts into savings. But the key development on net interest income on a regional basis and then in Sweden has been in this quarter some pressure on mortgage margins.

Okay, thank you. Secondly, just a note across the board, trading income or net result of financial transactions or whatever you call that line has been quite strong now for a couple of quarters, two, three quarters in a row in most banks. So Do you think that this is sustainable development driven by the fact that we now have entered a positive rate environment so that we should expect a high level going forward than we've seen previously during the zero rate or the QE years?

I think the volatility that we've seen over the last 12 months has been one of the drivers. Our customers are turning to us for risk management products and advice on rate management, FX, all of those different kinds of things. I think that has been one of the contributors. Whether that continues, I think, will depend on what we see in terms of market volatility going forward. We have had a really strong performance supporting our customers in that space over the last couple of quarters, and I think we'll be there for them going forward.

Okay. Thank you. The next question comes from Andreas Hackensen from Danske Bank. Please go ahead.

Good morning, everyone. Following up a little bit on Magnus's question on the deposit side, if you look across the region and the four countries, do you see any trends or do you have any plans to start to pay interest on the transaction accounts? That's the first question.

I can take that. Hi, Andreas. It's Frank. We don't see any sort of like experience any interest, big interest from our customers within high or hiring the interest rate, which is basically zero on transaction accounts. And we also should remember. that when you think about positive interest rates on transaction accounts, we are back to the days before the negative interest rates and also the very, very high requirements on transaction monitoring, you know, appeared or entered the markets. We have 3,000 people in Nordea that solely works with monitoring transactions, KYC, and sanctions. And the cost related to or connected to a transaction account is very, very big. So currently, no such plans are in place. And I would say that our customers are using our savings account and term deposits in a very active way and are very pleased with our offering. So no such plans as currently.

That sounds good. And then, since you are the only true pan-Nordic bank, could you tell us, if you look at asset quality country to country and sector by sector, Are you as comfortable in all regions, or do you see any pockets where you're a little bit more concerned?

So starting with the countries, all countries are looking strong. No signs of any deterioration of the quality happening, and absolutely no flags for now. And I would be a bit disappointed if there were flagging. flags coming out now from sort of like weakening in general. There will always be some here and there, but no structural issues for sure. And that should not happen in Nordea. When it comes to then, if you unfold it a bit first on sort of like household contra versus corporate, household is super strong. It's amazing how well the Nordic households are holding up. We are following, of course, a number of metrics. It's very careful, delayed payments and so. But as long as the unemployment rate is very low – and the deposit still keeps up in general, then I would say that our customers are handling it very, very well. On the corporate sector, I would say, the large one is in super good shape, absolutely no signs of any problems. The mid-size is similar, of course, but different impacts due to different types of businesses. And then looking at the small enterprises, sole traders and so, of course, the ones within the service sector and so some of them are, you know, of course, challenged right now. But from a bank perspective, it doesn't really impact anything or anything. Because they are very asset-light, right? So, of course, there are some challenges, but nothing that can impact our figures right now. And then left is commercial real estate. And as you know, we are a very small player here. It's around 7%, as I recall, of our total lending. And similar picture in Sweden, much lower than yachts. And it's very stable.

That's it for me. Thank you.

The next question comes from Maria Semikatova from Citi. Please go ahead.

presentation and taking my questions. First of all, on net interest income, just wanted to hear your latest thoughts on trajectory from current levels. If we annualize the first quarter results where effectively this implies 1.4 billion increase for this year, and this is effectively in the middle of your guided range. So just wanted to kind of check on Your latest thought on different drivers, specifically on volumes, you kept this as a positive contribution for 2023, but it was actually negative in the first quarter. And if there is anything else you can add on headwinds that you see from current levels. on your sensitivity slide, and then maybe on lending margins specifically, out of this 23 million impact in the first quarter, how much was from floors, and if you still expect this to disappear in the second quarter? Thank you.

So I think in terms of net interest income trajectory, first of all, given the rate path and our volumes, I would expect to see some further NIM expansion later into this year. And, of course, that's positive for net interest income. There's a bunch of different things to manage within that. The pressure on mortgage margins, particularly in Sweden, I think is an important factor. But I think everywhere else we're holding quite well, and our margin development in corporate lending is pretty stable. I think in terms of what we would see with volumes, first of all, in local currency terms, we've seen positive volume development. And I think the outlook for the rest of the year, we would split between household, where I think it's a much quieter market than we've been used to. And then on the corporate side, we're still seeing good interest and demand from our customers there. I think, therefore, our expectation is, I think you've called it quite well in terms of your extrapolation being in the middle of the range, and I guess we'll look to see how lending margins and volume development will affect that through the year. But we feel good about the prospects for NII this year. In terms of your detailed question, the contribution of the elimination of mortgage flows, of interest rate flows, I beg your pardon, was around 9 million negative, and I suspect that will fade to zero over the rest of the year.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. The next question comes from Ricardo Rovira from Mediobanker. Please go ahead.

Thanks. Thanks a lot for taking my question. There's only one, actually. The European Commission is discussing changes with regard to inducements on asset management products. You are a big player in this, not only in the Nordics, I would say, because you distribute your funds all across Europe. Do you see any impact? How do you see the situation? Do you see any potential negative spillover for you from this possible change in regulation? Thank you.

Hi, it's Frank. No, the short answer currently is no. So we have bans in place in some of the Nordic countries, and we have adapted to this in a, I should say, smooth way. And without me knowing the details yet of what is like coming, exactly coming, I would say that we will solve this. Anything to add, Ian?

No, I think, as you say, Frank, we've dealt with changes to terms in all of our Nordic countries successfully. We'll adapt, as you say.

Okay, thanks. Thank you.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

All right, guys, that was easy this time. So thank you so much for participating and looking forward to speak and reach out any time that you might feel the need for discussing something. Thank you so much.