Nordea Bank Abp

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

A very good morning to you. Today we have published our Q3 results. This quarter was once again characterized by ongoing uncertainty in the financial markets. The macroeconomic and geopolitical environment remained fragile. Here in the Nordic region, we have so far coped well with the macro uncertainty. However, economic activity has slowed down. We are all learning to operate in a new environment after many years of low, zero and even negative interest rates. We are seeing the normalization of positive interest rates now. Now we must be prepared for higher interest rates for a longer period of time. Asset prices and investment opportunities will also need to adapt to this reality. While employment rates have held up well, we are currently seeing lower economic growth estimates for the coming 12 to 18 months. We need to live with the prolonged uncertainty, but I am encouraged to think that the Nordic economies are in a good position to stand the test of time. In the new positive interest rate environment, banks in Europe have improved their profitability. This has attracted the attention of different stakeholders. But it should be recognized that societies, markets and the financial industry are learning to adjust rates that are now more in line with historical norms. It is also important to note that the ability of banks to support the needs of society requires them to enjoy investor confidence. Debt, the average European bank, is still valued below its invested capital. This is due to concerns about political and regulatory intervention as well as the potential economic risks from lower growth. Let's not forget that the transition away from a zero-rate environment to these more historical normal levels is a big shift. It has many impacts, including tough ones, and it doesn't happen overnight. The change is taking place, but it will require some time. The banking sector turbulence last spring showed that the financial industry is not untouched by these changes. we saw how crucial it is to have a strong, safe and profitable banking sector. This supports customers, economic growth and societies in all economic cycles. In this environment, we at Nordea continue to fulfill our role and responsibility as a bank. We ensure that credit is provided to viable business projects and households with the right balance between savings and borrowings. We are also investing to further strengthen the bank and drive growth. Our market position in the Nordic banking sector is strong and is supported by a strong balance sheet. Our broad product offering and prudent approach to interest rate risk management will also help us to sustain our leading position. You can see the strength of our franchise at work in the third quarter. We perform strongly with an active customer approach, high quality earnings growth and steady business volumes. Some highlights. Operating profit grew by 34% and EPS by 41% year on year. Total income increased by 19% despite significant weaker Norwegian and Swedish currencies in the quarter. The growth was mainly driven by a 36% increase in net interest income. Net commission income decreased by 4% year-on-year, while net insurance income increased by 66%. Mortgage lending was stable in a market with very low activity overall. Growth in corporate lending was 2%, asset on the management grew by 5%, and return on equity improved to 17.9%. Our cost to income ratio improved to 42 or 40% excluding regulatory fees. Credit quality remained very high with low levels of loan losses. Also, our capital position was very strong. Finally, our actions within the area of sustainability were acknowledged as we received a low risk rating for ESG risk from Morningstar Sustainalytics in its latest annual ranking. We improved our position and were ranked best among our Nordic peers. Let me now go deeper into the numbers, starting with the income lines. Net interest income increased by 36%. The main driver was improved margins due to policy rate hikes in all countries. This was partly offset by our deposit hedging and currency effects as we faced headwinds from the weak Swedes and, to a lesser degree, Norwegian currencies. Many economists expect rate hikes to peak this year and the central bank's policy rates to begin to fall in 2024. If this happens, our interest rate risk management through deposit hedging will help to mitigate negative effects on income. Naturally, the interest rate environment has led to more subdued market activity, dampening the demand for new loans. Despite the very low market activity, our mortgage volumes remained stable in the quarter. Corporate lending increased by 2%. Mortgage lending margins remained pressured in line with the general market trends. Net commission income was stable in local currencies. However, due to negative FX effects, the result in years decreased by 4%, excluding FX impacts, NCI was up 1%. Brokered and advisory fee income increased on the back of higher customer activity, and payment and car fee income was up due to higher volumes. We also continued to generate positive flows within our internal channels, but due to lower average asset under management, savings fee income decreased slightly. At the same time, net insurance results increased by 66%. Net fair value result decreased by 5% due to somewhat slower customer activity. We saw lower cost of risk management activity with the drop off mainly driven by FX products. Market making operations were stable during the quarter. Cost increased by 6% year on year. And this was driven by inflation as well as continued significant investments to further strengthen our technology and risk management capabilities. All cost development is in line with our plan. Our risk position and credit quality remain sound. Realized loan losses were low. Net loan losses and similar net result for the third quarter amounted to 33 million euros or four basis points. Our credit portfolio is well diversified and supported by prudent credit policies. that diversification is serving us well. Our loan portfolio is spread across multiple sectors in four home markets. This continues to provide considerable resilience. Naturally, the environment is becoming more challenging And we are following the impact of macro developments on our customers very closely. We kept our management judgment buffer unchanged and local currencies translating to 577 million euros. Our overall capital position remains very strong, and we continue to take actions to drive an efficient capital structure. At the end of Q3, our CET1 ratio was 16.3%, which is 4.3 percentage points above the current regulatory requirements. Our strong capital possession and balance sheet enable us to support our customers and society and also mean we have a strong capacity to grow our business both organically and through acquisitions. The latest Bolons, Top Danmark Life and Danske Bank's personal customer business in Norway are good examples of this. Let's then look at our four business areas. During Q3, the positive George trend continued. Each of our business areas grew income faster than costs. In personal banking, lending and deposit volumes were stable year on year. Our mortgage volume growth was stable in local currencies, despite the general housing market slowing down in all countries. We are seeing a drop in demand for new loan promises compared with a year ago, and pressure on margins continues. We increased the interest on all our savings accounts during the quarter, reflecting the change in rates. This ensures that we will maintain a competitive deposit product offering. Customer investment activity has followed the current economic environment and stayed lower than a year ago. However, we saw signs of increasing demand for recurring investments and stronger customer demand for our attractive range of deposit products. Customer use of our mobile banking app reached an all-time high with the number of logins up 11% year on year. As mentioned, to strengthen our market position in Norway, we have entered into an agreement to acquire Danske Bank's personal customer business there. The transaction is expected to increase our mortgage market share in Norway to around 16% from the current 11%. Total income for personal banking grew by 24%. Year-on-year, net interest income was up 37%, driven by higher deposit margins. Return on capital at risk improved to 29% from 19% in the same quarter last year. And the cost-to-income ratio improved to 42% from 49%. In business banking, we maintained solid business momentum and customer activity despite the weakening economic outlook. We have continued our proactive approach to support our customers and provided them with sound advice to navigate a tougher economy. Lending volumes rose by 3% in local currencies driven by Norway and Sweden. Deposit volumes fell by 2% in line with the market, Improved deposit margins continued to contribute to our results. During the quarter, we launched new versions of our Nordea Business Net Bank and mobile app, which have been well received by our customers. We continue to support our customers in the green transition. During the quarter, we saw strong demand for the new sustainability guarantee, which we launched in May in collaboration with the European Investment Fund. At the end of the quarter, our sustainable finance portfolio accounted for 10% of total lending. That includes lending with beneficial terms for investments in, for example, solar panels or energy renovations of commercial buildings. Total income was up by 20% year-on-year. Net interest income grew by 32%, supported by lending volume growth and higher deposit margins. Return on capital at risk in business banking was 24% compared with 17% a year ago, and the cost-to-income ratio improved to 36% from 43%. In last corporate institutions, we had solid overall results. Lending volumes were stable year-on-year, excluding foreign exchange effects. Deposit volumes were up 5% on the second quarter, but down 16% year-on-year due to more normalized liquidity needs in the energy sector. At debt capital markets, we continued to see activity recover. There was a gradual increase in investor demand for bonds on the back of the current interest rates and spread environment. In equity capital markets and mergers and acquisition, the market remained slow, although activity levels somewhat improved during the quarter. We continue to be a leading platform for sustainability-related advisory services and remain on track to facilitate 200 billion euros in sustainable financing by 2025. And again, we ranked first for Nordic Corporate Sustainable Bonds, according to Bloomberg. Overall, our third quarter results were solid, with total income growing by 10% year-on-year, net interest income grew by 26%, return on capital at risk was 19%, up 3 percentage points on the same quarter last year. And finally to our asset and wealth management business, which also performed well in the third quarter despite volatile markets. The third quarter is a seasonal slower period, but we had positive net flows in private banking, Nordic retail funds and life and pensions. We also continue to attract many new customers. Altogether, net flows and internal channels amount to 0.6 billion euros, showing the strength of our franchise. In life and pension, gross written premiums in the quarter amount to 1.8 billion euros, up from 1.3 billion a year ago. Year-to-date, gross written premiums reached an all-time high of 6.2 billion euros. We continue to develop our internal channels. We have been integrating Top Denmark Life, now called Nordea Pension, which we acquired last December. And in the third quarter, we launched our new Nordea Advenance corporate offering in Sweden. In prior banking, the acquisition of Danske Bank's Norwegian operations strengthened our position in Norway. Net flows in external channels were negative at 1.5 billion euros driven by the third party wholesale distribution segment. As we have seen before, the recent interest rate hikes have led clients to switch from low-risk funds to traditional banking products and direct government bond investments. Total income for the third quarter for the division was up 15% year-on-year, mainly due to higher deposit income. Asset under management increased by 5% year-on-year to 360 billion euros. Return on capital at risk was 55%. And the cost-to-income ratio improved to 40% from 45%. Let me conclude. This was a good third quarter for Nordea in a climate of high volatility and low predictability. We continue to deliver on our priorities and our financial target. We expect our return on equity to be comfortable above 15% for the full year 2023. As communicated earlier, we are reassessing our long-term financial target for 2025 and plan to provide a target update in connection with the Q4 report. Over the past four years, we have consistently improved our performance and profitability, driving high-quality earnings. This demonstrates the enduring strength and resilience of our well-diversified pan-Nordic business model. We have a strong market position in the Nordic financial services industry with a strong balance sheet and capital position. All this will help us to continue to deliver outstanding support to our customers, sustainable growth, high profitability and market leading shareholder returns. Now and in the future. Thank you.

Thank you, operator.

We're now ready for the questions. The next question comes from Magnus Andersson from ABGSC. Please go ahead.

Yes, good morning. Starting off with costs, I was just wondering, first of all, whether you stick to your kind of round 5% cost growth indication for 2023. And secondly, I note that headcount was flat quarter on quarter for the first time in six quarters or so. quite a long time. So also, if you could say something about the outlook there, whether we've reached a new plateau and the outlook for 24, and perhaps in relation to that, have you looked at further investments into risk management, et cetera? That's the one on costs.

Good morning, Magnus. So I think we're still seeing pretty intense cost pressure out there. And when you add in some additional spend, such as the Danske Norway acquisition that we didn't plan when giving guidance, I think it's probably reasonable to expect we'll be more around the 6% mark for this year rather than the five we guided. But still, strong cost control and that additional spend relates to the things we've decided to do. So I think we'll be pretty solid. And then in terms of FTE, yes, you're right. We ramped up significantly, particularly in the areas of financial crime prevention. And I think that we've seen the bulk of that increase so far. So relatively stable going forward.

Okay, so all is equal to cost growth in 2024, then should be lower than in 2023?

We'll come back on 2024 cost growth next quarter, I think, but you can expect us to keep a tight control of costs.

Okay, thank you. Secondly, just on, I mean, you alluded on your asset quality yourselves, and when we look at the group level, there are hardly any stage migrations at all and generally very solid. How do you see this developing going forward? You were a bit more, sounded a bit more cautious in the Q2 conference call talking about gross provisions probably increasing, et cetera, but it's really hard to see anything yet. Has Q3 surprised you, even you, so far?

It's been pretty stable, Magnus, and I think that's encouraging. But, of course, we all expect that the macro situation that's putting a bit of pressure on customers will lead to some credit migration. I think it's always been difficult to call the timing, and we're always pretty cautious on this, but it's been solid so far.

Okay. Thank you. That's all for me.

The next question comes from Jacob Hesselvik from SEB. Please go ahead.

Hi, good morning, everyone. So my first question is on lending margin and deposit margins, and if you have seen any further migration from deposit to savings accounts in the different countries.

Should I? Hi, Jacob. It's Frank speaking. So the lending margin, I think the direction of travel right now is downwards. But probably a bit more stabilizing on a sort of like or closer stabilizing than it was a quarter ago. Morgan's market is still very squeezed marketing-wise, and that goes for most of the countries. Corporate is a bit better. So let's see. Usually when you don't have any growth in the markets, the competition will be sort of like significant, and then you have a migration on the deposits, which I will come to now. So there is still a migration towards savings products, savings accounts, and also term deposits, which is just natural. There's no drama behind it, but we're all learning to live with higher rates. So are customers, so are societies, and there will be some flow towards higher interest rate accounts to come as well.

A couple of percentage points shift over the whole year, but that's a natural thing to see. Yes.

Okay, so I should think that in personal banking division in Norway, we saw for the second consecutive quarter a decreasing NII. Is that then rather more due to the notice period being increased to eight weeks from six weeks? That is a headwind for you.

Yeah, I mean, Norway's certainly a special case in that regard with that notice period. So that's always been a lag. And the more frequent rate rises we see, the lag is difficult to leave behind, if you like. We saw two hikes in Q3, which we need things to settle down before we start to see margin widening come through. And, of course, then there's the FX effect, which always is a feature with our Norway and Sweden businesses.

Perfect. And just a last clarification on your NII and page 17. Do I understand the graph right that you currently miss out on 100 million euro on 50 bps higher rates due to your hedge that you have in place and that you would gain 400 million euros while we are on upward trend without the hedges in place?

Yeah, that's the right way to think about it. So with the deposit hedge in place, we forego a little bit of interest income when rates are on the way up, and then it protects us when rates are on the way down.

So it should be quite a good outlook for NII next year then, I guess.

I think that's reasonable.

All right. Thank you so much.

The next question comes from Sophie Petersens from J.P. Morgan. Please go ahead.

Hi, here is Sophie from J.P. Morgan. I was just wondering if you could elaborate a little bit more on the net interest income improvement that came from your treasury-related items. How should we think about this net interest income going forward? And then just going back to the previous question, if you could also give a split of your deposit, how much is now in transaction account, how much is in savings account? And also just to remind us, are you now paying at least 25 basis points in all the different Nordic countries? And then just the final question would be, But I noticed on the CRE slide, you no longer give the ICRs or stress ICRs. Would it be possible to just comment on where the ICR and where the stress ICR for the commercial real estate could be? Thank you.

Okay, I'll start with your NII questions. I mean, Sophie, and good morning, by the way, the Treasury stuff, it's a bit of a catch-all. There's bits and pieces in there that don't relate to business areas, and there's no particular standout item. So I'm not going to point to anything particular in there. In terms of the split between transactions accounts and savings accounts, I think we said before it's around about sort of 40-60. And as we said in response to the earlier question, there's probably been a couple of percentage points movement towards savings accounts within that over the year. Nothing dramatic, but it shows that customers are picking up our really good deposit savings products. On the transaction accounts, currently we have 25 basis points in place in Sweden. It will come in the fourth quarter in Denmark and in Finland, and nothing in Norway as of yet. That's not a big impact for us and realistically not for customers either, but it's something that I think the market has chosen to do. You had a question on ICR. Sorry, I was busy scribbling down all your AI points there. Could you repeat?

Well, yeah, sure. So I was just wondering, in the second quarter presentation, you had the stress ICR and the current ICR and also the value, which I don't see defined in the third quarter presentation. So I was just wondering if you could give what the ICR and stress ICR is for your theory book is.

So our commercial real estate book has been pretty stable in Q3, and so we didn't have anything to particularly update, so we didn't give the information again. So a pretty stable picture, certainly as regards our portfolio, so nothing more to report.

Okay, I see. Thank you very much.

The next question comes from Nicholas McBeath from DNB. Please go ahead.

Thank you. So first question, please, if you could comment on what do you think is possible for net fair value results on a normalized basis in the current interest rate environment?

Hi, Nicholas. This is Frank. So it's always difficult to assess this line. Usually we would say What you have seen sort of like the last couple of quarters is sort of like probably where we would like it to be. This quarter is a bit lower due to less FX and rate hedges from the corporate clients. And we will probably be sort of like a bit slower in the coming quarters as well if nothing happens within the markets. But it should be nowadays a quite stable line, I used to say. And it might be that it will be a little bit higher than now in this quarter, but don't expect a very high number.

that is actually not what we sort of we try to keep it low and stable uh basically just mirroring the risk level the lower risk level we run the bank with okay thank you and then another follow-up question on the deposit hedge impact so if i look at the bridge on uh slide four in the presentation uh the year-on-year headwind is 280 million euros so that's translating to 830 something million on an annual basis, annualized basis. And presumably you would have had some headwinds already before Q3 last year. So is it correct that the current annualized headwind from the deposit hedge should be substantially above 830 million? Is that the way we should think about it?

Hi, Nicholas. No, it's not. What you see in Q3, I mean, I guess the impact of the hedge has built over the quarters. In fact, if you look back into 2022, you saw sort of mild net positive impact earlier in the year. So you shouldn't be annualizing that 200. It's somewhat lower than that for the full year. And yeah, so definitely don't multiply that one by four.

Could you comment in any more kind of explicit way where you think the annualized deposit hedge impact is, around what level?

Look, I think for this year, I said it's not four times 200. I think it's going to probably end up around the sort of 600 mark.

Okay, perfect. Thank you.

The next question comes from Riccardo Rovier from Mediobanca. Please go ahead.

Thanks. Thanks for taking my questions too, if I may. The first one is probably for Frank. Yes, very, very recently, the ECB has decided to go ahead with the digital euro. Is it something that you see as an opportunity, as a risk? Have you budgeted anything in the coming years to comply with that? So just if you can share your thoughts around this brand new topic. And the second question I have is again on the hedging, if I may, Ian. Is the hedging compatible with rates trajectory depicted by central banks, or with a rates trajectory embedded in forward curves, because there is a bit of a difference. The central banks in Sweden and Norway, they see rates stable for quite a long period of time at the current, or just maybe a bit higher level, while markets is different, it's much shorter. And in this top, and if If the situation of rates changes, can the edge be flexible and you can reshape it, remodel it somehow to adapt to new rates expectations? Thanks.

Hi, Richard. Let me take the first one and then Ian take the second one, please. So digital euro. So, yeah, I guess it's a question that has been wobbling around for quite some time. And I have met many central bank governors the last couple of years. And what is very interesting and nobody has really been able to explain the why. And I still miss a clear why for why this is very, very good idea. But it's got, you know, let's see, EZB is embracing it a lot and that's probably also why you ask. It's nothing that fails a lot, right? We are, you know, listening, learning. We have given our clear sort of like opinion about it that not we are against, but if we go that direction, we will need to understand what are sort of like the impacts and the consequences. And still, it feels a little bit like solution looking for problem. But let's see. So we're curious. We're listening. And of course, we will adjust to it if it really starts to take speed. I don't see any sort of like big cost right now. And we are not planning for sort of like significant cost pressure or anything in this regard. So that's where we are right now.

Thank you. Thank you very much. Very interesting.

And good morning, Ricardo. Our deposit hedge is a risk management instrument. So we don't take a rate view on it. We don't use it to manage our NII. So I guess just thinking about the context of your question, when we roll a portion of the deposit hedges every month, I guess the cost of those derivatives reflects the forward curve. So some market expectations are built into that. But that's simply the pricing of the instrument. We don't take a view on rates. There is some flexibility in determining how much of our stable deposit base we choose to hedge, and I guess some flexibility in duration, and we always look at that. But primarily it's about managing downside risk in the rate environment rather than thinking about making a call on where rates might be.

Ian, just for me to understand, If somehow the hedge follows the forward curves, assuming the forward curves, assuming central banks are right and forward curves will adapt to the central bank's trajectory, would this mean the hedging would cost you more than it is costing you today?

I'm not sure I understand that question and I think the answer is no. What we do today is we purchase derivatives to hedge a portion of our deposits each month and those are based on I guess market rates which bake in forward expectations. That's as far as it goes. If rates follow a different path, I guess it can have an impact because that will impact the price of the rates at which we fix and we settle in derivatives. But it's not something that we look at particularly. All right, thanks.

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

Hi, thank you. So just a couple of questions. First, on the CRE portfolio, there was this initiative by the Dames to increase the systemic risk weight on those exposures specifically. So I guess my question there was just, A, could you say something about what impact that might have on you? And secondly, are you having or seeing similar debates in any of your other Nordic economies with regulators, considering the capital levels that are being held by banks for specific exposure groups. And then my other question was just on NII. I think you talked in an interview about flattish NII, and I guess that's relatively consistent with your forward curves. But are there other material moving parts apart from the hedge in terms of deposit flows or pricing going into that? And I guess two observations. One, SBAV in Sweden is pricing at 3.75% of savings accounts. Can you maintain the low levels? Do you think large banks can maintain the low levels you have currently on a relative basis? And secondly, do you see clients or your own advisors proactively moving people out of savings accounts and more into fund products at this stage? Is that not really a debate you're having? Thank you. I'm sorry for the number of questions.

Yeah. So morning, Jakob. So in Denmark, Yes, the proposal is for a systemic risk buffer related to real estate lending. And it's going through the approval process in Denmark at the moment. And then there is a further step, I guess, which is then the Finnish FSA would have to decide whether it should be reciprocated in the group capital requirement. If it's reciprocated, we estimate that it's something of the order of 10 basis points impact on capital requirement. However, what I think we should all understand, and of course we'll make very clear to the authorities, is that currently the ECB has us operating with a risk-weight flaw on real estate exposures. And that means we already hold additional capital in relation to our Danish real estate exposures. And so it doesn't make a great deal of sense to us to add more on top of that. So we'll make that argument pretty strongly. In terms of rumblings about whether any other of the suite of regulators is thinking about specific exposures or sectors or anything, we're not hearing or seeing anything at this stage.

And then on deposits, the pricing. So I actually think we have very competitive prices at the moment. So you mentioned SBAB, that's a Swedish competitor, state-owned. And yes, they are running a campaign for deposits. But when you compare with, for example, our three-month deposit rate, then it's currently 3.8%. in Sweden. So it's a very strong competitive offering we have. I think there will always be some that will try to buy a deposit and that's the mechanics or the dynamics in the markets. But I feel that we are having a good offering and it serves us well. So no big change there, I should say. Then, as I understood your last question, Jacob, that was, do we see any signs of movement from or traffic from deposit savings accounts to investment instruments? Was that the sort of like the question?

Yes, and also, I guess, if your advices are driving that kind of movement. driving it. I guess either from the clients.

Yeah, I get the question. So we're not driving it, of course, but we are having the discussion, especially with the ones that have been active in investing their money earlier and perhaps is a bit muted right now or silent right now. Then we do, of course, have discussions. What is the appetite and when would the time be right to enter the market? What we do see is small signs of the sort of like continued investment, so monthly savings, for example, into funds. That is starting to pick up a bit again, but it's still early days, I would say.

Jacob, just a... Thank you very much. Jacob, just a... A follow-up on one of the points you made in your question where you talked about NII outlook being flat. I'm not sure how you picked that up. I mean, I think, as I said, if you annualize the Q3 net interest income, I think we end up in a higher place in 2024. We're not seeing a fall-off in NII, certainly in the near term.

Yeah, no, I think you're right. The way I understood it was that we're entering a period of more slack in AI development relative to Q3 going forward, relative year on year.

Let's see what happens. I mean, I know that there's a bunch of things that factor into it, you know, rate rises, deposit pass-throughs, lending margin, all those sorts of things. But we're pretty constructive on AI into next year.

Thank you very much.

Good. I think that was the last question for today. So thank you so much, all of you, for good questions and for participating. And as always, we're here for you. So just reach out if you have any questions. Thank you so much.