Nordea Bank Abp

Good morning and welcome to Nordea's fourth quarter and full year 2023 results presentation. I'm Ilkka Ottala, the head of investor relations for Nordea. Here in Helsinki, we have our CEO Frank van Jensen and our CFO Ian Smith. Today, we'll start with a presentation by Frank, followed by further details on our updated 2025 targets by Ian. After that, you will have a chance to ask questions. Please remember to dial in to the teleconference to ask questions. With that, I'll leave the stage to our CEO, Frank van Jensen.

Good morning. Today we have published our fourth quarter and full year 2023 results. 2023 was another strong year for Nordea. Despite the weakening economic environment, we kept up good business momentum and we moved forward in line with our priorities and business plan. And this led to solid financial results, Our return on equity was 16.9% for the full year, up from 13.8% in 2022. The trend has clearly been positive. Return on equity has consistently improved over the past four years, making us one of the strongest and most profitable banks in Europe. Our higher level of profitability and strong capital generation have, above all else, given us a great capacity to support our customers. This has always been our priority and is all the more important in the current economic climate. Rising prices and higher interest rates have affected economic activity. Households and businesses are feeling more uncertain about the future. But our customers have generally adjusted well to the new environment and the Nordic economies have demonstrated considerable resilience. At the same time, we have seen that our customers continue to show trust and confidence in Nordea as their financial partner. This was evident in higher customer activity and improved customer satisfaction scores in 2023. All in all, this was a good year for Nordea with good business momentum, which we also carried through Q4. If we look at the highlights for the quarter, our return on equity was 15.9%, excluding the write-offs of intangible assets we made in Q4. Earnings per share was 31 euro cents. Our underlying profitability was supported by a 19% increase in net interest income as net interest margins continued to improve. Net commission income decreased by 3% year-on-year and net insurance result decreased by 15%. Net fair value result was unusually low after being negatively affected by interest rates volatility. Total income was up 1% year-on-year despite the very low net fair value result. In Q4, we continued to see robust levels of lending despite the slow markets. Mortgage lending was stable and corporate lending was up 1%. Our cost-to-income ratio was 42%, excluding regulatory fees and the write-offs. We continued to have low net loan losses and our credit quality remained strong, as did our capital generation. Given our strong financial position and our full-year results, our board has proposed a dividend of $0.92 per share for 2023, a year-on-year increase of 15%. Today we have announced an updated 2025 target. We are now targeting a return on equity of above 15%. I'll come back to this a little later. For 2024 we expect our return on equity to be above 15%. Let us now take a closer look at the Q4 numbers starting with the income lines. Net interest income grew by 19% year-on-year. The increase was driven by higher margins resulting from higher policy rates in all our home markets. These positive impacts were partly offset by lower lending margins and FX impacts. Our deposit hedge continued to be a headwind given the higher rates, but will support our net interest income when rates start to decrease. With inflation and interest rates at their highest level in 15 years, the housing market has been subdued. Demand for mortgages continued to be slow and demand for new loan promises remained lower than a year ago. In this market, we maintained market shares in our home markets and continued to grow our share in Sweden. In line with the market trend, our mortgage margins remained under pressure. In the corporate market, activity was lower than a year ago. However, we grew our corporate lending by 1% and increased market shares in our prioritized segments. For net fee and commission income, the picture was mixed for the quarter. NCI decreased by 3% year-on-year, driven by FX impacts, lower lending-related commissions, and lower net income from payments and cards. Excluding FX impacts, NCI was stable. Brokers and advisory fee income increased on the back of higher customer activity. Savings income decreased slightly due to lower average assets under management. We continue to generate positive net flows within our internal channels. 1.9 billion euros this quarter. The institutional and third-party wholesale distribution net flows remain negative in the current environment. Net fair value was unusually low in Q4 after a very strong quarter a year ago. The treasury result was negative 47 million euros compared with positive 117 million a year ago. The lower result in treasury was mainly driven by interest rate volatility that caused negative revaluations as vitaling spreads pushed bond prices down in the liquidity portfolio and hedge inefficiencies, most with short-lived impacts. The revelation resulted in particular from the substantial decline in long-term interest rates, a large part of which happened late in the quarter. These impacts were largely similar, but in the opposite direction to the impacts we saw in Q4 2022. However, customer activity remained strong. This was driven by FX and rate products. Cost for Q4 developed in line with our expectations for 2023. Costs increased by 2% year-on-year, excluding write-offs for intangible assets. Most of these write-offs were due to a change in our accounting practice for development costs related to digital services, which we already communicated about in December. Going forward, we will continue to manage costs with strict discipline. We are continually investing to further strengthen the bank. In the course of 2023, we invested an additional €240 million into strengthening our technology and risk management capabilities. We have made significant investments in financial crime prevention, business continuity, data protection and enhanced digital services. The investments help us to further improve our position as a digital leader, protect our customers and ensure we are a safe and trusted banking partner for them. They also keep us aligned with the evolving regulatory environment. We anticipate that in the coming years we will maintain additional investment spent on our technology and risk management capabilities as we did in 2023. Our credit quality remains strong and our net loan losses have continued to be low. Our loan portfolio is very well diversified across our four Nordic countries and multiple sectors and is supported by prudent credit policies. During the quarter, we experienced some minor impacts from higher interest rates and inflation in our loan portfolio as we expected. We have made a small number of specific provisions against lending to corporate customers, those in industries more affected by the macro conditions. However, net loan losses were low at €83 million for the quarter. We have kept our overall provisioning levels and our coverage unchanged. Our management adjustment buffer stands at €495 million. We have also provided an updated overview of our commercial real estate exposures. Our commercial real estate portfolio continues to perform well. Overall, our customers and for-home markets continue to show considerable resilience. Naturally, with the environment being what it is, we are continuing to closely follow the impact on our customers and are prepared to help when needed. Capital generation was strong in Q4, and our overall capital position is good. At the end of the quarter, our CT1 ratio was 17%. This is 4.9 percentage points above the current regulatory requirement and demonstrates our strong capacity to support our customers, shareholders and society. Looking ahead, as we previously guided, we expect our new retail models to lead to some capital headwinds and now estimate a risk exposure amount, rare, increase of around 10 billion euros in the second half of 2024. This is still uncertain and subject to regulatory approval, but will reduce our CET1 ratio on implementation. Our acquisition of Danske Bank's personal customer and private banking business in Norway will also consume some CET1 capital. Our CFO, Ian Smith, will talk more about this later in the discussion on our financial target. Given our strong financial performance and capital generation, we are able to deliver solid returns to our shareholders. We are continuing in this manner with the proposed increase in dividends for 2023. Our board has proposed a dividend of 92 cents per share for 2023, a year-on-year increase of 15%. Together with our share buybacks last year, the total distribution will amount to approximately 1.27 euros per share, or 11% of our market capitalization. More than half of our shares are held by Nordic investors, including over 570,000 private individuals, which means that our dividends and buybacks help drive economic activity across the region. Through our distributions, our lending and financing activities, and our contribution as a major Nordic taxpayer, we are pleased to do our part to help the Nordic societies stronger. Let's now turn to the results of our four business areas. Each performed well in 2023, a trend that continued in Q4. In personal banking, we drove solid business momentum using our omnichannel model to connect with customers and support them with their banking needs. Use of our digital services reached a record level with logins for 2023 as a whole up 13% year-on-year. Our advisors were highly active, holding more than a million advisory meetings with customers, an increase of 9% on 2022. The Nordic housing market has been subdued, and in the fourth quarter there was lower demand for new loan promises than a year earlier. Still, we held our ground in mortgage lending, maintained a stable level of volumes with some pressure on lending margins in line with the overall market. We maintained our market share in mortgage lending across the Nordics and we continued to grow our share in Sweden. In Q4, our deposit volumes increased by 1% supported by new deposit products launched during the year. We also continued to see some further migration from transaction deposits to savings deposits. Despite the economic climate, customers have increased their savings activity, as seen in the net flows of €400 million into Nordic retail funds in the fourth quarter. Our plans to strengthen our position even further in the Norwegian market are on track. During the quarter, we got approval from the Norwegian Competition Authority for our acquisition of Danske Bank's Norwegian personal customer and private banking business. The acquisition is expected to close in the fourth quarter of this year. Total income grew by 10% year-on-year, driven by a 16% improvement in net interest income. Return on capital at risk improved to 26% from 23% in the same quarter last year. And the cost-to-income ratio improved to 45% from 46%. In business banking, we continued our solid performance. Despite the slow SME market, we grew lending volumes by 1% in local currencies year on year, driven by Sweden and Norway. Deposit volumes increased by 1% too, and we saw increasing demand for our savings and fixed-term deposit products. Alongside being very proactive towards our SME customers, we have continued to develop our digital offering. For example, in the autumn, we launched a new version of our award-winning Nordea business app, which lets customers manage and purchase products through their smartphone. We have improved the user experience and added new self-service features, including improved transaction search and multiple new savings and investment functions. The expansion of our digital services has supported increased usage and logins in Q4, where up 8% year-on-year and 7% quarter-on-quarter. Our efforts have helped us to improve customer satisfaction with scores higher in all countries and segments in Q4. A key focus is on supporting our customers' sustainable transitions. During the quarter, our green asset portfolio increased to 11% of total lending. Demand was also high for climate-focused deposits, which offer customers a way to invest their excess liquidity while helping to finance green assets. Total income was up 10% year-on-year, driven by improved deposit margins and higher lending volumes. Return on capital at risk was 23%, compared with 21% in the same quarter last year. And the cost-to-income ratio improved to 39% from 40%. Large corporates and institutions continued to focus on being proactive and offering good support to our customers in turbulent economic conditions. In Q4, lending volumes were broadly stable. Deposit volumes decreased by 7% year-on-year in local currencies but were up 4% from Q3. The credit quality of our LC&I loan book remained strong and loan losses continued to be low and driven by true customers in different sectors. Investment banking had a strong end to the year, delivering its second strongest performance to date. Debt capital markets activity continued at good levels, which increased investor appetite for bonds in the tighter credit spread environment. In equity capital markets and mergers and acquisitions, market conditions remained tough, although activity levels somewhat improved, particularly in private equity. Our total income decreased by 4% year-on-year, driven by the significant lower net result from items at fair value. This was upset by the strong growth we had in net interest income and net fee and commission income. Return on capital at risk was 19%, down 2% points on the same quarter last year. In asset and wealth management, higher customer activity in private banking contributed to continued good net flow momentum in internal channels. We were able to drive this performance even despite the continued market uncertainty. Q4 net flows from internal channels amounted to 1.9 billion euros. Net flows were positive in all internal channels. In life and pension, we continue to put our growth plans into action, supported by recent acquisition of Top Denmark Life, now Nordea Pension, an advance that strengthened our position in savings. Gross weighting premium in the quarter amounted to 2.3 billion euros, up from 1.2 billion a year ago, driven by the Nordea Pension acquisition and growth in Sweden and Norway. For the full year, gross written premiums reached an all-time high at €8.5 billion. In external channels, net flows were negative due to the market environment, as clients continued to favor fixed-term or money market funds, traditional banking products and direct government bond investments. Asset management increased by 5% year-on-year, driven by appreciating stock markets. Total income for the fourth quarter was down 6% year-on-year, mainly due to lower net insurance result. Return on capital at risk was 44%, a year-on-year increase of 3 percentage points. The cost-to-income ratio was 50%, down from 43%, impacted by the integration of Nordea Pension in Denmark and investments in nearshoring and risk management. Looking ahead, today we have announced our updated financial target for 2025, which is a return on equity above 15%. Ian will go into more detail in a moment, but let me give a brief overview of why we are confident in our ability to sustain high profitability. Our confidence is grounded in the progress we have made over the past four years. When we set a new direction for Nordea, we promise to focus on improving the customer experience and driving profitable growth for the Group. Despite the constant changes in the external environment, we have done this. The significant structural improvements across the Group has led the foundation for consistent high-quality earnings with high profitability and less volatility. Today we have a clear proven strategy that is working for us. We have a very strong business franchise supported by a diversified business model with operating income spread across our markets and business areas. We have a leading market position in all our markets and business areas with a leadership position in the Nordics as a whole. We have a Nordic market with great characteristics, including higher per capita GDP growth compared to the rest of Europe, strong welfare systems and a very digitalized economy. And we have a Nordic banking sector that is low risk, stable and profitable. Our foundation is strong and we have a clear direction forward with the ability to make tactical adjustments where needed. In the current environment, it means, for instance, shifting focus on ancillaries and cross-selling within and between our business areas. A key growth opportunity for Donera will be in further realizing our scale advantages as the largest financial service group in the Nordics. All in all, we are well equipped to drive sustainable higher performance. Finally, we have today also disclosed our outlook for 2024. We aim to again grow our income faster than our costs, though with narrower positive jaws than in 2023. We expect to deliver a return on equity above 15% for the full year 2024. And to conclude, Q4 was a solid quarter for Nordea, rounding off another strong year. I would like to use this opportunity to thank all our customers, shareholders and other stakeholders for their feedback and cooperation during 2023. I would also like to thank our employees for their great efforts during the year. Above and beyond the strong 23 figures we continue to deliver on our purpose and priorities. The role we play in society drives us to continually improve, build a leading bank in Europe, and earn the trust and loyalty of all our stakeholders. Our ambition is unchanged, to be the preferred partner for customers in need of a broad range of financial services. Thank you. And Ian, over to you.

Thank you, Frank, and good morning, everyone. I'm going to run through how we see the operating environment right now and briefly recap our progress in recent years. Both of these are helpful in understanding where Nordea is today and the outlook for the next two years. After that, I'll take you through the drivers and key assumptions underpinning our updated 2025 financial target and also provide some insight into how we expect 2024 to develop. Nordea operates in attractive markets with stronger growth prospects and lower credit risks than the rest of Europe. The Nordic region boasts open export-led economies with strong fiscal positions, modern infrastructure, world-leading digitalisation and robust labour markets underpinned by effective social safety nets. That provides a solid backdrop for Nordea to deliver best-in-class performance, and that is our aim. We're focused on our four home markets, with fairly even distribution of income in each, and with room to grow. Nordea is the largest and the only pan-Nordic financial services group in the region, providing scale and diversification, and crucially, lower earnings volatility. That confers a number of advantages on Nordea. For example, our ability to spread our risk, find pockets of growth, efficiently develop digital solutions that can be deployed across the region and fund better and cheaper than our peers. Delivering our strategy has led to a sustained improvement in return on equity. We refocused Nordea's business back in 2019 and since then have driven meaningful increases in profitability, delivering a sustainable step up in performance well ahead of the interest rate hike cycle. We regained market share, focused relentlessly on operational and capital efficiency, and grew our de-risk credit portfolio by clearly focusing on our Nordic home markets. Alongside this, we've also delivered a marked improvement in quarterly capital generation. The recipe is working well for us. In addition, we acted promptly with the support of the ECB to distribute excess capital following the lifting of the COVID payout restrictions. This has significantly improved our capital efficiency, helping to underpin our profitability. Looking back at our 2022 capital markets day, we were confident that we would reach a return on equity of above 13% in 2025, assuming quite modest rate increases. Of course, the environment is now very different. Rates have moved sooner and higher. And while they will likely come down between now and 2025, we think that they will normalize at higher levels than in the past 15 years. A new normal, one could say, that has enabled us to increase our target for 2025, cementing Nordea's position as market leading on profitability and shareholder returns. At the halfway point of our strategy period, Nordea's return on equity has raced ahead of expectations set at the capital market stay. Income has been much stronger, although our cost discipline, very low credit losses and accelerated buybacks have all contributed. Our income outperformance has of course been helped by rate hikes, but we should also look at what happened in the other key income lines. Net commission income was solid early in the period, but softened a little as the changed macro environment put pressure on assets under management and customer activity has been more subdued in recent quarters. Net fair value gains have been exceptionally high over the last two years, particularly as we help customers deal with economic turbulence and higher volatility. And that also helped to boost our stronger operating performance. That tailwind from volatility may subside over the next two years. And then capital. And it really is a game of two halves. In the first half of our strategy period, we quickly reduced excess capital and drove significant improvements in capital efficiency. In the second half, we'll absorb some known and previously discussed headwinds, including higher macroprudential capital requirements and Basel IV. We will therefore need to retain a small part of our strong capital generation in equity as we absorb these capital demands over the next two years. And while this naturally will be a minor drag on ROE, overall, we are fully on target with capital plans. So how do we see the next two years? Key to this assessment, alongside the continued execution of our strategy, are the expectations for economic growth and interest rates. And there's still a high degree of uncertainty for those. But we've taken a view and we show our assumptions for these parameters later in the slide deck. We expect to see cuts when central banks decide inflation is under control, even if the extent and timing of those cuts is uncertain. Our rate path assumptions are based on market expectations at the end of 2023, and even those have moderated a little since then. Critically, though, we share the market's view that rates will settle at positive levels, most likely around 2%. We think that volume growth will remain subdued in 2024 and be stronger in 2025. But whatever happens, we expect that Nordea will continue to increase volumes and market share, as we have done in the last few years. I'll talk in more detail about operating performance and capital in a moment, but let me deal quickly with loan losses. These have continued at very low levels, averaging three basis points over 2022 and 2023, but they will normalise at some point. As you know, our view is that normal level of loan losses are around 10 basis points per year due to our strong credit quality and the de-risking of our portfolio over the years. That remains our view, although the current macro pressures may elevate provision charges in the short term. And that is why we maintain a solid additional provision buffer of almost 500 million euro. Over the next two years, our aim is to continue to take market share and thereby grow lending a little ahead of the market. Even though interest rate cuts are likely, we expect NII to be fairly resilient. The pass-through on the later rate hikes was higher than the first rises, and similarly those first rate cuts are likely to have a smaller impact. So while we will see some reduction in net interest margin, we should retain the NIM improvement we saw in the early stages of the rate cycle. In addition, we'll see some benefit from our deposit hedge. And remember that our acquisition in Norway will increase net interest income in 2025. Net commission income will depend on activity levels and the development of assets under management. And so on that basis, we can expect 2025 to be better than 2024. And on net fair value gains, those can be impacted by macro volatility, of course. But our base case is that in a more stable or subdued environment, we will see lower levels than the average of the last couple of years. Costs grew in 2023 due to higher inflation and substantial investment in further strengthening Nordea in key areas such as digital, financial crime prevention and technology. And we will continue to invest in those areas. 2024 will also incur the majority of the costs for onboarding our Norwegian acquisitions. Offsetting the cost of those investments, you can expect to see our usual discipline in seeking out and delivering cost efficiencies each year. And we continue to expect a significant reduction in resolution fees for 2024. This points to us broadly maintaining our cost income ratio in 2024 and 2025, although there are a lot of moving parts to manage. Importantly, if the environment turns a little tougher, you can expect us to respond with cost initiatives. Turning to capital, I think you're familiar with the story so far. We were well prepared for the lifting of COVID restrictions on distributions, and Nordea was the first bank to gain ECP approval for buybacks. Since then, we've steadily increased our dividend per share with high payout ratios in line with our policy and acted quickly to reduce our structural excess capital through swift and substantial buyback programmes. We're therefore well progressed on our CMD commitment to return 15 to 17 billion euro to shareholders by the end of 2025. I'll briefly summarise how we expect our current capital excess to evolve through to the end of 2025. The normalisation of regulatory capital requirements is still in progress, although there is good line of sight of where we should end up given the announced increases in macro prudential buffers. That will absorb some of our current excess as we hit our estimated regulatory requirement, which together with our adjusted management buffer of 150 basis points will give us a target operating level a little above 15%. Rear inflation from the implementation of new capital models for retail later this year and the initial impact of Basel IV in early 2025 will further absorb excess capital. And of course, there's business growth together with our Norwegian acquisition. We'll therefore need to retain a small part of our strong capital generation in equity to ensure that we maintain our target operating level. Having said that, Nordea has substantially increased its quarterly capital generation over the last few years, and this lays a strong foundation for funding our growth, meeting the higher regulatory requirements that we flagged at CMD, and continuing to return capital to shareholders through an appropriate mix of dividends and buybacks over the next two years. We reaffirm our capital policy, strong dividend payouts supported by steady increases in dividend per share. And as previously guided, we will use buybacks as a primary tool to trim the excess capital we continue to generate. So likely to be smaller programs than before, but on a regular basis. All in all, we expect to slightly outperform our earlier commitment. and return a total of 17 to 18 billion euro to shareholders by the end of 2025. Let me close by repeating Frank's key messages. Our clear, proven strategy and key priorities are unchanged. Nordea is well equipped to deliver sustainable high performance in the attractive and low-risk Nordic markets. And our aim is to be the best performing universal bank in Europe. Thank you.