Nordea Bank Abp
Q1 2022 Earnings Call Transcript
Published:
- Matti Ahokas:
- Good morning, and welcome to Nordea's First Quarter 2022 Results Presentation. Here in Helsinki, we have our Group CEO, Frank Vang-Jensen; Group CFO, Ian Smith; and my name is Matti Ahokas from Investor Relations. As usual, we'll start with a presentation by Frank. And after that, you will have a chance to ask questions. [Operator Instructions] With that, I leave the word to our CEO, Frank Vang-Jensen.
- Frank Vang-Jensen:
- Good morning. Today, we have published our first quarter results. The start of 2022 has been extraordinary. Within the first couple of months, we witnessed a new wave of the pandemic, followed by a rapid lifting of restrictions. And then the war in Ukraine started in late February, shaking our societal building blocks; piece, security and stability. Our thoughts are with all who are suffering, fearing for their life and worried for their loved ones. We are carrying out our role in society, supporting our people and customers, helping the people of Ukraine, and ensuring business continuity. We have made sizable donations to help the Ukrainians and our people have been increasingly engaged in activities related to humanitarian aid. Nordea is a strong bank and continues to be a safe, trusted and stable partner for customers, for employees, for shareholders and for broader society. In these turbulent times, this is more important than ever. The resilience of our business has been tested and proven in many crisis. Building on the strong foundation and despite the turbulent external environment, we maintained strong business momentum, gained market shares across the Nordics and delivered a strong result in the first quarter. In Q1, we continued the positive lending volume trends. Our mortgage lending increased by 7%. Our SME lending was up 6%, and our large corporate lending grew by 11%. And asset under management grew by 6% year-on-year, but quarter-on-quarter, we saw a decline of 5% due to the negative impacts from financial markets. Total income was up 3%, driven by net interest income, which was up 8% and net fee and commission income, which was up 5%. Net fair value result was 20% below an exceptional strong Q1 a year ago, but still at a high level and up quarter-on-quarter. Our operating profit increased by 6%. Our cost-to-income ratio was 48%, stable compared with last year, even though regulatory costs were clearly higher this year. Our credit quality remained very strong with low levels of realized net loan losses. Our return on equity increased to 12.5% from 11% last year. In Q1, we completed our exit from Russia. We also made loan loss provisions for our direct financial exposure to the remaining few Russian counterparties. In relation to this, we had some extraordinary items during the quarter, and we have treated them as items affecting comparability. I'll come back to this a bit later. So let's look at the numbers starting with the income lines. In the first quarter, we continued to drive customer activity, which in turn led to strong growth in customer business volumes. Net interest income grew by 8% year-on-year That growth was mainly driven by strong volume growth in all business areas and markets. This demonstrates our ability to capture profitable growth across the board. We were able to maintain high activity in our mortgage business, even though markets have been cooling down a bit. Mortgage loan volumes increased by 7%. We grew in all markets with the highest growth rate in Sweden and in Denmark. On the corporate side, SME lending increased by 6% with the highest growth rate again in Sweden and also Norway. Last corporate lending increased by 11%. The volumes have now been growing for two quarters in a row following the repositioning of the business. The competitive environment has put some price pressure on lending margins but our approach is focused on profitable growth as always. On the other hand, deposit market increased, supporting the NII growth. Market interest rates increased in some areas during the quarter. If, in addition, policy rate hikes materialize in the Eurozone, now in Sweden. And in Denmark, this is expected to contribute positively to our financial performance. Also, lower funding costs on the recognition of the benefit from the ECB's longer-term refinancing operations contributed to the positive NII development. Net fee and commission income continued to grow, rising by 5% year-on-year. Savings income increased by 9% year-on-year, mainly driven by higher assets under management compared with the first quarter of 2021. Naturally, market turbulence and seasonal outflows had a negative impact on our savings income, which was down 10% quarter-on-quarter. The underlying net flow from our internal channels was positive despite the very turbulent markets. In addition, many corporate finance transactions were postponed due to the increased economic uncertainty. However, our pipeline is very strong and we expect this area to recover when the confidence increases. Payment and card fee income continued to increase following the removal of the COVID restrictions and higher activity. Our customer activity was very high during the quarter. And the net fair value result in customer areas improved by 15%. There was a clear increase in demand for FX and interest rate hedging products. The overall net fair value result was up 19% quarter-on-quarter, but down 20% year-on-year due to lower trading income in markets following the exceptionally strong first quarter of 2021. So moving from income to costs. Our cost development is progressing according to plan. We saw an increase in regulatory costs, primarily due to resolution fees and the Swedish bank tax. These were the main drivers of our cost increase. Excluding these regulatory fees, costs were up 2%. This was due to higher business activity. All-in-all, we remain focused on growing revenues faster than costs, while maintaining a strict cost control. The quality of our credit portfolio remains strong as has been the case during the entire pandemic and now even following the outbreak of the war in Ukraine. Our high credit quality is supported by our well-diversified and managed lending portfolio. Realized net loan losses were very low during the first quarter. Net loan losses and similar net result amounted to reversals of €12 million or 1 basis point. Even though the credit portfolio is very good, we have kept our management judgment buffer unchanged at €610 million. We find this approach prudent as it means we are well protected against potential future credit losses. Let me now describe the impact of the war, our exposure to Russia and items affecting comparability. We have no business in Ukraine. And we have made a strategic decision already in 2019 to exit all our Russian operations. Since then, we have been actively winding down our business there. And our direct exposure to Russia is very, very low. In Q1, we completed our exit from Russia. In relation to these decisions, we had some extraordinary items during the quarter. The first relates to the recycling of the accumulated FX losses, so we transferred €529 million to the income statement, which was previously recognized in other comprehensive income. This is a technical accounting item, which has no impact on our equity, CET1 ratio, our dividend and buyback capacity. In connection with the liquidation process, we also made loan loss provisions of €76 million for our direct financial exposure to the remaining few Russian counterparts. These two Russian-related items that recycled FX changes and the loan loss provisions are regarded as extraordinary and nonrecurring and are being treated as items affecting comparability. Furthermore, Nordea Asset Management decided in March to exit all fund investments connected to Russia. After the latest wave of the pandemic, customer activity has been picking up. However, there's no doubt that economic uncertainty remains high and business and consumer confidence is more fragile than in 2021. We expect to get a clear picture of the potential effects of the broader macroeconomic impacts of the war, including higher energy, food and commodity prices on our customers during the second quarter. All-in-all, Nordea remains strong and stable and continues to grow and gain market shares despite the turbulent external environment. For 2022, we continue to expect to reach a return on equity above 11%, meaning better than 11% and a cost-to-income ratio of the range of 49% to 50%. Our capital position continues to be one of the strongest in Europe. At the end of the first quarter, our CET1 ratio was 16.3%, which is 6.1 percentage points above the current requirement. This means we can continue to support our customers, pay out dividends and distribute excess capital benefiting our customers, our shareholders and broader society. Our Annual General Meeting in March approved the 2021 dividend of €0.69 per share. Including our share buybacks, we have distributed almost €4 billion to our shareholders so far in 2022. Moreover, we launched a new €1 billion share buyback program in March. We are also in discussion with the ECB regarding potential follow-on share buybacks in the second half of the year. Let me now move to our business area results. I'm pleased to see that all business areas had a strong start to the year. In Personal Banking, we demonstrated the strength of our omnichannel business model. We continued to build on our digital services, expanding our digital offering and improving customer experience. In Sweden, we were named Digital Coach of the Year 2021 by the business magazine Privata Affarer, which highlighted our efforts to help tackle digital exclusion. Our high customer activity led to further increase in volumes and mortgage market shares across the Nordics. Mortgage volumes increased by 6% and total lending volumes increased by 5% year-on-year. This is a strong signal in an environment where we see some signs of the market cooling down a bit. Margin development was relatively stable, but competition remains tight in the market. We are focusing on driving profitable growth by ensuring good service availability and expertise across all channels. During the quarter, we made it even easier for our customers to manage the savings, for example, by expanding the product offering in our digital channels. Monthly saving maintained the momentum, increasing by 3% year-on-year. Naturally, savings income growth was negatively affected due to the financial turbulence. Total income was up 5% and return on capital at risk improved to 18% compared with 16% a year ago, and the cost-to-income ratio improved to 50% from 53%. In Business Banking, the strong business momentum continued despite the market turbulence. We are reinforcing our position as the leading SME bank in the Nordics. Lending volumes were up 6% year-on-year. Our performance developed strongly, especially in Sweden and Norway, where we also continued to gain market shares. We were the number one bank for small corporates in Prospera's 2022 customer satisfaction survey in Sweden. We received first place ranking in six out of 10 categories in the survey, which led to the highest ranking for overall performance in Sweden. This result reflects our focus areas, knowledge, expertise, timely support in advice and in relation to sales and service in all channels. We also continue to actively support customers in the sustainability transition. Our green loans more than doubled year-on-year, and we continued to perform deep dive assessments on the most climate exposed sectors. Net interest income was up 12%, and net fee and commission income was up 3% despite lower capital markets activity due to the increased uncertainty. On the other hand, we had strong growth in net fair value results, driven by high customer demand for FX and interest rate products. Total income was up 12%. Return on capital at risk improved to 18% compared to 15% a year ago and the cost-to-income ratio improved to 42% from 46%. In large corporates and institutions, the high customer activity and good performance continued in the first quarter. We have continued to support our customers in multiple ways. This has led to increased lending volumes and increasing demand for several lots of financing solutions. Our lending volumes increased for a second quarter in a row following the successful repositioning of the business. Net interest income and lending volumes were both up 11% year-on-year. Net commission income remained solid, supported by strong bond income. As in Business Banking, LC&I had very strong customer activity in FX and rate products. On the other hand, many corporate finance transactions were postponed due to the increased economic uncertainty. Naturally, the pipeline remained strong, actually very strong, waiting for more balanced market conditions. Net loan losses amounted to reversals of €29 million, mainly due to restructuring in the offshore portfolio. Economic capital was up 1% year-on-year. Return on capital at risk was 19%, and the cost-to-income ratio was 38%. In Asset and Wealth Management, market turmoil affecting the first – or affected the first quarter performance. Our assets under management decreased by 5% quarter-on-quarter due to market turbulence and seasonal net outflows like dividends. However, excluding seasonal facts, the underlying net flow from our internal channels was positive despite the very turbulent market. In Private Banking, we generated net flows of €300 million across the Nordic region during this quarter. In Finland and Sweden, net inflows was particularly strong. Customer satisfaction in private banking remained high, driven by our productivity, personal customer relationships and innovative digital services. Year-on-year, asset under management increased by 6% to €389 billion, and total income was up 4%. Return on capital at risk was 30%, and the cost-to-income ratio was 45%. In addition, in March, we announced our acquisition of Topdanmark Life in Denmark. This will strengthen our customer offering and position in pension savings in Denmark and increase the share of capital-light income in line with our strategy. In February, we disclosed our new financial target and followed up with our Capital Markets Day, where we went through our plans for the strategy period 2022 to 2025. Our new financial target for 2025, a return on equity above 13%, meaning better than 13% is a firm target that we are fully committed to meeting. Our plans and targets have been created to stand the test of time and equip the bank for the future. In order to reach our target, we have reshaped our key priorities, which are to create the best omnichannel customer experience to drive focused and profitable growth and to increase operational and capital efficiency. We are also focusing on two key levers cutting across the entire bank, being a digital leader among our peers and integrating sustainability into the core of our business. That is how we will pave the way forward to be the preferred partner for Nordic customers in a need of a broad range of financial services in both good and in challenging times. Thank you. And now we are happy to take your questions.
- Matti Ahokas:
- Thank you. Operator, we’re now ready for the questions.
- Operator:
- Thank you. [Operator Instructions] We will now take our first question. Caller please go ahead. Your line is now open.
- Magnus Andersson:
- Yes. Hello. This is Magnus Andersson at ABG. I would like to start just with NII. First of all, I note that a good NII trajectories you had quarter-on-quarter in all business areas and also the strong volume growth, particularly in large corporates and institutions quarter-on-quarter. So I just wanted to ask you whether there is anything in there of kind of more temporary nature bridge financings, et cetera, any effect that we should expect to potentially roll off in the coming couple of quarters, unless obviously, markets would pick up or anything like that? That’s the first one on NII. Secondly, of course, just on rate sensitivity. You have previously talked about the €300 million sensitivity to 50 basis points higher rates, €150 million in Sweden and €50 million each in the other Nordic countries. If you could be a bit more specific there, confirm that this is still your base case and talk us through the dynamics there with floored lending volumes, deposit pricing, et cetera, how we should expect this to play out going forward. Finally, just on costs, will you can confirm that you still expect that the lion’s share of the resolution fund fee will be abolished from 2004 – 2024 and preferably tell us how much that is because I just realized that consensus estimates are almost flat quarter-on-quarter? And if 75% disappears, that’s roughly 4% of the cost base alone. So that’s my questions. Thanks.
- Frank Vang-Jensen:
- Thank you, Magnus. Ian, would you?
- Ian Smith:
- Good morning, Magnus. I’m Ian here. So we had a really good end to the quarter in LC&I with both sort of regular underlying lending growth, but also as you identify, we had some bridge financing, bridges to equity and others. So I think our broad sort of estimate is about half of the NII growth is the underlying lending volume development. And then probably the second half of it is related to some of the more temporary lending, but a really, really good finish to the quarter in LC&I. On rate sensitivity, yes, look, I think our sort of base case estimate of €300 million or so for 50 basis points across the board still holds as a good sort of estimate of impact. But as you point out, lots of different moving parts in there. Swedish rates moving, we will start to see benefits immediately. It will take a little bit longer to start to see the real benefits come through in Denmark and the Eurozone for a couple of different reasons. So in Denmark, as you know, we currently charge for certain deposits. And of course, there will be a bit of a dynamic, while rates move from negative into positive territory and as we work with customers on what the right sort of deposit pricing is. So that will sort of move a little more slowly with early hikes as they move towards at zero and into positive territory. Similar in Finland because of the zero rate floors on lending there. So I think, the key message is we’ll start to see some benefits immediately when the Swedish rates move. And as Denmark and the Eurozone move towards positive territory, we’ll really start to see the benefit come through there. So that’s the sort of broad shape of things. On resolution fee, we’ve never so far disclosed the impact, the sort of quantum that we expect to fall away. It is substantial. And no reason to believe yet that – sorry, let me rephrase. Our working assumption continues to be that it will reduce significantly from 2024 onwards and nothing to change that as yet.
- Magnus Andersson:
- Okay. And just to be clear then on the rate sensitivity. I mean in this 50 basis point, €300 million, I mean you are starting at minus 50 basis points down in the Eurozone, kind of zero in Sweden, I presume.
- Ian Smith:
- Yes. That’s right.
- Magnus Andersson:
- Yes. Okay. Thank you very much.
- Operator:
- We will now take our next question. Caller, please go ahead. Your line is open.
- Andreas Hakansson:
- Yes. It’s Andreas Hakansson from Danske Bank. So to start with just following up on Magnus’ question. You didn’t mention Norway. And of course, you’ve seen a problem in Norway that every time we had a rate hike, you have a short-term negative impact to how you communicate with your clients and so on. Now you start to see more of a positive impact. Would you say that we now reached a level where we’re all going to have the positive impact coming through even if we are further rate tax, let’s start there?
- Frank Vang-Jensen:
- That will be – hi, Andreas, that will be our assumption, yes. So then exactly how it will play out, it’s difficult to assess, of course, or finally conclude on. But the assessment is that now we start to see like the benefits of the rate increases. Ian, anything to add there.
- Ian Smith:
- Yes. I think the only thing to add, Andreas, is we always indicated that the successive rate hikes in 2022 would make 2022 a bit bumpy and then in clear water in 2023. But as Frank says, we’re now starting to see the benefits of that come through, having taken a couple of those sort of lag periods on the hike so far.
- Andreas Hakansson:
- Okay. So Sweden and Norway is what’s going to drive the rate part of NII rather than Denmark and Finland, I would assume, at least during this year or first half of this year.
- Ian Smith:
- In the short term, yes.
- Andreas Hakansson:
- Just to guesstimate, we hear different – sorry?
- Ian Smith:
- I said, in the short term, yes.
- Andreas Hakansson:
- Yes, exactly. We hear comments about different drivers of loan growth in each of the countries. Could you tell us a little bit where do you see potential for accelerating loan growth, a good loan growth, especially on the corporate side across the Nordic region at the moment?
- Frank Vang-Jensen:
- So the corporate side is growing this quarter, actually quite fast in both segments, the SME segment by 6%, and we discussed 11% in which we include the – which include like some temporary or some bridge finances. But with this, on the contrary, on the other side is like the nature of an LC&I business. So we are growing fast in BB, Business Banking, SME, in Sweden, and we expect to continue to do so. Norway is showing very strong growth. We expect to continue to do so. Finland is up to 3% and actually growing a bit faster than the market. And I think that will probably what you will expect to see also in the coming quarters. Denmark is not showing any growth, that will change, that we expect to change. That is our expectation toward the leadership team in Denmark. And I see some positive signs. So let’s see how that will play out. When it comes to LC&I, it is profitability that is the main focus of ours. But now actually, it’s quite encouraging to see that we – after like 2.5 years, having trimmed down the business, made it much more profitable, much more focused, then Martin and the team after this successful change, also actually find profitable growth, and we have seen that in two quarters now. So I would expect LC&I in D&L to show some growth in the coming quarters. Ian, anything to add here?
- Ian Smith:
- I think you covered it, Frank. Thank you.
- Andreas Hakansson:
- Okay. That’s it for me. Thank you.
- Operator:
- We will now take our next question. Caller, please go ahead. Your line is open.
- Antonio Reale:
- Good morning. It’s Antonio Reale from Morgan Stanley. Two questions for me, please. One on indications from rates and the second one on costs. You talked about sensitivity, how should we think about the possible impact from higher rates on other items, such as fees or credit demand, especially from corporates going forward? That’s my first question. My second question is on cost. You’ve confirmed your cost-to-income ratio guidance of 49% to 50% for this year, which, if I remember right, includes investments, regulatory cost as well as Swedish bank tax. And my question is what flexibility do you have on the cost side to mitigate any potential additional cost inflation you may experience? Would you reconsider or delay some of the investments you had planned? Thank you.
- Frank Vang-Jensen:
- Yes. Would you take?
- Ian Smith:
- Yes. Good morning, Antonio. I think it might – sort of rate rises and other things might have an impact on loan demand, but I suspect sort of reasonably small hikes, it might not be that material. And I think the bigger watch out, I guess, is growth and the sort of likely broader macro. But I think there is still among Central Bank forecasts that are out there, a sense that we will see growth in the Nordic region. So I don’t think we’re particularly concerned about that, and I think the rate hikes are good for our business. On costs, we have the usual flexibility, exactly as you described, in terms of what we might do with discretionary expenditure or the pace of investment. But of course, it’s a bit of a trade-off, isn’t it, whereby we want to make the investment because we see real benefits for our business in doing so. So I think we’ll just have to work carefully through that. But as you point out, we do have some flexibility if we see some slightly tougher conditions on cost inflation. But at the moment, I think we feel pretty good about being able to invest in our business as planned and deliver on our cost-to-income ratio.
- Frank Vang-Jensen:
- Yes. And just to add, we have a high bar to allow any increase in operational costs, right? So it is very much about doing what is good for the value creation for the long term in the different parts of our business.
- Antonio Reale:
- Very clear. Thank you.
- Operator:
- [Operator Instructions] We will now take our next question. Caller, please go ahead. Your line is open.
- Maths Liljedahl:
- Yes. Good morning. Maths Liljedahl, SEB here. Most has been answered. But if we just can continue with maybe a little bit on Russia, is that all done now? Or could we expect further impairments or adjustments in the coming quarters? That would be the first question. And then just seeing a ROE of 12.5%, and you still have a lot of capital and share buybacks ongoing, targeting 11% ROE for the full year with the rate hikes coming, et cetera, isn’t it time to revise that? Thanks.
- Ian Smith:
- Good morning. Maths, I’ll take your Russian question. So – we’ve done our best to sort of clear the decks on Russia in Q1. There was obviously the technical item on the historical FX recycling. And in terms of the provisions, as you know, we start from a point of very low direct exposure. I think we’ve done a pretty good job of identifying where we might need provisions. And clearly, if we felt we needed more, we would have done so. So I think we’ve cleared the decks. We’re not expecting to see impact going forward.
- Maths Liljedahl:
- Okay. Thank you. Very clear.
- Frank Vang-Jensen:
- Maths, in regards to the outlook for – or the guidance for this year, we are stating above 11% meaning better than 11% on return on equity. And this quarter, we showed 12.5%. And you’re right, we have a very strong capital base, more than 6% above the requirements, and we continue to distribute our excess capital. So we are confident with the information we have as of now that we will deliver – will be delivering on the outlook above 11%.
- Maths Liljedahl:
- But you don’t dare to raise it, yet.
- Frank Vang-Jensen:
- We are one quarter into the year, right, and in the middle of a war. So I think from a banker’s perspective, it would be prudent to stay to what we – what outlook we gave like 1.5 months ago or two months ago. But we are confident that we will deliver on this.
- Maths Liljedahl:
- Yes. Okay. Thank you.
- Operator:
- We will now take our next question. Caller, please go ahead. Your line is open.
- Namita Samtani:
- Hi. It’s Namita Samtani from Barclays. I just had one question. So the cost of living is clearly going up in the Nordics with mortgage rates going up and energy prices going up. So which parts of the Nordea P&L are you most worried about on the back of this? Is it lending volumes or asset quality? Thanks.
- Frank Vang-Jensen:
- Hi. It’s Frank. If we start like with the risk side, we have – we’re not concerned about the risk. So you are right, the cost of living is increasing, I think, in most areas of the – or at least many areas of the world, and that, of course, includes also the Nordics. The credit portfolio of ours is super strong, and it has been tested again and again during different type of crisis, and we come out very strong each time. And I should say, if anything has changed, then it’s only to the stronger this time. So what will happen when like all the costs and the interest rates – potentially increased interest rates hits the customers? Consumption will go down. That will be my expectation. There will be some smaller or some lower confidence in the future, and that will lead to lower consumption. That will slowdown, I believe, some activity within the housing area, and that is only positive, to be honest. I think that is fine that we get a little bit slower speed in the Nordics. And the other question is how much that depends on how fast the interest rates will increase. On the other side, what we do see when we talk to our clients on the corporate side, both SMEs and LC&I, they have a very high activity level. And we actually in this quarter as well saw very high activity within the lending side. So I would say that it's very positive. A very likely scenario that we will see a little bit like the opposite of what we have seen in the last couple of years through COVID that the lending demand within the household really went up. And on the contrary, then the lending demand within the corporate side went down. It might very well be that rebalance a bit. So – and how to conclude on that when it looks at – looking at the NII, it's very complicated. But we don't expect any negative surprises there, to be honest.
- Ian Smith:
- Just to add to that analysis, Namita, you might see a bit of rebalancing between fees and net interest income, particularly if we see a bit of a slowdown on the assets under management, which is always affected by confidence and market levels. But we're very optimistic about the outlook for NII.
- Namita Samtani:
- That’s helpful. Thank you.
- Ian Smith:
- Thanks.
- Operator:
- We will take our next question, caller please go ahead. Your line is open.
- Robin Rane:
- Hi, good morning. It’s Robin Rane from Kepler Cheuvreux. So two questions from my side, please. So you're still taking mortgage market shares across the Nordic countries. But looking at now when we are going into rate hike period, do you expect the competitive dynamics to change within the mortgage market from this? And then secondly, your SME growth is, as you mentioned, very strong, in particular in Sweden and Norway. Are there any particular sectors that you're seeing the activity being stronger than others? And are you growing faster in some sectors than others? Thank you for that.
- Frank Vang-Jensen:
- Good. Thank you. In regards to the mortgage markets, I should say that the competition has always been strong. The last many, many, many years, I – when I look back, that has been the case all the time. And the competition is also strong now. So the question about, will it change any – would it change the dynamic or something structure within the market as I hear you? I don't believe so. So you might see, and we expect that to become the case, the activity in general, and then the growth in the market in general will go down a bit. But then it's about how we, relatively to our peers, are positioned. And that's – and we have a very strong position. And that’s why we gain quarter after quarter, gained market shares, although our prices are on par or higher. So it's about service, it's about availability, it's about focus, it's about having the advisers, having the different channels, it's many things. So it's retail, it's detail. That will not change. So we expect to have a relatively strong position going forward in the different markets and then might be that the pool is a bit smaller but that will not impact anything significantly to our income base. That would be my take. On the SME side, I should say, it's a little bit – we don't really look at it in the segments as like you, which I understand, asked for. But – and there will, of course, be segments in industries that will be growing faster or having more demands on the lending side. But I don't have any particular view on which segments we believe that will bring most growth actually. But there's a good upside in all countries. And we have like the sequence we have, that is two countries growing very fast. We expect them to continue to grow fast and gain market shares, that's Sweden, that's Norway. Finland is growing above market and are having a super strong position. And then we have Denmark where it has been a repositioning of the business that has been managed well. And now we are starting to grow and to find the areas where we want to have the edge to our competitors. So let's see.
- Robin Rane:
- All right. Thank you very much.
- Operator:
- We will take our next question. Caller, please go ahead. Your line is now open.
- Unidentified Analyst:
- Thank you very much for taking my questions. Something that is not 100% clear to me from some of your preceding statement. When we look at loan growth across the board and especially on the quarterly side, it's not clear to me whether you think this might eventually slow down in the coming months. So basically saying the corporation exercise the opportunity to exploit particularly favorable financing conditions or maybe they were scared about what was going on between Russia and Ukraine and the saw opportunity to grab lending. Something similar maybe to what happened with COVID-19. Well, at some point, there was strong demand and then it slowed down, all of a sudden, is that something possible? It's not clear whether you think this is going to – the current price is going to go on like that. And the second question I have is on the asset quality side, what should we think about the 610 million of management buffer provisions? Will those be part of the furniture forever? Or will you use at some point? And with regard to RWA, should we expect at some point, some negative risk migration if the current situation is going to be prolonged? Or do you think that, in any, will not be too much of an issue. Thank you.
- Ian Smith:
- Hi Riccardo, so look, I think Frank was pretty clear that certainly on the corporate side, both in business banking and LC&I, we still see good prospects for growth. What we saw in LC&I at the end of the quarter was just companies turning to us to provide financing, particularly where equity and debt markets weren't functioning effectively. So I think that's a strong point, but we do have some good underlying growth, as I pointed out. And I think we feel pretty good about the prospects for loan growth on the corporate side. Frank highlighted perhaps some of the risk to growth on the personal side. But I think the corporate side looks pretty good. On asset quality, I mean we talked about this at our Capital Markets Day a couple of months ago. The portfolio is – continues to perform really well. And so we highlighted that over 2022 and 2023, we might expect to normalize, and that would either be to use our management judgment buffers for the purposes that we set them up or to release them, but to do that in a measured way. The portfolio still continues to perform well. As Frank highlighted in his remarks, we'll take a look at how we might expect the macro risks to play out in the portfolio over the coming quarter. We'll spend a fair bit of time looking at that. But I think it's a very different situation to what we saw with COVID. So I think the short answer to your question is we do not expect the 610 million to stay around as part of the furniture. As we said at our Capital Markets Day, we would expect either to utilize it or release it over the sort of 12 to 24 months. In terms of your final question on negative sort of credit risk migration in RWAs, we're not anticipating to see material movements in that regard so far. So things may change depending on what the macro picture does, but at the moment, not expecting to see anything significant in there.
- Operator:
- We will take our next question. Caller, please go ahead. Your line is open.
- Maria Semikhatova:
- All right. Yes, thank you. This is Maria Semikhatova from Citi. Two questions from my side. First of all, do you see new risk for the wage growth outlook in the Nordics in the high interest rate environment? And if there is any risk to your cost growth outlook of 1% to 2% to your strategic plan? And second, if we think about the impact of 55 basis point hikes once rates move above zero in Denmark and Finland, how does it compare to 300 million guidance? Thank you.
- Frank Vang-Jensen:
- All right. Thank you. Let me start, and then Ian, you can take the latter part of the question. So as I understood your question about costs, that was whether we expect to stay within the guidance of ours, growing 1% to 2%, the cost base and then delivering positive jaws. And as of now, we have no intentions of changing that outlook or that assumption. We – the most important for us, of course, is to deliver positive jaws and then we – that we are very confident that we will do. And as of now, our plans on the cost side are on checks. But of course, we're also following it what will happen and the inflation and the interest rates and whatnot, but now – as of now, we stick to our assumption.
- Ian Smith:
- Yes. Hi, Maria. So I think if rates are to move positive in Denmark and the Eurozone, I think we'll see a bit of an additional benefit coming through on top of our broad sort of base 300 million. We haven't guided much more detail than that, but it does start to accelerate the benefit on the widening of deposit margins and as loan rates start to move. So it's good for us.
- Frank Vang-Jensen:
- I think – could I just add there. I think what is very important that we all remember that is very simplified a bank, as ours, has three engines on the income side. We have the left side of the – like the airplane, that is like the deposit engine. The right side, that is the lending. And then in the middle, we have like the fee. And as of now, in the last, what, seven, eight years, almost 10 years, we have had only two of the engines. And actually, the left engine, the deposit engine started to go backwards, to run backwards when we went into negative territory. And that due to the charts in, for example, Denmark, of negative interest rates, it's not rolling backwards. It's actually silent at the moment. But still, we don't have an engine, deposit engine that help our earnings. And in the future, when the interest rate will raise – will go up, then, of course, we will get a more normalized earnings base. And that's just important to remember.
- Operator:
- [Operator Instructions] We will take our next question. Caller, please go ahead. Your line is open.
- Unidentified Analyst:
- Thanks for taking this follow-up. I have a kind of curiosity on capital return. And the buyback is an instrument that, maybe I am exaggerating a little bit, but a lot of banks in Europe are planning or would love to implement and go on with buybacks. So it is not that a distinguishing factor if I may say that. But you eventually consider to try to be the best in cash payouts rather than in buybacks. It is to better distinguish yourself among other European peers supervised by the ECB, of course.
- Frank Vang-Jensen:
- Yes. I could take that one, Ian, and then you, please, chip in. I think we are among the best, if not the best. And that's due to two reasons. The first, in order to have a dividend capacity, you have to have a strong earning. That we have. We are delivering a return on equity of on equity of 12.5%, and we are targeting above 13%, meaning better than 13% going forward. So – and it's very predictable. It's very stable. It's a business with very low risk. So the Nordea you say – you see nowadays is delivering strong and have a strong earning capacity. And then with a very high cost and capital efficiency, we will be able to distribute a high dividend. And our policy is 60% to 70% of the earnings out as dividends. And this year, it was, as I recall, it's 69%, and that was technically didn't become 70%. But of course, we are aiming as a start point for distributing as much as possible as a start point. Then, we will generate – with the business model we have, we will generate and are generating excess capital, meaning capital above the 60% to 70%, and our intention is to distribute that by buybacks. That is the capital policy and dividend policy we have. And then on top of that, we have excess capital. So we have more than 6% above the requirement of the – from the regulators. And that excess capital is what we now are, in a sort of accelerated way, distributing to our shareholders. So I would say that we will have a very strong payout plus a buyback going on, hopefully, also in the many years to come. Ian?
- Ian Smith:
- I think, absolutely, overall, we're among the best, and we would expect to always be there in terms of cash to shareholders. The mix of that will obviously depend on facts and circumstances. We feel pretty good about that balance between dividends and buybacks at the moment. It's very consistent with how we set out our position back in 2019. But of course, we'll keep it under review. And I think our shareholders are very happy with that mix at the moment.
- Frank Vang-Jensen:
- Yes.
- Unidentified Analyst:
- That’s very clear. Thank you.
- Frank Vang-Jensen:
- Thank you.
- Operator:
- We will now take our last question. Caller, please go ahead. Your line is open.
- Unidentified Analyst:
- Here is Sofie from JPMorgan. So my question would be on the Russia provisions that you did 76 million this quarter. You don't have any operations in Russia or Ukraine. But one of your peers that has a subsidiary in both Russia and Ukraine say that they don't need any provisions given that they have parent [ph] guarantees on this exposure. Could you maybe just talk us through why did you take 76 million? And is there any possibility that we could also see write-backs on the 76 million provision for Russia? And how much do you rely really on parent guarantees. So that would be my first question. My second question would be on kind of capital headwinds and tailwinds that you see going forward. Anything you can say on the IRB models, anything you expect from the Swedish overhaul on capital? So – and any kind of European regulatory invites that we should be aware of on the capital side? Thank you.
- Frank Vang-Jensen:
- Hi, Sofie. Look, I think we feel that we've done a good job of identifying potential exposure to losses in the very small number of direct positions we have open. Sometimes it's a little bit technical. If you – Russia has been downgraded, and you can't rate a Russian corporate any higher than the sovereign. And so even in circumstances where you feel pretty good about the cash flows, you're required to calculate a provision. So I think we've done, as I say, a good job of thinking about what our potential exposure might be. And as I said earlier, we wouldn't expect to see anything else coming through on that. And I can't speak about the decisions taken by our peers, but I think we've done the right thing here and we move on. On capital headwinds and tailwinds, nothing new to report. As you remember, we had a pretty detailed exposition of how we thought the capital requirements and other things would move during our CMD, nothing changing that at the moment.
- Unidentified Analyst:
- Okay. That’s very clear. Thank you.
- Frank Vang-Jensen:
- All right, thank you, guys. Thank you for the questions and the dialogue, and looking forward to speak soon again. Thank you.