Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Nordea's Second Quarter 2020 Financial Results Presentation. We will start this webcast with a presentation from our President and Group CEO, Frank Vang-Jensen. This will be followed by an audio cast where investors and analysts also have an opportunity to ask questions from Frank as well as from our acting CFO, Mark Kandborg; our CRO, Matthew Elderfield; and Head of Investor Relations, Rodney Alfvén. Thank you again for joining. With this, I'll turn it over to Frank.

Thank you so much. So a good morning. Today, we have published our second quarter results and half year financial report for 2020. The impact of COVID-19 became increasingly in depth during the second quarter, and the pandemic continues to severely affect individuals, businesses and societies. The crisis has also accelerated many existing trends. During the past month, societies have adopted new ways of living, working and consuming. We have witnessed an increasing trend towards e-commerce, mobile payments and digital customer interaction. All -- and in all these areas, we have a strong position as a bank. For example, the number of mobile payment transactions has been more than doubled compared to this previous year. Most of our customer meetings have been online, while we have been fully operational with more than 70% of our people working remotely. These extraordinary times really show -- was -- is all at the core of our customer promise, supporting our customers through good times and challenging times, anywhere and anytime. Thanks to the dedication and commitment of our employees, we have stayed true to our purpose, enabling dreams and everyday aspirations for the greater good, and I'm proud to see all our efforts are paying off as customer satisfaction is improving in all business areas. The challenging societal and economic conditions have tested resilience of our business model, and we came out very well of that test. For the second quarter, we reported another solid results and continues to progress towards our '22 targets. All key activities to improve our operational efficiency delivered on target. Cost decreased by 8% from the previous year. This resulted in a clear improvement of our cost-to-income ratio, which is -- which, in the quarter, was down to 52% compared to 58% in the same period last year. Our other financial target, the return on equity, was heavily impacted by loan-loss provisions made in the quarter as well as our large capital base. We saw an increase in customer volume for lending and for deposits in Q2 with a strong growth rate. By contrast, the pandemic reduced economic activity during the second quarter, especially affecting the fees. Our income was 2% lower, but the sizable cost reductions led to a profit before loan losses that was 4% higher than last year. We entered the COVID-19 crisis with a strong financial position that we have managed to maintain. Our capital position remains very strong with a CET1 ratio of 15.8%, which is 5.6 percentage points above the requirement. Clearly, our financial strength enables us to support our customers and maintain our dividend capacity. But of course, the Board of Nordea intends to follow the ECB's recommendations and will refrain from deciding on a dividend payment before 1st of October '20. Regarding credit quality and as communicated in our Q1 report, we have now updated our macroeconomic scenarios, including our longer-term view on the expected impact of the economic downturn. Furthermore, we have completed a thorough review of our loan book. Our conclusion is that the underlying credit quality of our loan book remains very strong. This is evident in the numbers for the quarter. However, based on the updated assumptions and the analysis made, we project that total net loan losses for the full year '20 will be below EUR 1 billion, equivalent to less than 41 basis points. Underlying net loan losses were EUR 310 million in the quarter. On top of that, we have made additional management judgment allowances of EUR 388 million. Including earlier management judgment allowances, we have now a total buffer of EUR 650 million to cover future loan losses and IFRS 9 model improvements. All in all, these provisions are expected to mostly cover the full year loan losses. We deem this to be a prudent and appropriate approach given the current economic uncertainty, and I will come back to this topic in a few minutes. Naturally, our results and profitability are highly impacted by our loan-loss provisions. If we look at the income lines, our business performance in the second quarter continued to show the promising signs seen in the previous 2 quarters. Net interest income increased by 2%, supported by sound volume growth in all markets. Net fair value recovered and was up 12%, mainly driven by improved trading activities. However, the lockdowns and the market turbulence had a negative impact and affected fee and commission income, which declined by 9%. Our net interest income is driven by volume growth, especially in mortgages in all countries. Mortgage volume are steadily increasing, and we are growing above or well in line with our target. In the quarter, we also experienced strong deposit growth. Margins have been improving slightly and contributed to the net interest income growth compared to the previous year, however, with some pressure in Q2. That was mainly triggered by the sharp interest rate decrease in Norway. As mentioned, net commission income was negatively affected by the lockdowns, reduced activity in the corporate advisory space as well as lower asset management fees impacting our income. Fee income from payments and cards was naturally impacted by lower consumption and economic activity. However, we saw an improving trend towards the end of the quarter. For example, by the end of June, consumer card volumes recovered and were close to normal in all the Nordic countries. In Sweden, [ recovery ] has been slightly slower than in the other Nordic countries although also with an improving trend. Our net fair value bounced back in the quarter, primarily driven by trading activities and recovering market valuations. We recorded a solid performance in our customer areas, supporting the growth. On the cost side, I'm pleased to see that we -- how we continue to optimize our operational efficiency, create new ways of working and building a strong cost culture. We are progressing according to plan. Costs were down 8% compared to the previous year. This led to a improved cost-to-income ratio of 52%. That is over 5 percentage points better than last year. We are closely tracking our cost-to-income ratio, and we will ensure that it is moving towards our '22 targets. As a bank, we entered the COVID-19 crisis from a position of strength, and we have maintained all our positions through the first wave of the pandemic. The CET1 ratio at the end of Q2 was 15.8%. And that -- and the CET1 capital buffer was 5.6 percentage points above the requirement. This is one of the highest buffers relative to requirements in Europe. Our strong capital position gives us a solid foundation to continuing supporting our customers although the future is uncertain. Both stress testing and historical CET1 volatility confirm that we are well prepared to face even the most extreme scenarios. The capital buffer has significantly increased since the beginning of the year. The current CET1 buffer is twice as large as the extended impact from a stress test. Both when we compare with the EBA stress test and when we compare with our own latest internal COVID-19 stress test. Given the ample CET1 capital buffer, our dividend capacity remains intact. The Board of Nordea has the mandate from the AGM to decide on the 2019 dividend, and an evaluation will take place during the autumn. And as I said earlier, the Board intends to follow these [indiscernible] recommendations to refrain from deciding on a dividend payment before October. In light of COVID-19, bank's role remains crucial to keep the economies and our societies running. We have a robust liquidity position to respond to this situation and to support our customers. Our substantial liquidity buffer amounts to more than EUR 100 billion, which -- with the liquidity coverage ratio of 160% and a net stable funding ratio of 113%. Customer activity increased with growth in both loans and in deposits. Deposit inflow increased 4% in the quarter. Nordea's funding activity and credit spreads largely normalized during the second quarter. We issued approximately EUR 9 billion in long-term debt across Nordic and global funding markets at competitive spreads. In some instruments, spreads our back to pre-crisis level. I'll now go through our loan-loss provisioning for the second quarter and projections for the full year '20. We are comfortable with our strong credit quality and well-diversified loan portfolio. Our exposure to the sectors significantly affected by COVID-19 is very limited. In addition, our derisking actions over the past years have lowered the expected loan loss levels even further. As planned and as stated in the Q1 report, we have now updated our macroeconomic scenarios and assess the expected impact of the economic downturn on our loan portfolio in a larger and a longer-term perspective. For the full year '20, we project total net loan losses below EUR 1 billion, equivalent to less than 41 basis points. In Q2, underlying loan losses were mainly driven by our macroeconomic updates and individual losses in a few sectors, such as the oil and gas and offshore segments, resulting in underlying loan losses of EUR 310 million. Aside from the items mentioned, net loan losses were at a relatively low level of EUR 69 million. We didn't observe any major rating downgrades or defaults in the quarter. On top of that one -- on top of the underlying loan losses, we have made additional management [ judgment ] allowances of EUR 388 million in the quarter. Given the longer-term view, we have now built a buffer of EUR 650 million. This already covers for estimated future losses. Our credit portfolio is well diversified across our Nordic home market that are low risk and stable due to well-structured social safety nets, strong official positions and effective legal systems. We have an even distribution of lending across the 4 countries with an equal distribution between household and corporate exposures. The last part -- the largest part, approximately 85% of the retail portfolio, is mortgages. And the corporate portfolio is well diversified across many sectors. During the quarter, we have developed a deep understanding of what impact COVID-19 will have on our customers, and we have updated our analysis done in March. There's a wider impact on a broader group of sectors, but the significant impact appears to be more limited than in our initial analysis in the first quarter. Based on our updated analysis, the significant [ infected ] sectors account for only 4% of our loan book. In the first quarter report, we assessed the immediate impacts of the COVID-19 outbreak. And given the high uncertainty and low visibility during that time, we mentioned that further assessment would be made in the second quarter. Now we have completed a thorough review of our loan book. Our full year loan-loss projection is based on a bottom-up business assessment, a special review of individual exposures in the significantly affected sectors and the outcome of our stress tests. All 3 approaches produced broadly similar outcomes and were based on our updated baseline macroeconomic forecast. The macroeconomic forecasts we use are at least as conservative as those published by the Nordic authorities in almost all aspects. The scenarios are fully in line with the guidance from the ECB. For the full year 2020, we project total net loan losses to be below EUR 1 billion. These projections also cover improvements to IFRS 9 models and take into account the ECB's new guidance on nonperforming loans that will come in force in the fourth quarter of this year. We are, therefore, in a position to provide the forecast that our costs for risk for the full year '20 losses will be less than 41 basis points. Our understanding -- the underlying net loan losses remained on a relatively low level during the second quarter. These amounted to EUR 310 million. Underlying net loan losses are mainly coming from the oil and offshore sectors, individual provisions for the remaining part of our credit portfolio and largely on par with the previous quarters. The other driver of the underlying loan losses was the update of the macroeconomic scenarios in our IFRS 9 models. This accounts for approximately 50% of the underlying losses. Based on the analysis completed, we have established an additional management judgment in order to have a significant buffer to cover future loan losses. This additional buffer amounted to EUR 388 million in the second quarter. We consider that our approach is prudent and have now built up a significant buffer in total of EUR 650 million for future loan losses. Our total provisions in the first half of the year, therefore, amounts to EUR 852 million, which mostly cover the full year loan loss estimates. We have a long history of low and stable loan losses. In the past year, we have actively continued to lower our risk profile by continuously executing the Nordic markets -- the non-Nordic markets, sorry. We have further reduced our risk appetite in several risky segments. Let me now move on to the business area results. All our business areas are taking promising steps with high customer activity and improving underlying financial performance. However, there are still further improvements to be made to reach the communicated '22 targets. In Personal Banking, mortgage volume growth continued strongly in all 4 countries. I'm satisfied with our high activity and improving customer satisfaction. Rate movements are affecting both lending and deposit margins slightly. In total, revenues declined by 3% in local currencies, primarily due to lower consumer activity, which impacted especially payment and card fees. Our savings income was subdued due to lower levels of assets under management, but it bounced back during the quarter. We continue to focus on improving operational efficiency, and cost declined by 3%, leading to a decrease in cost-to-income ratio by 3 percentage points to 54%. In Business Banking, we have been proactive in reaching out and supporting our corporate customers. Our customers' activity has been 20% to 30% higher compared to the normal activity level. The solid and steady improvements we have seen over several quarters continued in Q2. Lending volumes were up 4%, and deposit volumes were up 15%. As a result, revenue increased by 2% in local currencies. Lockdowns had a negative impact on fee and commissions. However, income was picking up towards the end of the quarter. Costs declined by 3%, leading to an improved cost-to-income ratio of 48%. Large corporates and institutions continued its repositioning to create a more focused, less complex and a more profitable business. Revenues grew and net fair value was up, driven by an increased customer activity, strong markets business and recovered asset valuations. Costs are significantly lower and declined by 14%. This led to an improvement in cost-to-income ratio of 44%, down from 63% last year. Economic capital was adversely affected by an increase in market volatility. Together with loan loss, losses risk led to a clearly lower ROCAR level. And a number of mitigating actions to reduce capital consumptions are ongoing. In Asset & Wealth Management, revenues declined 4% due to the market turmoil. High customer activity and a market environment with solid inflow increased assets under management by EUR 31 billion compared to the previous quarter. Total assets under management now amount to EUR 311 billion, coming closer to pre-crisis levels. Costs continued to decrease, and cost-to-income ratio improved by 3 percentage points to 55%. After the past extraordinary months, it has been encouraging to see the number of countries starting to reopen their societies step by step. This creates hope, consumer confidence and [ gradual recovery for businesses ]. We see signs of this in macroeconomic data and in our own cards and payments data. However, this might be a bumpy ride. We will probably face setbacks, hopefully temporary. This great uncertainty is a true test of resilience and collaboration. We need all onboard: individuals, corporates and societies. As the leading bank in the Nordics, we are actively contributing and doing our part to fulfill our responsibility. My leading principle is to do what we say. As a bank, we have a clear direction. We are focused on our 3 key priorities: one, to optimize operational efficiency; two, to drive income growth; and three, to create great customer experiences. We have taken steps forward in the right direction, and we will continue to do so a little bit better every single day. The COVID-19 pandemic has created challenges for many business, including us. And it's still too early to conclude on the longer-term consequences of the crisis. However, we remain committed to our plan and key priorities. We are ready to act to ensure that we meet our financial targets for '22. Thank you for listening.

Okay. Thank you all for listening in. And thank you, Frank, for that. We will now start the Q&A session. This is Rodney Alfvén, outgoing Head of IR in Nordea. And at the Q&A, we will have CEO, Frank Vang-Jensen. We will have the acting CFO, Mark Kandborg; our Chief Risk Officer, Matthew Elderfield; and our ingoing Investor Relations, [ Matti Ahokas ]. So operator, please start the Q&A session.

[Operator Instructions] And our first question comes from Magnus Andersson from ABG.

Just starting off with, I think, the most striking deviation in the quarter, which was the cost line. I mean even if I annualize the H1 number, which includes EUR 200 million of resolution fund fees, I end up below EUR 4.7 billion. So this report indicates that we should be, all else equal, much below your guidance for this year, unless something will happen in Q2. I also note that staff cost was down 8% quarter-on-quarter, while your -- the average number of employees, which continues down, but it's down 2% quarter-on-quarter. So I guess, there's some profit-based remuneration or something in there. So I'm just curious, what is it that we are going to see in the second half, which means that costs are going to be as high as in the first half, despite the fact that you don't have resolution fund fees? That's my first question.

Yes. Let me start, and then I will hand over to Mark. We are running the bank structurally with a lower cost base compared to 1 year ago, and we are following our plan. So the overall message that we are giving that we are quite confident when we restate the cost target for the full year '20. But what is important to be aware of is that structurally, we have lowered our costs. And that is the aim. Every day, we want to create a strong cost culture. So we are, overall in the bank, really challenging [ the ways ] working, bureaucracy. You can say a number of people in meetings, the way we intact, how we travel, and that is leading to both a stronger culture but also a lower -- and thereby, a lower cost run rate. Mark, anything to add here?

Yes. I think it's a fair observation, but we should also take into account that we have seen significantly weaker Swedish and Norwegian krona during the first half that has been supporting the underlying lower cost. We have also seen almost nonexisting traveling and marketing costs, which we would expect to normalize as the crisis begin to abate. And then finally, there has also been delays to some certain IT developments that will also come back in the next second half.

Okay. And on staff costs, is there anything particular there that will bounce back in the second half as well?

We had some reversals in relation to the viable pay in the second quarter, but they're not something in a significant amount.

Okay. And then just on NII. First of all, 2 detailed questions. I noted just in the NII bridge quarter-on-quarter that you had quite some support from lower cost of funds that was EUR 22 million, if you could comment on that? And secondly, you mentioned earlier this morning that the Norwegian rate cut cost you EUR 20 million of NII in Q2. Obviously, we will get something of this back when you lower your deposit rate. And I just wonder if you would share with us how much in the second half.

Yes. The EUR 22 million is relating to a lower funding cost comes in relation to some adjustments in relation to internal pricings. But overall, we do see that our funding costs remain to be in line with what we have seen in the previous quarters. We do see a significant increase in our deposit volumes, which means that our net stable funding ratio has reached 113 percentage points, which gives us some flexibility also relating to funding in the next quarter. And in relation to the question on the Norwegian deposit impact, then we would expect roughly EUR 10 million improvement.

Okay. Just on the outlook for funding costs in the second half, will funding cost be a tailwind or a headwind in the second half relative to what we see now?

I think that is too early to say. But overall, we see funding costs in line with what we have seen in the first half.

Okay. And then just on capital, the SME supporting factor, can you tell us what impact that had on risk-weighted assets in Q2 and whether you took 100% of that now, and -- or if we will see some additional impact in the third quarter?

Yes. It had an EUR 1.6 billion REA impact here in Q2, and we expect...

Sorry, I didn't hear you. One point ...

EUR 1.6 billion positive REA impact in Q2, and we expect additional EUR 1 billion in Q3.

Our next question comes from the line of Robin Rane from Kepler Cheuvreux.

A follow-up on the costs. So would you say that as we stand now with the half -- more than the half year past, are you in a better position now than you were at the beginning of the year looking ahead in 2020 would you say on the cost, given the FX movements and the traveling and so on? And in that case, would you prefer to make more investments or actually lower the sort of the guidance or the cost for the year that you had anticipated?

Yes. For the first, I can take that one. It's Frank speaking. So we are in the best position, so -- and that I expect us to be continuously, basically. Then of course, Q2 has been, as Mark stated, a little bit special. But it's important to note that structurally, and that is what we are looking at, that's the structure continuously reducement of the cost, that is progressing as planned. In the Q2 -- on the second half, I should say, we will probably do more on the digital sales side. We will ramp up further there. We also will try to see if we can do even more on our, you can say, bifunctionality digitally. But it is too early to conclude what amount we will talk about. But we are down structurally. And then, of course, when societies reopen and so, there will be some bounce-back, although we are really looking for how to work differently in the light of the learnings we have had in COVID -- during COVID-19.

Okay. And then on fees, so brokerage and advisory was relatively low in the quarter as was the card, as we mentioned before. How does the pipeline look now on the advisory side? And could we expect some bounce-back there in the second half? And also, on cards, could you elaborate a bit on how you see the cards recovering? You said that consumer cards transactions were back at level -- at normal levels. But on the corporate side, how does it look there? And also, how -- is it possible to give the split between corporate and private cards that you have or the income on that?

Yes. Thank you so much. Rodney, will you take this question, please?

Yes. On the -- I didn't hear the first part of the question. But on cards, we have around 80% household cards and 20% corporate. That's approximately the split. Can you then please repeat the first question?

That was advisory fees and...

Advisory? Yes. Well, first of all, we had a very strong Q1, so the Q1 was a good level. And then secondly, these fees vary between quarter, depending on when fees are done and so forth. So there's a fairly natural volatility between quarters always. And then this quarter was a bit extra volatility.

Okay. And then lastly on the lending rates. And looking at the 3-month mortgages in Sweden, the average lending rates negotiated in June was bounced up a bit, I think, also relative to competition. Have you seen any effect on this on volumes? And then more generally, how do you see lending rates on mortgages and competition develop from here and in the other markets as well?

Yes. So let me take the competition and also the overall picture of the mortgage business, and Rodney then, you have the details about the expected margins. And so in general, I would say that we are doing quite well in the mortgage, I'm pleased to see -- area. I'm pleased to see the way we develop, and that is in all countries. So -- and if you look particularly in Sweden, we are taking around 14% of the front book, a net increase in the market for the first 5 months. And our back book market share is somewhere between around 13.6%. So we are in a good -- at a good level. The June figures we haven't seen yet. And in general, the speed and the activity level within the mortgage business, which is for Nordea a very important business and for our customers, probably the most important business, is progressing very well. Rodney, the margins, please?

Yes. In this quarter, we had a fairly negative impact on deposit margins, minus EUR 31 million. Almost everything of that came actually in Norway, and then we had some improved margins in Denmark, following the rate increase there. Then also, we had some pressure on lending margin. It's fairly moderate, but driven, for instance, by higher euro rates, which means that we will have 0 rate floors in Finland, you get some margin pressure there. That's the biggest thing. And then all the stores improving lending margins in Norway, following these rate cuts.

Our next question comes from the line of Andreas Hakansson from Danske Bank.

First one on capital distribution. I mean you now seem to be probably the best capitalized bank in ECB regulated. And you also have one of the highest profitabilities, and you seem to have taken IFRS 9 fully upfront, which makes you also quite unique in Europe. I mean from a regulatory point of view, could you see any reason why you should not be allowed to distribute capital later in the year? And let's say, for whatever reason you won't be, given that you have a capital distribution target of distributing excess capital through buybacks, should we then expect a larger buyback program next year? Or how should we consider that dividend for 2019, if it's not being paid out this year? That's my first question.

Yes. Thank you, Andreas. So let me just start and then Mark take over. Happy for you saying so, and we agree that we are very well-capitalized. And we -- even though in different severe stress tests we have done, we clearly have the strength to support our customers and pay out dividend. And then we have the seed capital, which we aim to distribute to our investors through buybacks, and that has not changed. And as I also said in my introduction, we have accrued for '19 dividends, and we are accruing also for '20 dividend. Mark, please, how to do that, and what is our picture as of now?

As we are all aware of ECB's guidance of not paying out dividends before October 1, and then the [ system ] [indiscernible] [ force ] recommendation also on not paying out before 2021. There, we are awaiting ECB's vulnerability assessment and guidance later in July is our understanding on updated guidance towards banks. And then in what shape and form that this will look, depending on their guidance, we will take notice of. But just reiterating that we have this very strong position, and we have the capacity to distribute but whether it is as dividends according to our dividend policy or through buybacks.

Perfect. Then a bit more detailed question. If I look at your Stage 2 loans, you have a coverage ratio there of 4.8%, up from 4.4% in Q1. That is 3 or even 4x higher than some of your local peers. Can you tell us why are you so conservative there? Or is that really just you upfronting IFRS 9? And how should we be thinking about this line going forward?

Thank you. Matthew will you take than one, please?

Yes. Thanks for the question. Sorry. Thanks for the question. So the context here is our approach to credit risk that Frank's talked about, really the 3 key elements that we've taken a forecast for full year loan losses of below EUR 1 billion, less than 41 basis point cost of risk, point one. Point two, we see our underlying loan losses at EUR 310 million. And thirdly, that we wanted to build up a significant buffer of EUR 650 million for future loan losses. So your question speaks a bit to the second element there and also the management in terms of what's happening on Stage 2. So the underlying position on Stage 2, the increase there is really driven exclusively by the macro scenario by using the new conservative baseline scenario, feeding that through the IFRS 9 model and by creating the management judgment buffer. So just to drill down to that a little bit, we see the Stage 2 balances have increased by EUR 4 billion. The Stage 2 provisions have increased by EUR 201 million. But when you take away the management judgment effect and when you take away the macro scenario effect, we actually see very stable underlying credit development. There's actually a small reversal in Stage 2. So it's really management judgment and the macro scenario. And in terms of coverage ratios, as Frank said, we think it's prudent to take these actions, and we now have much stronger coverage ratios. Overall, our coverage ratios increased from 39% to 43%. And for those 5 significantly affected industries, our coverage ratio is now up to 49%. So that's a bit of detail on what's happening on Stage 2.