Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Good morning, and welcome to Nordea's Third Quarter 2020 Results Presentation. With me here in Helsinki, we have the President and CEO, Frank Vang-Jensen; acting CFO, Mark Kandborg; as well as Group Chief Risk Officer, Matthew Elderfield. My name is Matti Ahokas, Head of Investor Relations. We will start with the presentation. And after that, you will have a chance to ask questions. In order to ask a question, you will need to dial in to the teleconference. With that, I'll leave the word to you, Frank. Please.

Thank you, Matti, and good morning, everybody. Today, we have published our third quarter results. But before going deeper into the numbers, I would like to bring us back to October a year ago. At that time, we published our new financial targets and updated our business plan. We needed a new direction and clear priorities to retake lost ground in business and become truly competitive again. The recipe was and still is very customer-centric and straightforward. We decided to focus on 3 key priorities: one, to optimize operational efficiency; two, to drive income growth initiatives; and three, to create great customer experiences. In addition to our targets and priorities, we needed to change our mindset: to prioritize, to simplify and make sure that everything we do starts and ends with the customers. At the end of the day, it is all about execution. And that is what we have done so far. Despite the COVID-19 pandemic, we have continuously moved in the right direction. I'm happy to see clear improvements across the entire bank. During the pandemic, we have supported our customers in multiple ways, launched new products and services and increased our business volumes. Our assessment is that we are growing faster than market in several areas. The third quarter was no exception. The results were strong. We had high level of customer activity and increasing business volumes. This continues a positive trend seen in previous quarters. Our total income was up 4% compared with last year. We continue to progress towards our '22 targets. Costs were down 6% and our cost-to-income ratio was 52% in the quarter. We have a strong capital position and a strong credit quality. Actually, we are one of the best capitalized banks in Europe, with a CET1 ratio of 16.4%, which is 6.2 percentage points above the requirements. Our net loan losses were very low. We keep our credit outlook unchanged as economic uncertainty still remains. All in all, many positive signs, but we still have a lot to do. And we are committed to delivering on our business plan and our financial targets. Let me now go deeper into the results. In the third quarter, the global economy has seen a gradual recovery, but has also faced some setbacks in light of COVID-19. The situation remains uncertain, but societies have been able to adapt to new ways of living with the pandemic. In the quarter, our operating profit increased by 24% compared with last year. Mortgage lending volumes and market shares increased, and SME lending increased as well. Furthermore, assets under management grew by 4% to a record high of EUR 326 billion. At the end of the quarter, our return on equity was 10.1%. Our return on equity and operating profit were supported by very low level of loan losses in the quarter, but the underlying development is clearly positive. Our cost efficiency efforts are generating the expected results. Our cost-to-income ratio decreased by 6 percentage points from last year to 52%. Net interest income was 6% higher than in the third quarter of '19. This is the highest growth rate since 2012 and was due to increased mortgage lending volumes, a higher market share as well as increased SME lending. In Sweden, in particular, we have very high customer activity and continued to gain market share. In large corporates and institutions, lending volumes were lower, which was due to a business-driven decision to focus on profitability rather than volumes. Lending margins improved in all countries. Deposits continue to grow. They increased by 16% in local currencies compared with last year and increased by 3% over the quarter. Net fee and commission income is still being impacted by lower levels of economic activity due to the pandemic and was down by 4%. Savings income was up 4%, driven by strong asset management inflows and performance in the quarter. In brokerage and advisory, we had a good activity and concluded major deals in the quarter. Card and payment fees improved from previous quarter but are still clearly lower than average precrisis levels. Net fair value result in customer areas was broadly in line with what we have seen last year. Moreover, we have continued to improve our performance in markets due to high levels of market activity. This led to a result that was 30% higher than in the same period last year. Our net fair value result was also supported by treasury income following positive revaluations. We are working to improve cost efficiency, and we are gradually building a stronger cost culture. These efforts continue to pay off. Our costs decreased by 6%, in line with our cost plan. We have improved our efficiency by reducing complexity in our operations, in our -- and processes. We have also fewer employees and lower staff costs. The cost development was partly supported by a VAT refund of EUR 26 million in the quarter. We continue to project that total cost for 2020 will be below EUR 4.7 billion, including the cost related to SG Finans, which will -- which we will consolidate from the fourth quarter onwards. The quality of our credit portfolio remains strong. Actually, we had a reduction in new defaults in the quarter and saw positive net rating migration. In line with this, our net loan losses were close to 0 for all business areas, and we had a net reversal of EUR 2 million for the group. We continue to make further provisions on oil and offshore exposures in LC&I and made some further write-offs on our Nordea finance portfolio, but these levels were not different from past quarters. The management buffer was kept in place at EUR 650 million since the economic outlook and the cause of the pandemic are still uncertain. We consider it prudent to keep our buffers in place. As stated in the previous quarter, we predict the full year loan losses will be below EUR 1 billion. Right from the beginning of the pandemic, we have been fully focused on supporting our customers. As an example of this, we were quick to react and decided to grant installment-free periods for customers affected by the pandemic. Approximately 95,000 customers took up the offer of this help to overcome temporary liquidity problems caused by COVID-19. Around 50% of the COVID-19-related payment holidays will have expired by the end of October. When we look at the situation, for those customers whose payment holidays have expired, we see that it's stable. So far, the vast majority of customers are returning to normal servicing of their debt. Our capital position is strong. We are one of the banks -- best capitalized banks in Europe. Our financial strength gives us a resilience and also the flexibility to support our customers. We entered this crisis with a very robust position and have strengthened that even further since the outbreak of the pandemic. At the end of the quarter, our common equity tier 1 ratio was at 16.4%, which is 6.2 percentage points above the regulatory requirement. On top of this, we have already deducted dividend for '19 and for '20 from our capital. This corresponds to 1.8 percentage points in additional buffer. We intend to pay out dividend for the financial year 2019. The Board will refrain from deciding on the '19 dividend payment before 1st of January '21. We will review the situation in the fourth quarter in light of any further communication from ECB. Moreover, we are growing the '20 dividend according to our dividend policy and have the financial strength to distribute it. Let me now move to the business area results. In Personal Banking, we saw a very strong momentum in mortgages. Volume growth was up 6% in local currencies compared with 1 year ago. We have succeeded in growing volumes and market shares in all 4 home markets. Total income was down due to extraordinary net fair value income in '19 and the impact of lower card fees. In contrast, saving income picked up from the previous quarter. Net interest income was unchanged compared with last year, but clearly improved from the previous quarter. Customer satisfaction has improved since the third quarter of last year. We have seen clear progress. For example, our customer satisfaction with online meetings has increased by 29%. Operating profit increased by 7% compared with the third quarter of last year, and costs decreased by 13%. This resulted in a cost-to-income ratio of 54%. In Business Banking, total income was up 5%, supported by a 4% growth in lending volumes. Despite volume growth -- deposits volume growth was also very strong, actually 20% growth in local currencies. Operating profit amounted to EUR 304 million and was the highest level ever in the quarter. Cost decreased by 3%, leading to a cost-to-income ratio of 47%, down from 52% a year ago. We have now completed the acquisition of SG Finans. We're strengthening our position in the Nordic SME market even further. We expect the acquisition to have a positive impact on annual income of around EUR 140 million during the full year 2021. In large corporates and institutions, we are progressing steadily with the repositioning as a focused and more profitable business area. The work continues, and there is still a lot more to be done, but this quarter was a good step in the right direction. Operating profit was as at highest level since the fourth quarter of '16 with improvements across all income and cost lines. Total income increased by 21% and cost decreased by 11%. Economic capital decreased by 13%, which is equal to EUR 1 billion. This was driven by lower market risk and a reduction in low-yielding assets. In Asset & Wealth Management, we had a strong net inflow of EUR 4.6 billion. This is the highest quarterly inflow since 2016. Assets under management increased by 4% compared with the third quarter of last year and now amount to EUR 326 billion. Customer satisfaction has been improving. We have continued to display a high level of productivity towards our customers. The proof is in the customer satisfaction figures as well as the business volumes. Total income increased by 4%, while costs continued to decrease, resulting in a cost-to-income ratio of 50%. When we set the new direction for the bank a year ago, we needed to have a new mindset. We didn't need fundamentally to change our strategy. We needed to get things done and to step up. That was the reason why we updated the business plan and launched 3 key priorities as well as new financial targets and operational performance indicators. These tools and metrics helped us to assess and understand how our business is developing and ensure a close follow-up. It is a transparent way of measuring the progress. One year after the Capital Markets Day, we are on track and progressing as planned. Naturally, we still have a lot of work to do, but we know what it will take to achieve the targets. The business areas have now been in the driver seat for 1 year. They are entirely accountable for the income, costs, risks, customer experience, investment decision and capital management. All business areas are progressing towards the targets. For LC&I, the third quarter was promising. But further acceleration is needed in order to meet the targets for '22. Looking now at the group as a whole. Our business volumes have continued to increase in a range of areas, particularly in mortgages and SME lending. Our customer satisfaction levels are higher now than prior to the outbreak. We have launched new products and services for our customers. For example, we launched a new corporate Netbank, added green mortgages to our mobile bank app and launched a new fund combining sustainability and innovation. Savings business has been under some pressure due to the pandemic, but we are now recovering and seeing strong inflow in the third quarter. At the same time, we have ensured that our engine is more streamlined and more efficient than before. We have started to build a strong cost culture, simplify our work and have a more focused operating model. In the coming year, we will explore new ways of working and the potential not only to change working life, but also to lower our costs. All in all, we are progressing, but we still have work to do. As a next step, our clear target is to improve even more. The COVID-19 pandemic has somewhat dominated our first year with our updated business plan and new targets. As a bank, we are ready to tackle all the challenges that come our way and make continuous progress. I feel both humbled but also glad that we have been able to provide care and support to our customers over the past few quarters. At the same time, we have proved the resilience of our business model. The progress we make every day confirms that our plan is the right one. Going forward, we will continue, as we started, focusing on the execution and thereby staying on track. We remain committed to delivering on our financial targets and meeting our key priorities to optimize operational efficiency, to drive growth income initiatives and to create great customer experiences. In doing so, we will also continue to fulfill our responsibility towards our customers, employees, and shareholders. This benefit both society and our business. Thank you for listening.

Thank you, Frank. We are now ready to take your questions. Operator, please.

[Operator Instructions] So we begin now with Mr. Kazim from Deutsche Bank.

I have 2 questions, if I may. First one is on costs. Just want to talk how should we think about your cost guidance going forward. I mean 9-month underlying cost is about EUR 3.2 billion. And unless you have a major boost in the fourth quarter cost, it could be below your guidance. Headcount declined more than 1,100, if I'm not mistaken, year-to-date. Staff costs are like 14% lower year-over-year. So in the light of all this, how should we think about 2021 cost outlook? Are you ahead of your targets here? That's my first question. And my second question is on capital. If you can walk us through the known headwinds and tailwinds on capital for the coming quarters.

Yes. This is Frank speaking. Can you hear me?

Yes.

Good. Thank you. So on the cost guidance, so we are, as you see in the quarter, running with a cost below EUR 1.1 billion, then we are having a VAT refund of EUR 26 million in the quarter, which we need to be aware of. And then again, I also remember that our resolution fee is coming in, in the first half of the year. So the question, of course, what will including the SG Finans be the next level of '21. And we don't -- we have decided not to guide on that yet. We want to just have a little bit more visibility during Q4. But I should say the majority of what we have done on the cost side is definitely structural. So of course, there are some tailwind from less traveling and so -- but that is minority. The absolute biggest part is structural. And we will come back with our guidance for next year. For this year, we are reconfirming our guidance to come in below EUR 4.7 billion, that is including the integration cost and also the run cost for SG Finans in the fourth quarter. When it comes to capital, yes, you have the figures. I will let Mark go through the bridge. But we are having a very strong capital position, and I explained the start point and also the buffers. And we, as I said, have accrued for, of course, for '19 dividends, and we are accruing for full '20 dividend as well. So we intend to pay out dividend, but are, of course, following the recommendation and have decided not to take any decision before 1st of January. Mark, would you try to explain the different movements, please?

Yes. Thank you. As you have seen in our -- development in our capital position in this quarter here, it has strengthened further, and that has partly been due to reduced market and credit counterparty risk. It is related to the implementation of the SME supporting factor. And then it also has an FX effect. And if we look forward, then given our dividend policy of accruing 70%, then we will be building capital when we look ahead. We do have here in the fourth quarter a 35 to 40 basis points impact from SG Finans that will reduce our CET1 capital, while we also have forecasted that the consequence of the changed software deduction rules will give a positive impact of 25 basis points.

Our next question comes in from Mr. Andreas from Danske Bank.

So it's Andreas Hakansson here from Danske. First one, it was a bit interruptive when replying to the previous one. But on the capital distribution question, we appreciate that you want to pay, and that's good news, of course. But have you had any discussions with the ECB how they are thinking about capital distribution? I mean it seems very much like a political decision up until -- or what we have today. But have you any view on how to think about next year?

Yes. We intend to pay out the dividend. We have refrained from deciding about it before 1st of Jan. We are expecting some further communication from ECB, and I should say November, December, early December. We have no indication pointing in any direction that should be else that we have communicated earlier. So let's see how it will play out.

Okay. Yes, I will wait and see. Then on the NII, it is particularly strong in Sweden in basically all divisions. And could you tell us a little bit what -- what is driving this? Is it the funding impact of having deposits flowing in? Or what's driving it? Because it looks very, very strong.

Yes, we have a very strong development, and we have had that for some time in Sweden, and then it has definitely not been less in Q3. We have strong growth in mortgages, strong inflow of new mortgage customers. Volumes are growing. I don't have the exact number here, but I should say somewhere 6% and so. And we are gaining market share and have done that for the entire year, and it looks quite nice in Q3. On the SME lending, we are also growing with very high numbers if you look in local currencies and having good speed. So it's just very good activities level, but actually, we have that -- we have experienced a very good activity level across the entire group in all the countries. Mark, could you give just a little bit more flavor behind the NII from Sweden, if there are any particular things, just a short one to add?

Yes. Maybe let me comment just on the funding cost. As you can see, we have a very strong net stable funding ratio of approximately 15 -- 115 percentage points. And that has given us the possibility to issue in the lower end of our guidance for the year. And going into 2021, we also see with the deposit inflow that we are getting that we can lower our expected issuance. So this has supported our funding cost. There is a slight headwind with the increase in deposits until we are able to reduce the funding costs, but nothing of material impact.

Can I just follow up on the NII? Two small things. Have you seen any impact on the TLTRO money you took in the middle of the summer? And then also, you have a strong growth in Danish mortgage lending. I think it was 5% year-on-year, which is then quite much more than the system growth. And given that new credit is so aggressive, could you tell us how could it be so successful in that area in Denmark?

Let me take the last one. And then Mark, you could elaborate on the other one. We are -- of course, very humbly, we have worked hard to regain business momentum. It started actually a little bit earlier in Denmark, and it just takes time. But when you get the organization aligned, if you increase accessibility, have a lot of activity, I should say 24/7, having all employees to understand why we are here and really feel passionate about what we are doing, and that is really what they have done, then you just see a nice pickup. And at least, normally, you do that. And that is what we are experiencing in Denmark. They had some tough years, years ago and continuously have improved. And now they are just in a good position, I should say. But of course, it's up to us every day to be there for our customers, but they have succeeded quite well in Q3, but also actually earlier quarters. Mark, the other question, please.

Yes. As you probably are well aware of, we have participated with approximately EUR 7 billion in the TLTRO. And we have done that for the reason that this is at attractive funding levels. If we are able to demonstrate growth in our lending, then we will get a further reduction in the rates, and that will give us upside on the NII in 2021.

Our next question comes in from Mr. Magnus Andersson from RBN.

I think -- it's Magnus Andersson at ABG. But I'll just go ahead and start off with your follow-up from the CMD. When I look at the LC&I division, it looks quite good year-on-year with NII up despite lending down, costs are down. You have reduced economic capital and risk-weighted assets. So I was just wondering, at the CMD, you were talking about the potential income loss of some EUR 150 million, if I remember correctly. So I would just like to know whether that has come true or how much of that's come true. And secondly, as the headcount is down by more than 200 employees and your cost trajectory is quite nice, if you have -- you expect to do more there? And finally, on capital, you were talking about -- a year ago about EUR 1.5 billion reduction in economic capital. You're down EUR 1 billion from Q3. I think, you're right, EUR 1.3 billion since June. Risk-weighted assets, you were talking about down roughly EUR 8 billion. I think you're down just EUR 2.5 billion or so. So what should we see there going forward on this topic?

Yes. Thank you. So yes, we are basically delivering on the plan we had. And of course, if the COVID-19 created some volatility that pushed us a little bit backwards, but then we needed to work even harder, and that is what we have done with low-yielding assets and getting down the volatility and, thereby, the EC employed in LC&I. And I think that what we are seeing now is the first steps in the right direction, but there is a long way to go, right? So 1 quarter doesn't create a more profitable business area, but it is certainly a good step in the right direction. Cost will continue to be trimmed down. We are, as we also have said, closing down some of our footprints outside the Nordics. We are working on the capital employed to get that down even further. We are working with a focus on profitability and not on volumes. That will lead to a more focused, a more profitable unit, but probably also a little bit smaller unit or a division, and that is what our intention is. It has not really been visible in the income lines yet. We are sleeping with our boots on. So let's see how it will play out. Of course, if we can do it without income impact -- negative income impact, it will be nice, but it's too hard to forecast implications. As we said, we expect some negative impact, but let's see how it play out. But the work will continue. And I should say, when I look at Q3 compared to what we said at the CMD, I think we are as expected, and we'll just continue to move forward.

Okay. So we should expect to see continued reduction in risk-weighted assets and economic capital in this area?

Yes, as good as a go, right? And then the question, I think, long term, mid-long term, of course, is one is to deliver on '22 plan, to get them up to a better shape when it comes to -- the business up to a better shape when it comes to profitability. But of course, the next step to take is how to create a real profitability that is corresponding to the other business areas in the bank. And that work, of course, is the next one to look into and that we, of course, will try to figure out how to do that. And I have started that work, I should say.

Okay. And my second question is related to an area we haven't talked about so much since you took over as CEO, but an area we talked a lot about before that. It's namely IT spending, where we've seen that -- I mean they peaked. If I add capitalized IT costs and IT costs in our P&L, it clearly peaked in 2017 and then they have come down quite significantly. So I'm just wondering, have you achieved everything you intended to achieve in terms of platform integration across the Nordic countries when it comes to lending, of course the payments, et cetera? Are you on track there? And will you -- I mean we talked about the close -- potential closing down of some older systems in 2021. And beyond that, is that still on plan? Where are you there?

Yes, we are following our plan. But on the question, have we like concluded everything and finalized the work and so, absolutely no. But we are progressing. And I think we need to divide it in some buckets. So say, the core banking work, the core banking platform, the main engine in the bank, that work is progressing. Of course, there has been -- during the last years, there has been adjustments here and there. There has been -- agenda has taken some attention and so. But in general, we are progressing. So nothing particular to say there. We just continue to build the system. And then the main effect from the core banking, you can say, will come when we close down the legacy systems, and that is some years out. But what we have achieved that has actually benefited the bank very, very nicely, that is the new mobile banking platform. And that we have rolled out -- we finalized the work rolling out in Norway in the first quarter. And that is a platform. I think the first time in Nordea's lifetime where we have a common mobile banking platform, the same one in 4 countries supporting all our customers. And today, that is -- it's very high-rated. It's 4.5, 4.6 rating in the App Store. And we have more than 1 billion log-ins now across the Nordics. And with that, of course, it's much easier for us to add products, to add digital services, digital sales. And then we need to connect it even better with our data warehouse. And that is basically what we focus on now. Two things. First of all, to increase the number of digital services and digital sales. That's one. We have a road map we follow every 3 quarters. We basically add news and then we prolong it for 3 months, so we continuously roll it. And we have like 120 services we want to add, and we are somewhere around 45, 50, I should say, right now in my best guess -- would be my best guess. And then we have the data, and that is what we are starting to work hard on, how to use more data in our digital interactions in order to stay relevant, in order to be personal in a digital meeting. And I think we are starting to see some small, nice steps forward. But of course, this is a big, large work we have in front of us. But we know how to do it. So the work has started, if I could say so.

Okay. And finally from me on a more detailed note in terms of IT expenses. I saw that in other costs, the information technology cost in Q3 is the lower number -- lowest number I've ever seen, and I went back to 2004. So the question is, is there anything particular in there? Or is it really a step change in your IT cost level in the P&L?

We have reduced from last year. That's for sure. But I don't recall any particular, Mark, do you, in the quarter?

No, I think we have -- if it's the booking of the VAT refund, actually that goes into that line, and that distorts it a little. So I think that should be taken into now. Can you confirm that, Matti?