Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Hello. This is Zafar Aziz speaking, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. I'm pleased to announce that our next presentation will be from Nordea Bank from Finland. Before I introduce our speaker, a few points to note. Please submit your questions in the ask your questions box below the slides. Once the Q&A session has ended, don't log out. You will automatically transferred into the Nordea booth, where you can continue to ask questions via the chat facility and access shareholder materials. On a final note, all of today's presentation is recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Matti Ahokas, Head of Investor Relations from Nordea Bank, which trades on the NASDAQ Helsinki, Stockholm and Copenhagen and in the U.S. on the OTC market as NRDBY. Welcome, Matti, and over to you.

Thank you very much, and greetings from my side as well from the cold North. As mentioned, Nordea is a Nordic bank, and the Nordic region is basically consisting of 4 countries: Finland; Sweden; Norway; and Denmark. And as you can probably imagine, at this time, it's quite dark and cold here in the North. But in terms of banking, we are doing very well. Nordea is the leading Nordic bank with actually strong market positions in all of the 4 Nordic countries, and we operate in 4 different business areas. We are also the only bank with meaningful market shares in all of the countries. So many of our competitors, they have market shares in some of the countries, but not all of them. So I would say that Nordea is definitely a pan-Nordic bank. And the Nordic region, of course, is known, not only for the cold weather, but also for very stable economies and high welfare. And that, of course, is a very favorable environment for the banks to operate. Nordea has undergone quite a lot of changes during the last couple of years, and we have come with a new strategy regarding the -- our businesses. Operator, if you can move the slide. For some reason, I've -- my slide deck isn't working. Thanks a lot. And we've had a new management team, a new CEO. And roughly a year ago, we presented a new Nordea strategy, which lies on 3 key priorities. And our CEO, Frank Vang-Jensen, is quite adamant on the fact that every employee should remember these 3 key priorities almost in their sleep. These are: to optimize operational efficiency; drive income growth initiatives; and to create great customer experiences. If we dwell into these 3 a bit more in detail, first, the optimizing operational efficiency. Cost control is a very important part of Nordea nowadays. And historically, we may not have always been that great on that, but this is very high up on the agenda of our new management team. It means, in general, a focus on costs, focusing on everything -- rather not having cost targets, but rather seeing the kind of creation of a cost culture. And that goes to everything that is being done at Nordea. The second thing is to drive income growth initiatives. We are definitely focusing on growing our business, growing our market shares. And this has been true, especially during the last year, when we have been able to kind of increase our market shares, mainly in the traditional retail banking businesses in Finland, Denmark, Sweden and Norway. And that is very important for the future and to reach our financial targets. And the third 1 is to create great customer experiences. And that basically means having more satisfied customers -- more satisfied customers bank at Nordea, they want to do business with us, and that's the third one of our key priorities. We -- this is also a segment where we have lagged behind historically but are definitely catching up on that item as well. And ultimately, we target to be a strong and personal financial partners for people working in the Nordic region. And I said, Nordea is a Nordic bank and the Nordic concept and the Nordic aspect is what we do. We have very little business outside the Nordic region. We have 2 important financial targets, that is to have a cost-to-income ratio by fiscal year '22 at 50%. The latest financial data, as I'll show you a bit later on, is that we were at 52% in the third quarter, and we still are making good progress, but have some way to go. And the most important financial target, obviously, we have is to have a return on equity at end of '22 of above 10%. And as many of you may know, in European banking, this is actually a quite high figure. The average return on equity of European banks at the moment is roughly 5% or even below. So in a European context with negative interest rate in most of the countries we operate, this is actually a fairly ambitious and good result altogether. In terms of capital, we target 150 to 200 basis point management buffer on top of the regulatory capital requirement, and we plan to pay out 60% to 70% of the profit to shareholders and excess capital, which we, at the moment, actually have quite a lot is intended to be distributed to shareholders through share buybacks. How do we get to the 10% or above 10% return on equity target by 2022? This is comparing to the figures when the plan was announced last September and when our new CEO came along. We are definitely not expecting that the environment would help us a lot. We are looking at, firstly, kind of 3 levers. The most important 1 is income. We expect to grow our business volumes in all of the 4 Nordic countries and also especially our assets under management. Nordea is among the Nordic banks, one of the most geared towards asset management. We had EUR 326 billion, that is slightly more in dollars, in assets under management, all-time high in the third quarter. And it is also very profitable growth that this is generating. Costs are an important lever here. And when we speak to our investor base, many of them say that cost control is the most important thing in this low interest rate environment we're seeing, especially here in Europe. And that is something that we work very hard on. We -- our top management is extremely focused on this. And we have, like I show you, shown good progress on that front. And the third big lever is that for our large corporate and institutional business we plan to make it more profitable and smaller and more efficient as well. And this would also increase the return on equity to our target of above 10%. We do, however, expect that there will be inherent pressure on margins, largely due to competition, but we will be able to compensate that with stable credit quality and very tough measures in terms of costs and also growing the revenues, as we expect. It is actually quite surprising that despite the corona times, despite COVID-19, we have actually had very strong growth. And if somebody would have asked -- told me that during corona times, Nordea is able to grow their balance -- or our balance sheet and lending, especially in mortgages, more than it has during the last 3 years, I would have probably said that you're kidding. But that is the case. And what we've seen in the Nordic region, despite the corona, people have more obviously stayed home. They're more focused on renovating their house or apartment. They're maybe buying a new house or an apartment. They're planning on buying holiday homes. So we actually have had very nice volume growth in all of the 4 Nordic countries despite the COVID situation. And one of the reasons, of course, is that people have been able to bank with us, is that our omnichannel distribution system where you can use the mobile bank, where you can use the Internet bank or then the telephone system, so that you actually don't have to physically visit the branch anymore. You can do all of your business, including buying a house, via that. And that, I think, is quite a surprising development altogether. And we planned and we are continuing this positive trend in the business despite the fact that we're seeing accelerating development on the COVID front also in Europe. Maybe less so in the Nordic countries, the Europe overall, but still, we are seeing the similar situation. The business area, which is the fourth one, our large corporates and institution business, is an important lever for us to improve the group profitability. We are looking at reducing costs. We're optimizing our international footprint. We basically exited our businesses in Hong Kong, Germany, Russia. So focusing the business on the Nordic region and especially reducing low return assets, especially large corporate loans that we entered into the last couple of years, which are not yielding the return our shareholders are requiring. And this is a positive progress in a sense. Most of our customers understand this, and it has been an amicable process as well with them. So there's no hard feelings, both of us, if we can't decide on that this business would be returning enough profits to our shareholders. Then we are exiting that on a case-by-case basis to reach the 10% return on equity potential. And that also means streamlining the -- downsizing the lending book but improving profitability. And the third quarter was actually a very profitable quarter for us. As you can see, the return on capital at risk has been hovering around 5%. Now we were at 12%. We were definitely that either in most M&A transactions in the Nordic region during the quarter. And this is a very important driver for us in the future, not to service the large corporates on the lending side. They, normally, in the Nordic region, at the moment, are very cash rich. They don't need the lending, but they do need treasury services, ForEx and M&A advisory as well. And here, we have been highly successful in the third quarter despite the turbulence we've seen in -- regarding the economies of the COVID situation. Costs, as I mentioned, are very, very high on the agenda of this management team, and we've had a 6% decline in costs during the third quarter compared to Q3 '19. Our staff costs are down by 5%, and overall cost down by 6%. And we do expect that the cost would continue on a downward trend, maybe with the same magnitude but clearly kind of focusing on the new ways of working. At the moment, roughly 30% of our staff is working from the office and 70% from home, and still the bank is functioning and growing business volumes, like I showed, quite a lot. But I think in the future, we will all be faced with a new ways of working. We will work more from home. We don't have to travel that much. And we can work more efficiently in terms of timing. And I think this conference is also a great example of how new ways of communicating also with the investor base is made possible and very efficient use of time and money. And I think what we're hearing from our staff is that everybody is creating new ways and thinking how could we be more efficient in our working ways. Nordea is actually one of the strongest, if not the strongest, capitalized banks in Europe at the moment. Our core Tier 1 capital stood at 16.4% at the end of the third quarter. And this is 6.2 percentage points above the regulatory requirement. I'd also like to note here that this 16.4% is taking into account the already deducted dividends for 2019, and therefore, the first 9 months of 2020. If, for some reason, we would not be able to pay out this dividend, this figure would be 18.2%, so 8 percentage points above the regulatory requirement. However, we definitely have the capacity and the intention to pay dividends and also support our customers. And many of you may know that the European Central Bank, which regulates the Eurozone banks, is actually -- had a ban or a recommendation for banks not to pay dividends during the calendar year 2020, but we definitely hope and expect that we could resume paying dividends in '20 -- in the beginning of 2021. We have accrued EUR 0.40 for 2019 and then rough EUR 0.28 so far for 2020. But especially the 2019 dividend is something we hope to be able to pay out as soon as this dividend ban or recommendation by the regulator is lifted. We are definitely in the forefront of European banks to pay dividends. And this has been acknowledged by many analysts and investors as well. And we definitely hope that we will be able to do this as soon as possible and then continue on a normal 60% to 70% payout ratio from net profits. Credit quality is, of course, the #1 thing in the crisis and for us as well. We basically had zero loan losses in the second -- in the third quarter, and this was because we did a fairly similar thing like many of the American banks. We took a very front-loaded view on the loan loss provisions and the COVID crisis. We had actually did 3 different kind of exercises. One was a top down IFRS 9 related model review where we actually expected and took very significant negative GDP cuts to our estimates and incorporated that to the IFRS 9 provisioning model. Then we did a very thorough stress test on a number of exposures. So we expected that these kind of severely impacted sectors that we have in our portfolio, it's actually a very, very small amount, only 4% of our lending portfolio is to hotels or airlines, is almost insignificant and to sectors which are affected by the COVID situation. Actually most of our business and the lending book is very, very stable and has had almost nonexistent impact on the COVID situation. But we have, at the moment, a EUR 650 million management judgment buffer just in case the situation would deteriorate. And this is something that what we believe is prudent at the moment and has been also very positively taken by our shareholder base. We are prepared for almost any foreseeable scenario with our provisions. Our business plan, as I mentioned, focus is on the 2022 financial targets. We had a Capital Market Day a year ago when our new -- when our CEO basically took the helm at Nordea. And we are definitely on track to reach the financial targets. The financial group targets have also been split to business areas, and this is one of the key aspects of our management team that the business areas are very much accountable for their performance, their costs, their capital use, and they decide on how to reach the targets, so that we get to the group targets of above 10% return on equity and cost-to-income ratio of 50%. The only area where we're slightly behind schedule or not exactly on schedule is our large corporate and institution business. As I mentioned, this is a business where we intend to be smaller in terms of lending volumes, but more profitable. And of course, the corona situation and especially the very high market risk and the market volatility has had an impact altogether. But on a group level, we're definitely here, and we're on track to reach our financial targets. And that is definitely the most important thing that the management team and all of us work for to reach in the future. In summary, what Nordea promises Nordea delivers. That's the most important message from our CEO. We had a strong result in the third quarter, a very strong result, one of the strongest results for a long time despite the COVID situation. And especially I think the most important thing that we are seeing is that we're seeing the income grow, driven by strong net interest income, especially increased mortgage volumes, increased market shares. We're not competing with price. We're competing with service. And also our assets under management for our clients were at an all-time high of EUR 326 billion. And this means we are seeing good progress towards the '22 financial targets. And cost especially is a key focus and a key lever there, and we will continue to work very strong on that front. Our financial position is extremely strong. We are one of the best capitalized banks in Europe, and we definitely intend and want to come back paying dividends to our shareholders. And we have a very, very strong balance sheet, and we are able to support our customers but also pay good dividends to our shareholder. And we have a very strong provisioning in our lending book, and that we can almost foresee any foreseeable situation and offset that with our loan loss provisions. And we will deliver on our business plan and financial targets. That was my presentation, and I can see there is quite a lot of questions, and I'll try to answer them as good as I can.

First of all, there is a question regarding how does the low interest rate environment impact the profit of Nordea? It definitely has had an impact. And, as you may know, the Eurozone area and Denmark, which is roughly 50% of our businesses, have had negative policy rates for a long time. So we have had to adapt to that situation, and that has meant lower margins and a negative impact on profitability. 50% -- 50 basis point higher rate in our operating areas would mean significantly higher profits for us, but we don't expect the interest rates to rebound. If they would, it would be highly positive for us and considered more of a bonus. But we are adapting to the low interest rate environment. We are changing our operations in a sense we're changing our deposit pricing in some countries. But basically, so far, the impact has been negative. The good thing is, of course, that with low interest rates, it also is easier for the clients to service their loans. So loan losses before COVID have been very low. And we expect them to kind of normalize going forward gradually after the crisis has hopefully ended in terms of COVID-19. There is also a question of about, do we have an active buyback program? And the answer for that is no, but we definitely intend to have that in place as soon as possible. The ban from the European Central Bank also applies for share buyback. So even though we had the program, we probably would have had to kind of stop that. There's actually very few ECB or European Central Bank regulated banks that have a share buyback program. And this is not widely used in Europe. But as said, part of our strategy is to have all excess capital paid out on top of the normal dividends via share buybacks. And that is definitely something that we plan to launch once the regulatory approvals have come. There's a question of what's the biggest challenge on digital banking for Nordea? Nordea is definitely in the forefront of digital banking. The Nordic countries are definitely -- we don't basically have any checks in these countries. People use mainly their mobile phone, not the Internet bank. So -- and our mobile bank users, our digital bank users, they're actually more profitable and they're more satisfied than our other customers. So it is a very, very important tool for our future. And we have much more log ons through the mobile bank. It's very easy to use. We have roughly 40 functionalities in the mobile bank at the moment. We will have maybe 130, 140. So basically, anything you can -- you want you can do on the mobile bank, and that is the core of our digital banking. Then, for example, when you buy a house or an apartment, then you probably need some personal advice. That you can do digitally as well. And as said, you can actually buy a house or an apartment without ever seeing a physical person or visiting the office at Nordea. So that's definitely possible. Then some other questions. Any plans to reduce office space in our main hubs, and what cost savings can be realized? I think the whole COVID-19 situation has basically brought forward a totally new way of working. And we are very much also thinking about how does or how do our premises look like in the future, how much will people work from home also after the crisis and the COVID situation and what are the kind of most efficient ways of working. I don't think we're overall going to have all of us working from home when the situation normalizes. But I think it will have also a significant impact on the way we operate. And I think that goes for these kind of conferences and seminars as well that this will be part of the toolbox in Investor Relations for companies even after the financial crisis. There's a question on, have we increased provisions for loan loss reserve for -- as a result of COVID 19? Yes, very much. So as I said, we took significant front-loaded provisions on -- in the second quarter. We basically went through the entire lending book and did significant stress test, much more severe than, for example, the Central Bank stress test that were made. And we feel very comfortable that we are prepared for any future loan losses that would arise. As I said, we have roughly 60 -- EUR 650 million, which is kind of earmarked for any potential future losses from our portfolio. So we also believe that the development in terms of profitability will improve because we are prepared and buffered for almost any foreseeable negative scenario. And obviously, if the scenario -- if a negative scenario doesn't materialize, at some stage, obviously, it's possible that we will have to then write-back some of these provisions, which we gladly would do if the situation normalizes. There's a question on what are we doing to address gender inequality in pay and promotion for middle banking roles? This is very also important. First of all, the Nordic region, as you may know, is -- equality is considered very important in the Nordic countries. I mean, most of the Nordic countries, women were allowed to vote for the first -- among the first globally. And for example, in -- both in Norway and Finland, we have a woman Prime Minister. So the quality is more in the genes of Nordic people. And that, of course, when it's part of the Nordic culture, it is also part of Nordea. 2 of our biggest -- or the heads of our 2 biggest business areas, i.e., Personal Banking and business banking are women. So the bulk and the most important engine of Nordea is -- has women as leaders. So I think that's also a very strong indication that we take gender equality very, very seriously. There's a final question, I guess, that we could take is that how is the delay in the EU budget affecting European banks and the EUR 600 billion plus COVID stimulus? That, of course, is something that we've seen quite significant support from the government. And even though there might be some delay on that, as I said, we are basically -- our loan loss provisioning is dependent -- or is not dependent. It's taking into account that we will see these stimulus measures ending and we still will be in a position to support our customers and pay dividends. And we are not dependent on that situation. Actually, it looks like that most of our customers have resumed normal payments after payment holidays. Our time is running out. Thank you very much for your attention, and thank you for your interest in Nordea and looking forward to speaking you to all again. Thank you very much.