Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Good morning, and welcome to Nordea's Fourth Quarter 2020 Results Presentation. Here in Helsinki, we have our group CEO, Frank Vang-Jensen; Group CFO, Ian Smith; and Group Chief Risk Officer, CRO, Matthew Elderfield. My name is Matti Ahokas, Head of Investor Relations. As usual, we'll start with the presentation by Frank, and then we will take your questions. [Operator Instructions] With those words, I'll leave the floor to you, Frank.

Thank you, Matti, and good morning. Today, we have published our fourth quarter and full year results, and we are showing good progress. Before going deeper into the fourth quarter numbers, I'd like to reflect about 2020 as a whole. This time, last year, I summarized our fourth quarter results as the first steps in our new direction with the following words: the results reflects our priorities and are very much as planned. Now reflecting on our 2020 results, I'm happy to repeat the same message. It is not what might be expected after a year of COVID-19 pandemic, lockdowns and turbulence, but we are progressing. We have improved our performance, and we are delivering on our business plan and our key priorities. Our business volumes have grown, especially in mortgages, SME, lending and asset management. And we have gained market shares across the Nordics. We have created better customer experiences, improved customer satisfaction scores and reduced customer complaints by more than 20%. At the same time, we have reduced our costs and increased operational efficiency. The resilience of our business model was tested and proven in difficult circumstances. The remarkable efforts of our employees and our advanced digital capabilities kept the bank fully operational with high levels of customer activity. It makes me very proud, but also very humble, to see all the extraordinary efforts of our dedicated, passionate and highly competent employees. The results in the fourth quarter showed continued development in customer business volumes and market shares in all countries. And I want to highlight that we saw strong growth in mortgages, SME lending and assets under management. All of these were at record high levels. We are on track to reach our '22 targets. We have steadily improved our cost-to-income ratio from 57.5% in 2019 to 54.8% in 2020. In Q4, our operating profit was up 11%, driven by income growth and our return on equity was 8.5% -- or 8.4% compared to -- or compared with 7.6% last year. At the same time, our capital base increased by EUR 2.2 billion. Costs were in line with our full year guidance of below EUR 4.7 billion. Cost in the fourth quarter were somewhat higher than in the previous quarter due to certain nonrecurring items. We will continue working to improve cost efficiency and expect operating cost to be below EUR 4.6 billion in '21. Furthermore, the backbone of Nordea is strong. Our capital position and credit quality are among the best in Europe. This means that we are in a good position to take our performance to the next level. There's a still lot of work to be done. The next 2 slides summarize the P&L for the quarter and for the full year. I'm going to take you through the key lines in each. In the fourth quarter, net interest income increased by 6%, driven by strong growth in customer business volumes. This was the highest annual growth since 2008. Our mortgage loan engine is gaining speed in all countries. In fact, our mortgage loan grew by a record 6%, the highest rate of increase since 2011. Our consumer lending volumes were negatively affected by lower customer demand during the pandemic. We saw positive SME lending development, especially in Sweden and in Norway, supported by the acquisition of SG Finans, which we now have rebranded, Nordea Finance Equipment. Lending margins for large corporates also continued to improve. Net fee and commission income was up 2% in the quarter and good customer activity and higher advisory fee income supported the growth, together with an 8% increase in savings income due to higher asset management inflows. Card fees improved from the previous quarter, but are still somewhat below the average precrisis levels due to COVID-19. Net fair value results developed as expected, given the more subdued markets in the beginning of the quarter and was down 13%. On a positive note, we witnessed a promising underlying development in market making. Customer activity improved from the previous quarter, but was at slightly lower levels than last year. It should be noted that during the quarter, we changed the way we report value changes in our Danish mortgage portfolio. We relocated EUR 30 million of positive net fair value movements to the net loan loss line where it more naturally belongs. This also reduces the volatility of the net fair value in line with our presence. Our full year costs were below EUR 4.7 billion, in line with our guidance. Costs in the quarter were 3% higher due to certain nonrecurring terms -- items, mainly the integration of Nordea Finance Equipment and noncore IT impairments. Underlying costs developed according to plan, and we were down 3% in the quarter. In '21, we will continue to take actions to improve our operational efficiency. We will take cost out, while managing ordinary cost pressure due to several factors. In addition to normal cost inflation, we will also have higher costs from the integration of Nordea Finance Equipment. We expect somewhat higher resolution fee and higher IT-related depreciation and amortization. However, there should be a net reduction in costs this year as well, and we expect the total cost for '21 to be below EUR 4.6 billion. The quality of our credit portfolio remained strong throughout the quarter and throughout the year as well. Our realized loan losses have been very low, and net loan losses in the fourth quarter were EUR 28 million. As mentioned earlier, we realized a net fair value gain of EUR 30 million from the Danish mortgage portfolio, which is now reported along with loan losses. The net loan losses for 2020 amounted to EUR 860 million, well in line with our guidance of below EUR 1 billion for the full year 2020. During the fourth quarter, we updated our detailed analysis of the impact of COVID-19 on our credit portfolio. Our assessment remains unchanged. Only 4% of our total loans fall within the industry sectors that are deemed to be significantly affected by COVID-19. We have retained our substantial management buffer of EUR 650 million, which will protect us effectively against losses. We continue to monitor the situation closely, of course. But we are -- but we consider it to be too early to release a buffer at this stage. We thought this approach prudent as the full economic impact of the pandemic on our customers and the societies around us remain uncertain. Our capital position is very strong and among the best in Europe. Our CET1 ratio was 17.1%, which is 6.9% -- percentage points above the current requirement of ECB. We continue to generate capital and increase our CET ratio, even after having deducted the proposed 2019 and 2020 dividends. During the pandemic, we have been able to support our customers, maintain our financial strength and ensure that we are fully operational. And in times like these, we understand the reasonings behind the ECB's exceptional capital distribution recommendations for the entire European banking industry. We have followed the recommendations, even though they might be less relevant for us as a strongly capitalized bank. Our capital and dividend policy is unchanged. Dividends are important to our shareholders and benefit both them and society at large. We consider dividend payment to be a matter of time only. Today, our Board has proposed a dividend of EUR 0.39 per share for 2020. This is in line with our dividend policy. In addition, the delayed '19 dividend of EUR 0.40 per share is proposed to be paid out to our shareholders in 2 installments. The first installment of EUR 0.07 after the Board decision in February, and the remaining EUR 0.33 after September '21, in line with the recommendation of ECB. Thus, the total dividend payout in '21 amounts to EUR 0.79 per share. Let me now move on to the business area results. All our business areas continued to show progress in the fourth quarter. In Personal Banking, we continued to see high levels of custom activity in mortgages in all countries. Volumes increased by 6% in local currency. We also gained market shares across the Nordic region. The savings business performed well, and the result picked up from the previous quarter. However, total income was down 1%, mainly due to reduced payment and cards activity, high deposits inflow and lower consumer lending volumes. Cost decrease on the other side by 7%, which led to an improved cost-to-income ratio of 55%, in line with our business plan. Business banking continued its strong performance. Income growth was supported by the impact of the integration of SG Finans, now called Nordea Finance Equipment, but the business grew also excluding this impact. This demonstrates our high level of business activity and our ability to support our customers throughout the year. Total income was up 8% due to high levels of customer activity and increased lending volumes. Lending volumes were up 8%, with the strongest growth seen in Norway and in Sweden, where we also continued to gain market shares. Net fee and commission income increased by 2%, mainly driven by a strong equity capital market activity, while lower payments and card fee income continued to impact the result. The cost-to-income ratio improved by 3 percentage points to 46%, fully in line with our plan. When we look at large corporates and institutions, they progressed well with its strategic repositioning, although there's still a lot of work to be done. Business activity remained at high levels, and total income was up 8%. Lending margins increased, and investment banking-related products performed strongly. Due to the repositioning, lending volumes were lower, and economic capital decreased by 15% compared with the same quarter last year. Return on capital at risk improved to 11%. The cost income ratio decreased by 3 percentage points to 49%, in accordance with our plan. In Asset & Wealth Management, we had a quarter of excellent volume development. Our asset under management increased by 9% to an all-time high of EUR 354 billion, supported by a record high retail inflow. We also saw exceptional strong demand for our ESG funds, which contributed 70% of the net inflow in the quarter. Total income was down 6%, mainly due to lower income in Nordea Life & Pensions. The cost-to-income ratio for the quarter was 53%. Let me now move on to a special topic for this year. We are raising our ambition within the area of sustainability. The finance industry has a unique opportunity and obligation to help drive the transition to a carbon-neutral economy. We're doing so because sustainability is a crucial topic for our customers and all our stakeholders, and because we think is the right thing to do. As it says in our purpose, together, and for a greater good. Let me emphasize, the sustainability is not a new topic. For more than 10 years, it has been an important strategic priority for many parts of our business, and we have committed to several international initiatives in this area. In a recent ranking, Nordea was again among the top 100 sustainable companies in the world and the most sustainable bank in the Nordics. And now we are taking the next step, which is more ambitious and broader in scope across the entire bank. What is new here is that we are doing this work consistently, placing sustainability right in the center of our business plan. We firmly believe that the increasing demand for sustainable products and services is good for our business and for society. During 2020, we saw strong evidence of this demand. Approximately 80% of our asset management fund increase was into sustainable funds. We are now also accelerating our efforts on the lending side, supporting customers in the transition to more sustainable business models and ensuring that they have a plan -- or we have a plan for sectors where the climate impact is significant. We are setting more ambitious targets, where our own direct impact on the climate is concerned, including targets for travel and procurement. We also integrate sustainability in our people processes throughout the comprehensive diversity and inclusion plan. In addition, climate and environmental risks will be integrated into our risk management processes and customer advice. I strongly believe that you should practice what you preach. And that is why our new approach is also visible in our ambitious climate targets for 2030, and our aim to be net 0 by 2050 at the latest. In working towards these targets, we will further strengthen our lending -- our leading position in sustainability or in sustainable banking and help pave the way to a more sustainable, low-carbon economy. As a bank, we begin this year, humble, yet determined. We are well on track to meet and deliver on our '22 targets. Our focus will remain on our 3 key priorities: to optimize operational efficiency, to drive income growth initiatives and to create great customer experiences. In general, there are several signs that we are heading towards brighter times. We have found new ways of living, working and consuming. More importantly, the rollout of vaccines signals that we will eventually beat the virus. The ongoing lockdowns and restrictions reminds us about the importance of endurance and patients. I would like to thank all our customers and other stakeholders for their flexibility and cooperation in these extraordinary times. Looking ahead, we need to balance recovery with readiness for some setbacks. The recovery is not going to be easy. Societies and businesses will need to fight the feat again. As a strong and personal financial partner, we will continue to take action to drive sustainable growth and recovery together with our customers. This is the direction towards brighter times. Thank you for listening.

Thank you very much, Frank. And now it's time for your questions. [Operator Instructions] Operator, please go ahead.

[Operator Instructions] The first question is from Johan Ekblom from USB (sic) [ UBS. ]

Maybe to start on with the forward-looking question on capital. How do you think about the moving parts in 2021 and potentially beyond? And I'm specifically thinking, I guess, in terms of requirements, you mentioned the potential for a systemic risk buffer in Norway. What do you think the probabilities that, that will not be recognized by the ECB? Secondly, you mentioned in your slides that you're currently using CET1 to fill some of your Tier 1 and Tier 2 buckets. So are there any plans there in terms of issuing that to optimize capital structure over time? And are you expecting any model reviews outcome during 2021? So that's kind of the first -- maybe slightly broad question on capital. And then secondly, just -- we've seen your main shareholder being under increasing pressure to think about their stake. And I realize that's maybe not for you to comment on, but in terms of the toolbox that you have, is there anything preventing you from doing a directed buyback should they decide or communicate their wish to reduce their stake? Is there any regulatory hindrance to that? I guess we have to think of after September, but you can just talk about how you think about that?

Thank you. It's Frank speaking. So let me just start with the latter part and then enter into capital and then hand over to Ian and Matthew to talk about the details that we are looking into, but without giving any guidance. So we don't comment on our, as you also alluded to, our shareholder base. Shareholders are always -- they are coming, they are going. We have a main shareholder of Sampo. They are a shareholder of -- with 15.9% shareholding. And we don't want to speculate in that. We are in service of all the shareholders, our focus and management is to continue developing the company following our plans being a Nordic company, servicing our Nordic customers and that we intend to progress also well with during this year and the coming years. So no further comments on that topic. But I can say that buybacks, in general, is a part of our tool base. And as we have stated in our dividend policy and the capital policy, then our long-term intention is to pay out 60% to 70% of our earnings and capital exceeding that, we intend to use buyback as a tool to distribute to our shareholders. So that is -- nothing has changed in that regard. When it comes to capital, we are, as you see, very, very strongly capitalized. We all need to understand that the current requirements of regulators are somewhat lower than they were precrisis, which is natural, which it also should be as it was primarily the contracyclical buffers that were rolled back. We expect them to enter the scene again. The question is just when and with what speed? When we have accrued for our full year '19 and '20 dividend, we still have an excess capital of 6.9% above requirements. So no matter how you calculate the buffer to requirement also after rolling or coming back to more normal requirements, you can say, will be significant, but we don't want to speculate in the details in that. Ian, do you have anything to add in this -- to this topic?

So I think -- thank you, Frank. I mean, in regards to how we might execute a buyback, I think we would be -- we'd look at all options, and I don't think anything is off the table, but that's certainly something for later this year. On moving parts on capital going forward, Johan, very specifically, we recognize that in due course we'll come back to sort of precrisis requirements there or thereabouts. We still have a substantial headroom over those historical requirements. In terms of the Norway proposal, we don't think it's needed. We think we are already holding enough capital to deal with the objectives of the Norwegian authorities. And so we're making strong representations in that regard. In terms of optimizing capital, yes, it makes sense for us to use our excess CET1 at the moment and not issue a Tier 1 or Tier 2, but we will optimize once we're able to start distributing CET1 capital again. And then in terms of model reviews and other regulatory actions, Matthew, do you want to just sort of say how you're still seeing that in this year?

Yes. So in terms of the model application process, we're still on track to hit our deadlines. In fact, our preapplication for the retail RB models went in last week. The full application will go at the end of March. For the nonretail, that will be the case towards the summer for the preapplication and then in the autumn. So we're on track for that. And then it's in the ECB's hands to approve that, but we feel very confident about that. And just to add very briefly on the systemic risk buffer, just to be clear, there's still a number of processes still to go through. The Norwegian authorities have applied to the European Systemic Risk Board, but that needs to be debated. ESRB's previously noted. This raises questions about complexity and level playing field. And then after that, it's to the Finnish and ECB authorities to determine how to adapt this possibly. So there's still a number of steps, and it's still under active discussion amongst the public authorities.

If I just may, Johan, add there that in the reports we also write about 2 other aspects, which is the structural FX relief that we are going to get now in the first quarter and the removal of the Finnish risk weight floor, but you see that in the report and roughly maybe 30 basis points impact positive from those.

And the next question is from Nick Davey from Exane BNP Paribas.

Two questions, please. The first, just picking up on this dividend discussion. Could you just help us to better understand the dialogue that you've had with ECB on what you've announced today? And the second question would be on the large corporate and institutional business where interest income has held up really well against the backdrop of a falling loan book, both in the quarter and in the year 2020. I just wondered whether you could comment on the sustainability of net interest income in that unit looking forward?

Yes. Thank you. Yes, in regards to dividend, as I also stated in the presentation that we are following the recommendation of ECB that we have done all the time and that we also are doing now. But of course, with our strength and the growth we have been showing, and the -- of course, the need to come to back to normal, we are proposing to the AGM or the Board is to decide about a dividend -- or mandate the Board to decide about a dividend of EUR 0.39. And then when it comes to '19 delayed dividend, we are -- the Board is going to decide in February -- now in February, about the first installment of EUR 0.07 and then the remaining part to be proposed to be mandated the Board in -- at the AGM to be paid out all after September '21. That is in line with our dividend policy, and it is also following the ECB recommendations. And of course, we do it because we want to do it, and we intend to do it. So nothing further to comment there. When it comes to LC&I, I'm pleased to see the progress. They are doing a lot of activities to deliver on the promise we gave you at our Capital Markets Day to trim down the costs, to reduce or trim down the EC employed in that unit and to get up the ROCAR of the business. And they are delivering. It's the first year of out of 3 to reach our targets. But I think it's promising signs. And I cannot see why we should not be able to continue the development. What has happened is that we are -- they have looked into the low yielding, you can say, businesses, and volume is not a merit anymore. That is profitability. And that is in line with what we have said before. It will probably lead to a smaller LC&I, but certainly a more profitable and a more focused LC&I. And I think what we see here after 2020, and especially in the latter part of '20, that is fully in line with our plan, and we intend to continue that down that path.

Sorry, could I ask a quick follow-up on the dividend? And sorry, if it's a stupid question, but given that you're intending to pay out in the course of this year, more than 100% of your 2020 profits, does that require specific ECB approval? Or do they think of it the way that you think of it that one dividend relates to 2019 earnings and one relates to this year? And if you need approval, have you got it already?

So, Nick, no approval required for dividends from ECB. And so they're briefed on our plans. And so there's no impediment for the Board doing what it wants to do as far as we're concerned, subject, of course, to any sort of blanket or industry recommendations from ECB. But just echoing Frank's comment, I think the ECB has acknowledged privately and publicly, indeed, that things need to get back to normal.

Next question is from the line of Magnus Andersson from ABG.

I just want to -- my first question is on cost, your outlook for 2021 of being below EUR 4.6 billion. I was just wondering if you could give us some more details on how you are thinking around headcount development, staff costs, IT costs, year-on-year resolution fund fee, so that we can get some kind of feeling what the main drivers will be here? And also related to that, what kind of integration costs are you expecting for the former -- the Nordea Finance Equipment?

Thank you. So as we know, this year, we guided for below -- to come in below EUR 4.7 billion, and then we did that. We included or integrated -- started to integrate SG Finans first of October, leading to it being a part of our P&L for 1 quarter. And of course, the year -- this year, they will have full impact. So that, of course, will elevate the cost level some. Next -- this year, we are guiding for below EUR 4.6 billion, including SG Finans, now Nordea Finance Equipment. So that's a start point. Then, of course, beneath, we need to underline, we need to be aware of what does that mean? And if you look at the cost inflation, the depreciation, appreciation and you look at an expected somewhat higher resolution fee, and finally, the Nordea Finance Equipment cost to reach below EUR 4.6 billion, we are talking about a gross takeout of around EUR 250 million in that area. So that's like a start point. And the levers will be FTEs, where we just will continue to increase efficiency. We'll challenge ways of working. Everything that doesn't add value for our customers, we will, of course, try to do differently, but primarily to remove. And then it's about IT. It's about locations. And I think that's the main drivers. Ian, would you have anything to add when it comes to cost take out for the coming -- or this year?

Yes. Just to supplement your response there, Frank. So we're continuing to do all the things that you'd expect us to do on costs, as Frank described. And that gross takeout of circa EUR 250 million is pretty substantial. But the things going the other way, those headwinds, particularly because we've been investing heavily in the business. So depreciation and other things do absorb a reasonable chunk of those gross cost takeouts. So we need to be reasonably clear that the net cost -- we'll see a net cost reduction into next year. We will absolutely go below EUR 4.6 billion, but it won't be to the same extent as you saw between '19 and '20. And that's because actually we made such good progress in some of those areas. So definitely continue doing what we're doing. You'll see net cost out. It will come from FTE and other sensible savings, but we do have to deal with some of those headwinds.

Do you have an explicit target for headcount reduction in 2021?

No, we don't have such targets. But in general, I would say, banking industry is in a transformation. And in general, the number of employees working in universal banks will, in my opinion, continuously decrease in the coming years. There will be a lot of automation, digitalization. But on the other hand, there will be new tasks that are within the area of digitalization and other technology areas, but the total number of employees in a universal bank as ours will decrease in the coming years. And so I think you will see the same direction as -- and the same speed as you have seen in 2020.

Okay. My second question would be on asset quality, just considering your low level now and that you keep your management judgment buffer of EUR 650 million, if you can say anything about the outlook for 2021, '22 there, given that the world slowly would normalize?

Yes. Thank you. Matthew, would you take this question?

Sure. So I think in general, our projected impact from COVID-19 is unchanged from the analysis we did in Q2. You may recall, we looked at that from a number of different perspectives. We had a new run of our stress test model, our IFRS 9 model, and we also do a bottom-up customer review. We've done that again in Q4. Looking at, for instance, the customer bottom-up analysis, 25% of assets. And basically, the projected impact is the same as we see in Q2, except now the forecast losses are ahead of us because, as Frank said in his presentation, we're not seeing the realized losses yet. We have the management judgment buffer in place, so they're ready when they are realized. So overall, and taking account of the buffer in place, we expect loan loss levels in '21 to be lower than in '20, and will be back to more normal levels in 2022.

Next question is from Antonio Reale from Morgan Stanley.

It's Antonio from Morgan Stanley. I've got 2 questions, please. The first one is on M&A. I mean, the most recent SG Finans acquisitions provides a good template for equity deals. It's clear you want to pay cash dividends. But can you remind us what is your latest thought process when deciding whether to use the capital for dividends, share buybacks or M&A? And in particular, on the M&A side, can you just remind us where you see sort of the best opportunities to grow across which products? And my second question is on the SME loan book. You've been gaining market share here, mostly in Sweden and Norway. How do you see your market position versus competitors? And how do you balance the market share gains, while at the same time, defining margins and credit quality in the SME space?

Yes. Thank you. Let's take the M&A first. So we are -- our primary focus is to grow organically, and I think we have shown that. We are in a good position to do so. We have changed the focus in the bank. We have a very high momentum and are showing good growth in the core areas of the bank. When it comes to M&A, we would like to do bolt-on acquisitions. It needs to be in the core of our strategy, basically supporting the profitable parts of our business or at least supporting profitable business to be even more profitable. And it should be in the Nordics as we are Nordic bank, Nordic focused and we'll continue to do so or be that. So SG Finans is a good example. It strengthened our customer offering within the SME segment. And it was a good -- and it is a good business that will add profitability and efficiency -- cost efficiency to the average of the group. The size is good. It's a -- it's not too small, it's not too big. It's 350 new colleagues we have gotten and a fine cash flow, I should say. So we have, of course, a wish list, if you can say so, and are working with that continuously. It might be within -- more like SG. It could be in savings. It could be in life and pension, it could be in asset management, in that area, but it could also be elsewhere. But that is like it needs to be in the core of our strategy. So let's see how it will play out in the coming period. But as you mentioned, we certainly have the capital and the -- you can say the way we basically try to look at it is that we want to have a stable dividend, 60% to 70%. It needs to be predictable and sustainable, and that's why we changed our capital policy -- dividend policy 1.5 year ago. If we then have excess capital, then we intend to distribute it to our shareholders by buybacks. And whether we have extra capital or exceeding capital or not, of course, also is a little bit dependent on about whether we succeed with these M&A transactions or not. Yet, we need to remember that sizes like these bolt-ons, they don't employ that much capital. So they are actually quite easy to make and still have a very, very fine payout together with buybacks for our shareholders. So let's see how it will play out. When it comes to SME business, then we are not chasing market shares, that we will never do. We cannot see why we should start, why we should not, you can say, defend our market shares because we have a very strong book, and it's in areas where it's profitable. So therefore, our start point, of course, is that we grow in line with the market. And then it seems like we are doing better than market. We're very -- our customers who want to do a lot of business with us, we are having a lot of new incoming business, especially in Sweden and in Norway, and that has led to fine growth rates and also gaining market share. And that we want to continue to do if it's profitable. So growth cannot come on behalf of margins and low profitability, and that's for sure. But we have managed to both grow and improve our ROA for the group.

Next question is from Adrian Cighi from Crédit Suisse.