Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Good morning, and welcome to Nordea's second quarter 2021 result presentation. Here in sunny Helsinki, we have our Group CEO, Frank Vang-Jensen; Group CFO, Ian Smith. My name is Matti Ahokas from investor relations. As usual, we will start with a presentation by Frank, and after that, you will have a chance to ask questions. [Operator Instructions] With those words, I'll leave the floor to you, Frank. Please go ahead.

Thank you, Matti. And good morning. Today, we have published our second quarter and half year results. We continue to progress well with our business plan, and I am happy once again to report strong financial performance. COVID-19 has, for obvious reasons, dominated our agenda for the past 5 to 6 quarters. The bigger picture is now getting clearer and somewhat brighter. Over the past few months, Nordic societies have gradually started to open up. Restrictions are easening. Vaccination programs are progressing, and a return to a post-pandemic way of life is underway. However, we still need to be mindful of potential setbacks due to unpredictable virus variants. In all this, we continued to deliver on our commitments, standing by our customers and supporting them in their transition to a post-pandemic environment. Our mindset and focus are clear. Everything we do starts and ends with our customers. In the second quarter, we continued to drive customer and business activity. We increased volumes and gained market shares across the Nordics. These positive developments led to strong quarterly results. High income growth, firm cost control and lower loan losses resulted in a significant increase in our operating profit. Income grew by 16% year-on-year. We continued to grow our revenues faster than costs, improving our cost-to-income ratio to 49% from 52% a year ago. Costs are developing in line with our plan, but significantly higher income performance has led us to slightly update the cost outlook for '21. Credit quality remains very strong. And we expect '21 loan losses to be significant below the '20 level despite the continued uncertainty. Our return on equity increased to 11.4%. Our solid capital generation continued and we have one of the best capital positions in Europe. All in all, we are well on track to deliver on our business plan and financial targets. Let me now move on to the detailed numbers for the quarter. In the second quarter, our operating income increased by 16% year-on-year, driven by higher levels of business activity. Mortgage volumes continued to grow significantly, as did SME lending. Asset under management increased by 24% to an all-time high of EUR 387 billion. This was driven by a strong performance and continued solid net inflows, especially into retail funds and Private Banking. It is encouraging to see that our internal distribution channels are performing well in line with our business plan. Net interest income increased by 13%, the highest growth rate in 10 years. Net fee and commission income grew by 30% to its highest level ever, mainly driven by higher savings and advisory commission income. Our net fair value result was solid and at a more normalized level compared with the same quarter last year. Customer activity remained high, and customer net fair value revenues were stable both in relation to Q2 last year and the very strong Q1. Both of our financial targets, return on equity and cost-to-income ratio, are meeting our targeted '22 levels this quarter. Naturally, we are happy about this development, and work is underway to ensure we consistently deliver on our targets and progress even further. In the second quarter, net interest income increased by 13% year-on-year. This is an even higher growth rate than in the previous quarter and is the strongest development in 10 years. I'm pleased to see that we are a top performer in this important area. The growth was driven by higher business activity, increased volumes and improving margins. Mortgage volumes were up 6% and SME lending was up 8%, and we are gaining market shares in many segments. This shows that, with a firm focus on customers, customer experience, we have been able to deliver good business momentum and drive income growth. Lower funding costs are -- and exchange rate effects also contributed positively to the result. Looking at net fee and commission. It was up 30% in the quarter. This is our highest quarter ever. The comparable figure for 2020 was naturally low, but during the first 6 months of this year, we have consistently driven higher levels of business activity. The main driver of the growth was an increase in savings and investment commission income, which was up 37%. We witnessed high levels of customer activity in our brokerage and advisory services, especially through healthy deal flows in our equity and debt capital market businesses. Card income has started to recover, and that is a leading indicator of post-pandemic economic recovery. As expected, net fair value result returned to more normalized levels during the quarter. Continued high activity in customer areas contributed well, as did our treasury investment portfolio. We are committed to continuously growing revenues faster than costs. These require us both to drive income growth and continuously to work on our cost base to improve efficiency. In the second quarter, we made further progress in improving our cost efficiency. The significantly higher business activity and strong performance led to higher revenues and profits but also somewhat higher operational costs. Our costs including -- excluding resolution fees increased by 4%. This was primarily due to the inclusion of Nordea Finance Equipment, increased provisions for variable pay linked to our strong performance and exchange rate effects. Adjusted for these items, costs were at the same level as last year, which I'm pleased to see. Given the items mentioned, costs for '21 are now expected to be around EUR 4.6 billion, whereas they were previously expected to be below EUR 4.6 billion. All in all, we will continue to optimize and to increase our operational efficiency. The quality of our credit portfolio remained very strong. Realized loan losses were very low and amounted to net reversals of EUR 51 million. The reversals were driven by the improved macroeconomic environment and portfolio quality. We have kept our substantial management buffer largely unchanged at EUR 610 million. As planned, we utilized EUR 40 million of the structural part of the management buffer to cover IFRS 9 model updates during the quarter. Giving that we are moving towards a post-pandemic environment, we expect net loan losses to be significantly lower this year than in 2020. However, our assessment is that it's still too early to draw conclusions about the full economic impact of the pandemic on our customers. Therefore, we maintain our management buffer largely unchanged against potential future loan losses. Our capital position continues to be among the strongest in Europe. By the end of the quarter, our CET1 ratio had improved to 18%, which is an increase of 220 basis points on last year. It is now 7.8 percentage points above the requirement even after the deduction of the unpaid dividend for '19 and '20 and the accrued dividend for '21. We remain committed to our capital and dividend policy, which include delivering an efficient capital structure. The Board is ready to decide on a dividend payment of a maximum of EUR 0.72 and expects to distribute this in October after the current restrictions are lifted. Furthermore, we intend to launch a share buyback program in the fourth quarter of this year and have started the application process. Let me now move on to our business areas and their respective results. I'm pleased to see that all business areas are delivering strong performance and progressing according to their business plans. In Personal Banking, we continued to see high levels of customer activity in all countries. Mortgage volumes were up 6%, and we continued to gain market shares across the Nordics. Both mortgage and deposit margins improved. Our improved performance is a result of focus on strong customer service, particularly in terms of speed and availability and disciplined pricing. We continue to progress in developing our omnichannel banking model and building enhanced digital capabilities. 65% of all private customer fund sales are now made through digital channels. Customers can now both apply for a mortgage and receive a digital loan promise smoothly via the mobile app within minutes. They can also sign mortgage agreements digitally and switch between variable- and fixed-interest periods within a few -- or with a few taps. These examples mainly applied to customers in Sweden, but we are now implementing the same features in other countries as well. Return on equity -- or we can start with return on capital at risk improved to 19%, and the cost-to-income ratio improved to 49% from 54%. In Business Banking, we had a strong quarter with higher levels of business activity. Customer lending volumes grew by 8%, supported by the acquisition of Nordea Finance Equipment. Excluding Nordea Finance Equipment, lending volumes grew by 4%. Business momentum remained strong, particularly in Norway and Sweden, and continues to be driven by higher engagement with both new and existing customers. We have now rolled out our new netbank to more than 50% of our corporate customers and will continue to add new functionalities going forward. Our leading position within sustainability strengthened even further. Overall, our sustainability-linked lending grew by 20% in the quarter. Our capital markets business performed very strongly in the first quarter, and the same continued in the second quarter. Savings and payments income also picked up following a more subdued period related to COVID-19. Return on capital at risk improved to 18%. And the cost-to-income ratio improved from 50% to 44%, its best level to date. In Large Corporates & Institutions, we continued to progress well with a strategic repositioning. The repositioning plan includes a decisive focus on profitability, which has also been visible in improved margins and lower capital consumption and lending volumes. Our performance is steadily improving. The cost-to-income ratio improved to 41% in the second quarter. Total income was up 9%, driven by strong commission income. We hold leading market positions across the Nordics and -- in debt and in equity capital markets and M&A advice. We have capitalized on the strong customer demand for these services and have a solid project pipeline in place going into the second half of the year. Economic capital is decreasing and efficiency is improving. Return on capital at risk was 16% in the quarter. In Asset & Wealth Management, assets under management increased by 24% to an all-time high of EUR 387 billion. Customer activity remained at very high levels, especially in our internal channels. Net inflows into retail funds were strong, particularly in Denmark and in Finland. In Private Banking, we gained many new customers and saw record-high net inflows which amounted to EUR 2 billion in the first quarter. Total income was up 28%, mainly driven by the growth in assets under management. And the cost-to-income ratio improved to 41% from 57%. Interest in our sustainability products continues to increase. Sustainability products are the primary driver of our growth in asset flows, generating more than 90% of the net flows in the second quarter. Customer demand for digital services has also been high, and we expect this to continue. We are developing further functionalities in all our digital channels that will match the best in the market. During the first half of the year, we made good progress in 2 priority areas at the core of our business: sustainability and digitalization. We launched our new sustainability strategy in February this year. The implementation is progressing well across the whole bank. We are actively engaging with our customers, preparing sector-specific targets for the most climate-exposed sectors and developing internal competencies in ESG areas. We are determined to ensure that we reach our target to become a net 0 commission (sic) [ emission ] bank by 2050 and to reduce emissions from our lending and investment portfolios by 40% to 50% by 2030. We will continue to enable our customers to make sustainable choices and support them in their transition towards a low-carbon economy. It is encouraging to see that sustainability is becoming more important for our customers. The demand for sustainable products and solutions is clearly increasing. We are growing our sustainability-linked lending. Our ESG saving products are gaining in popularity. And we remain a leading arranger of sustainable bonds. These are just a few examples of the impact our customer offerings are having, and more is to come. I want to highlight that sustainability is not a project for us. It is an integrated part of our value proposition to customers and how we organize our internal operations and manage our risks. It's a lifestyle. It's our DNA, at the core of our purpose. Digitalization is a trend that has clearly accelerated in the wake of the pandemic. At Nordea, we are making very good progress in developing our omnichannel banking model. Our mobile app now has more than 1 billion log-ins annually, and it has an excellent app store rating at 4.5 to 4.6 stars out of 5. Moreover, we are continually adding new functionalities to the app. On the corporate side, we have rolled out our new netbank to more than 50% of our customers. Our digital services have attracted higher levels of activity, and customer satisfaction is good and continues to improve. We will build on our digital capabilities, developing them even further to meet changing customer preferences and needs. When mentioning digital development, it's not an either-or but rather a both-and topic for us. We do not prioritize digital development over in-person service but want to show care and understanding and deliver a great experience in all customer interactions no matter what the channel is. To conclude. The second quarter was strong for us. We continued to increase volumes and gain market shares. We grew income faster than costs. We continued to build a strong cost culture. We had loan (sic) [ low ] credit losses and very good credit quality. We maintained a very strong capital position and improved profitability. We are well on track to meet our financial targets, a cost-to-income ratio of 50% and a return on equity above 10%. It is key for us to maintain this performance level consistently and improve even further step by step. We will continue to focus on our 3 key priorities: creating great customer experiences, driving income growth initiatives and optimizing operational efficiency; and of course, do all things a bit better every single day. That is our mindset and way forward for the benefit of our customers, shareholders and society at large. Thank you.

Thank you, Frank. Now it's time for the Q&A session. [Operator Instructions] Operator, let's start, please.

[Operator Instructions] We have a question from the line of Adrian Cighi from Crédit Suisse.

This is Adrian Cighi from Crédit Suisse. I'll start with a bigger picture question. One of your shareholders this morning wrote that it's time to increase the ROTE target to 12% to 14%. This quarter, you had 11.4% ROE and around 13% ROTE. And yes, we had write-backs which we can expect to reoccur, but Nordea is also running with a substantially higher equity base which will, hopefully, decline over time. Where does management see the right level of expectations given the footprint and business model? And the second question. Last quarter, Ian mentioned that you're running with a 14% to 15% CET1 for internal planning purposes. We still do not have the communication from the Finnish regulator on incorporating the Norwegian systemic risk buffer impact, which you mentioned is 95 basis points. Can we assume that the 14% to 15% internal CET1 target potentially absorbs some of that or even all of that 95 basis points?

Thank you for the questions. Let me take the first one, about the targets. And then Ian, please take the capital position and our, like, forecast. When it comes to targets, we have a 3 years plan in place with targets -- '22 targets. And you're right. We have been -- we have had or experienced very strong progress in basically all the time; and significantly income -- I should say, income growth with a very firm cost control also in the first quarter of this year. That has led to us meeting our targets. Both of these actually. And where we are now is to consistently make sure that we are meeting our targets and continue progressing onwards, in line with what we have been saying earlier. In the fall, we will continue and finalize the strategy work with the Board for the period going forward, and that will also lead to us concluding on targets for the future. Let's see how we will -- when we will and how we will communicate. And let's come back to that one, but the first thing is to finalize the strategy work and then conclude about the future targets. And we expect to communicate in the -- I should say, in the beginning of the next year about the -- both the strategy and the targets for the coming strategy period. Over to you, Ian, when it comes to [ projection ] of capital requirement, please.

So yes, we have thought long and hard about impact of the Norwegian SRB and the extent to which it's reciprocated. And it's interesting to note that a number of our home regulators have kind of passed on the decision at the moment about reciprocation. And I think that means they're looking at it very carefully and in particular the SRBs guidance on looking for overlaps in capital requirements. That being said, we feel very confident that we can absorb a worst-case outcome. I suspect it pushes us towards the higher end of that 14% to 15% range, but it's very much factored into our plans and everything that we say about capital return.

Our next question comes from the line of Sofie Peterzens from JPMorgan.

Here is Sofie from JPMorgan. So in your presentation and report you mentioned that you are discussing already with ECB a potential share buyback. Could you kind of give us a little bit more details around potential size, what you have done so far? Have you already submitted the formal application? And kind of how we should think about the share buyback in the fourth quarter. That would be my first question. My second question is that you target a 50% cost-to-income ratio in 2022. This is kind of unchanged. I recognize this, but consensus is at 48%. Given that you slightly increased your cost guidance for 2021, do you -- how should we think about this 50% cost-to-income target in 2022? Do you think there is upside to over-deliver here? Or do you expect Nordea to come in at 50% in 2022?

All right, should I -- Ian, let me start with the first one, buybacks. And then you can take over. In regards to buybacks: So we have commenced the application process and then -- and in line with what we have been saying earlier. And we plan or intent with -- intend to start the buyback program in fourth quarter. That is what we can say now. And when we have more information to share, we will, of course, come back to you. Ian, anything to add here?

Yes. Sofie, look, we've been talking to the ECB about share buybacks for quite some time. It's been on the agenda since the 2019 CMD, so it's a continuing dialogue. We've submitted an application. We're not at this stage talking about quantum. That's something for later, but we're well aware, of course, that the ECB has not yet announced any lifting of restrictions. But the direction of travel has been pretty clear. In the absence of negative surprises, they would expect to do so. And of course, there is a sort of timetable and process for doing these things. And we are -- we've been ready for some time and so we want to be sure to be on the starting blocks when the restrictions are lifted. So yes, we've commenced the application process, as Frank has said, including having submitted an application.

And may I just ask in terms of the share buyback program? I mean you don't want to comment on the potential size, but is it fair to assume that you could potentially utilize that full 500 million of shares that you have Board approval? Do you kind of -- or would be -- or would that be too optimistic, I assume?

I don't think -- the shareholder approval of up to 500 million of shares was simply to give us plenty of capacity and flexibility, as we talked about last quarter. I'll say we'll not be drawn on quantum at this stage, but we expect to be ready to go when the restrictions are lifted.

Coming back to the question about cost-income. So our targets for '22 is 50%, but what we also have said before, that is -- or earlier, that is it is -- it was a target that was set as a right one for the coming period. And then we would and will progress beyond the 50% and continuously improving. And I think, the most important drivers to remember, that is our 3 key priorities. They are out in the entire organization. It's a guideline. It's a -- it is supported by activities, tactical activities, strategies and so in every corner of the bank. And that is to drive income growth initiatives. It is to create great customer experiences, and it is to optimize operational efficiency. And now it -- at least after 2 first quarters, it has made us pass the targets, the target of 50%. And we have to see how the coming quarters will look like. And we are doing everything that we can to continuously every day strengthen the bank and thereby progressing. What that will lead to exactly in '22, that is up to be seen, but the start of the year has been good. And we are -- our mindset is going to the bank, going to work every single day and do it a little bit better than yesterday. So let's see how it will bring -- or what it will bring.

Our next question comes from the line of Magnus Andersson from ABG.

Yes. Just following up there on costs and cost efficiency. We can see that you still have a very good momentum in head count reduction. I think head count is down now for the eighth quarter in a row, but just when I look at Nordea -- without being explicit about levels since we will come back with new targets, but if I look at the best banks in the Nordics in terms of cost efficiency, they're running now at between 40% and 45% or at least below 45%. How do you look at yourself in this context given your size and complexity? Do you think that you could reap scale benefits and eventually become in line with the best banks or even more efficient than the average of your peers? Or do you think that your complexity and size always will be a disadvantage as it has been since Nordea was created some 20 years ago? That's my first question.

Yes, yes. So on the question whether I believe or if I believe that we can reach the levels that you mentioned, my clearly answer is yes. I'm absolutely convinced that we can do so. Of course, it will be supported by technology. It will be supported by digitalization. And the way that customer interaction and also digitalization is going or the direction it's going, it will enable us to reach scale benefits; also, for example, in what earlier was a branch network, as there is not really any big scale benefit running 4 -- or a branch network in 4 different countries, right? It's very local business. Now it's starting to become a different game as -- for example, our digital capabilities. When you look at the -- within our digital capabilities, when you look at the app, in this app we have now more than 1 billion log-ins, right? It's developed on the same platform by the same guys. And we try to basically do it equally in all countries, of course adjusted to what is needed to be local and local language. It's a huge scale benefit. And there, of course, will be more to come, but it's nothing that will come tomorrow. But I'm sure. I'm convinced that we will be able to reach a very strong cost-income ratio in the long run. That said, you, of course, short term, needs to remember that, when you look at the 4 countries when it comes to -- and this is very important, not to look at return on equity, because that is actually very different. And also, some of the countries that are having a structural higher cost-income as of now, they are running with a very interesting and very encouraging return on equity, but in regards to cost-income, we have, for example, Denmark that in the industry is like, I should say, 60 country. And the same goes with Finland, while Sweden is probably 40 or somewhere there. And Norway is similar, right? So when you come and look at our bank, right, then -- and add it, then you have, of course, a structural start. That, we will, long time, mitigate by scale benefits, being very clear about what is Nordic infrastructure and what is local. We want to be super local, but we want to build on the Nordic infrastructure. And digitalization and the future infrastructure will enable us doing so. That is my [ convention ].

Yes, okay. I guess we will come back to this in the beginning of the next year, when you present your plan. Then secondly, just on a more detailed note on NII: When I look at the consensus forecasts, it's pretty clear that there is no expected TLTRO III impact in there for 2022, so my question is just should our expectation be another 50 basis points on the EUR 12 billion you have in that program.

I think it's too early to tell, Magnus. We're very prudent about that. There is a requirement to meet certain lending thresholds. And there are still 6 months or so to go before that's measured, so I think it's appropriate to set it to one side for the moment. And we'll know towards the end of this year about how we're progressing against the lending thresholds.

[indiscernible] add to that, Magnus. As you know, there has also been a really slow development in the corporate lending market in the Nordics, so the market is soft at the moment.

Yes, yes, soft but improving, yes. Okay.

Our next question comes from the line of Johan Ekblom from UBS.

Just 2 things just coming back to the capital return and the buyback. Do you have -- in your conversations that you've been having since 2019 with the ECB about capital, return on capital planning, when they look at buybacks, is that purely based on capitalization? Or do we need to think about a Q4 '21 buyback being somehow linked to your total earnings in 2020? Just trying to think kind of how we can see -- are there any important thresholds such as crossing a 100% total payout, et cetera that the ECB looks particularly closely on? And then secondly, just coming back on the cost side. I think, when you presented the cost numbers, you kind of said, "Here is the fixed cost target for this year. Long term, the intention is to reduce costs in absolute terms." Can you maybe talk about how much of the costs this year would you say is driven by the increase in activity that we've seen? So apart from the variable staff costs, is there anything else we need to consider when we think about what costs could be next year, say, if we see a normalization in activity levels?

So look, in -- on the conversations with ECB, there's no suggestion of a sort of aggregate limit on payout or anything of that nature. They have a -- well, I think, a very sensible approach to this, which is our discussions have been about what does the capital surplus look like right now? How is it projected to develop over the next couple of years? And also how are the capital requirements expected to develop over the next couple of years? So I think the short answer is they look at it in sort of absolute capitalization terms. And certainly our conversations around buybacks and our plans there are phrased in that context. There's no aggregate sort of limit or threshold or anything.

Thank you, Ian. And when it comes to the costs: So our focus is cost-income. That's why we have our cost-income targets. And it will -- and it is our metrics that we very much measure [ during ] the organization. Then to give a guidance this year as well as last year, we gave a guidance of taking it down from EUR 4.7 billion to below EUR 4.6 billion. And as we said -- and also, in the first quarter, it is -- of course, with that high activity level, it is being more difficult to beat the target, but we are doing what we can. Q2 is just showing very, very strong business activity; a lot of volume; and improved, significantly improved, performance on income and profits. That, of course, also brings some costs. We have been able to basically absorb all the costs when it comes to IT, when it comes to call centers, adviser capacity and so. So that's I'm very pleased to see that. And it's really good to see that we have continued to improve the operational efficiency. There are some one-offs in this quarter that lead to us being around EUR 4.6 billion, perhaps slightly above. And that is why we think it's prudent just to you now guide for what we said about as below. That is more around now. So structural, no change. We're fully in line with our plan, but temporarily we have some few one-offs that is adding a little bit costs, and therefore we update our guidance for the year. That is the way we look at it. So I'm very pleased with the progress that we are making, and we are fully in line underlying with our plan. When it comes to the future, what we have said is that it is cost-income that is the important part. And it is a delta between income growth and cost growth. Potentially that is the most important part. Whether the costs will come down, whether they will be stable, what are they -- whether they will go slightly upwards, that is a matter of how much business activity we will have, but what we have said and what we stick to and are very determined to do, that is to continue to improve operational efficiency and thereby improve our cost-to-income ratio in the years to come. Did that answer your question?

Yes.

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

Just more, some follow-up questions. Just on the cost guidance again, just to make it clear: I understand that -- the so-called increased cost guidance you now have of about -- around EUR 4.6 billion, it's driven by better revenue momentum. If we would see a slowdown on the revenue momentum in the second half, do you see that you have flexibility to go back towards below EUR 4.6 billion? Or does the increase really capture the activities in the first half? That's the first question.

It -- potentially that might be the case. I don't hope that it becomes the case because then it will -- as you said, it is clearly linked to income and business activity, and if -- but if it is the case, then let's look into it. Let's look into it.

Yes, okay, fair enough. Then just on your overall return on equity target, as someone said before, you're above. And if we will adjust the -- your capital, you were significantly above. And loan losses is at very low level. And you say that you have a EUR 610 million buffer still in there, so could you tell us, first, what was the loan loss provision level you thought about when you gave us the above 10% ROE target? And given the environment we see, if we assume that there's no fourth wave and given the high capital -- or provisioning buffer you have, do you see any way that provisions in 2022 could reach the level that you thought about when you set the target?