Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Good morning, and welcome to Nordea's Third Quarter 2021 Results Presentation. Here in Helsinki, we have our Group CEO, Frank Vang-Jensen; Group CFO, Ian Smith; and my name is Matti Ahokas from Investor Relations. We will follow the usual procedure and start with a presentation by Frank. And after that, you will have a chance to ask questions. [Operator Instructions] But 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 third quarter results. I'm happy to report we continued to make good progress in implementing our business plan and again, delivering strong financial performance. In recent months, we have witnessed many encouraging developments in the Nordics. Societies have been reopening and millions of people have been able to resume a more normal way of life. Also at Nordea, we have been able to start returning to our offices and finally meet in person again. COVID-19 has rapidly increased our customers' needs and wishes for even more flexible services. We have proven the strength of our omnichannel business model by meeting the increased demand. As the year progresses, we continue to develop our digital offering. This quarter, our efforts delivered a 7% increase in mobile bank users and 14% more mobile bank log-ins than a year ago. On our Nordic digital platform, we had, on average, 88 million customer log-ins per month during the quarter. Saving product sales through digital channels increased to 66% of all retail savings. Our customers are also using mobile banking -- our mobile banking app more actively in the mortgage process. On the corporate side, we continued to build on our digital capabilities. Our corporate netbank app continued to receive positive feedback. And as an example of our new services, we launched a new service, enabling corporate customers in Sweden to make real-time payments to consumers. I believe that our combination of high-quality digital and in-person services is key for our customers. It is one of our main levers to become and remain their preferred partner for customers in need of a broad range of financial services. Our strong customer focus, continual growth in business volumes, quality income growth and good cost control led to a strong result in the third quarter. Our business volumes grew strongly across the Nordics. Mortgage volumes were up 6%, SME lending was up 9% and assets under management were up 21% year-on-year. On the income side, net interest income was up 7% and net fee and commission income was up 19%, while net fair value result was down 13% due to weaker market conditions and seasonal effects. Costs are developing in line with our plan, and our operating profit increased by 17%. Both return on equity and cost efficiency improved. Return on equity for the quarter was 10.8%, up from 10.1% a year ago. The cost-to-income ratio improved to 49% from 53% a year ago. Credit quality remains strong with a net loan loss reversals of EUR 22 million. Our capital position is very strong, and we continue to generate capital. We have now distributed the dividend of EUR 0.72 per share, and we will start our buyback program tomorrow. Let me now go deeper into the numbers, starting with the income line. In the third quarter, net interest income increased by 7% year-on-year. I'm pleased to see that we continued to gain market shares following further growth in business volumes. This growth was the main driver for the higher net interest income demonstrating that our franchise is developing strongly across the Nordics. Mortgage volumes grew in all markets and were up 6% year-on-year, and we have been very active in supporting our SME customers. Our lending to SMEs increased by 9% in total, and by 5% excluding Nordea Finance Equipment. Also, deposit volumes were up 7% in local currency. Market development was relatively stable -- our margin development was relatively stable. Mortgage margins are facing some pressure, especially in Norway and Sweden, but the changes are small, and we have been somewhat offset -- and they have been somewhat offset by higher deposits and pricing adjustments compared with last year. Net fee and commission income was up 19% in the third quarter. This strong development was absolutely one of the highlights of the quarter. We had a very good increase in saving fees income, which was up 25%, driven by strong net inflows within all channels. Income from both payments and cards is improving now that most pandemic restrictions have been lifted. This quarter, we saw higher numbers of consumer card transactions following the reopening of societies and the boost provided by the summer holiday season. Now corporate card transactions also started to increase. It's a little -- it is still a little too early to determine whether these increases will be sustained, but the signs have been encouraging. The third quarter is seasonally slow for brokerage and advisory fees. But we saw the activity increase again in September after the summer holiday season. On net fair value result, our customer activity remained high in all customer areas, which support results. On the other hand, the quarter was challenging for the trading result due to weaker market conditions and seasonal effects. However, the end of the quarter was better and the trading results improved in September. In addition, the overall net fair value result was supported once more by strong investment valuations in treasury. Moving on to costs. We continued to optimize and increase our operational efficiency and ensure strict cost discipline. All in all, we remain focused on growing revenues faster than costs. In the third quarter, our costs were lower than in the previous quarter where we booked additional variable pay provisions due to significantly higher business activity and strong performance. Reported costs increased by 1% year-on-year due to the integration of Nordea Finance Equipment and exchange rate effects. Adjusted for these items, underlying costs were down 1% year-on-year. The cost development is in line with our plan, which was communicated in Q2. Costs for '21 are expected to be around EUR 4.6 billion. As we have said, our main focus will continue to be on cost relative to our income development. The quality of our credit portfolio remained very strong. Early indications show that our customers are, in general, emerging from the pandemic restrictions in good shape. As a result, net loan losses in the third quarter were very low and net loan impairment amounted to reversals of EUR 22 million or 3 basis points. This demonstrates the strength of our very well-diversified lending portfolio. Net individual provision and write-offs were low in all business areas and Stage 3 loans continued to decrease. Our assessment is that net loan losses will be significantly lower this year than in 2020. However, we have kept our management judgment buffer unchanged at EUR 610 million. We remain alert to the risk of losses emerging in the loan book as government -- governmental support schemes comes to an end. This prudent approach ensures that we have resilience to overcome potential setbacks in the recovery from the pandemic and can cover expected further changes to provisions, models and processes. Our capital position is very strong, and we continue to generate capital. At the end of September, the ECB has widely signaled withdraw its recommendation for a bank to limit dividends. Following the change, we distributed the unpaid ordinary dividend of EUR 0.72 per share earlier this month, in line with our previous communicated plan. In total, this distribution amounted to EUR 2.9 billion in dividends to our shareholders who include more than 500,000 private individuals and a large number of pension funds across the Nordics. Our dividend payments will give a boost to the Nordic economies and help support the post-pandemic economic recovery. In addition, our capital and dividend policy states that share buybacks are a tool to maintain an efficient capital structure and to distribute excess capital. This tool will now be used to deploy our excess capital as intended. We received supervisory approval for our share buyback in September and we're among the first banks in Europe to do so. The Board has decided to initiate the buyback program starting tomorrow. We are also in dialogue with the ECB about a potential follow-up program and expect to make a formal application in early '22. Even after the capital deduction related to the buyback, our CET1 ratio remained very strong at 16.9%. This is 6.7 percentage points above the requirement and makes us one of the best capitalized banks in Europe. 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. Our decisive customer focus has led to high levels of activity, which have resulted in solid income growth. In Personal Banking, we continued to drive high levels of business activity. Mortgage volumes were up 6%, and we are growing in all markets. Consumer lending volumes also picked up and grew in line in the third quarter as well. Competition continues to be intense, but mortgage margins have remained relatively stable despite temporarily lower margins due to the interest rate change in Norway and some pressure in Sweden. Deposit margins improved during the quarter, and total income was up 10%. We continued to develop our omnichannel model to create even better customer experiences. Our digital offering is being very much appreciated by our customers. And we had a 12% increase in mobile bank log-ins and the number of mobile bank users increased by 7%. While Nordic countries or Nordic societies have reopened, online meetings have remained the most popular option for customers, accounting for 67% of total meetings. Naturally, it is our customers' needs that define the best way of interacting. We will provide smooth and helpful experiences both digitally and in person. Return on capital at risk improved to 18% compared with 15% a year ago, and the cost-to-income ratio improved from 54% to 50%. In Business Banking, high business activity continued, resulting in an improved financial performance. The SME sector is a key driver of the sustainable economic recovery and I'm happy to see that our SME lending volumes accelerated to 9% during the quarter. Excluding the integration of Nordea Finance Equipment, the volumes were up 5%. Business activity was high with particularly strong momentum in Norway and in Sweden. Also Denmark showed good growth momentum. We continued to integrate sustainability into our advisory and risk processes and to enhance our sustainable offerings for corporate customers. During the quarter, we introduced green corporate loans in Finland and Sweden in cooperation with European Investment Fund. Overall, in Business Banking, our sustainability-linked lending grew by 13% quarter-on-quarter. Return on capital at risk improved to 16% compared with 13% a year ago, and the cost-to-income ratio improved to 47% from 51%. For Large Corporates & Institutions, the third quarter is usually seasonally slower in some areas. Despite this, we managed to maintain high business activity and leading market positions. Our investment banking and equity businesses continued to develop very well while our market business was impacted by the weaker trading conditions over the summer before improving in September. Overall, total income was down 8%. In line with our strategy, we have increased our focus on ESG products and even further integrated ESG considerations into our credit and advisory processes. During the quarter, we continued to engage with our customers to support them in their transition towards a low-carbon economy. On the product side, we continued to rank first for Nordic sustainable bonds. Large Corporates & Institutions is progressing well with the repositioning of the business and becoming a more focused and profitable business area. Economic capital was 13% lower, return on capital at risk was 12%, and the cost-to-income ratio was 48%. In Asset & Wealth Management, assets under management increased by 21% to an all-time high of EUR 393 billion. The strong development in assets under management and net inflows have continued now for 6 consecutive quarters demonstrating the solid position of our franchise. We achieved a net inflow of EUR 4.1 billion in the quarter, with all channels supporting this performance. This was the primary driver of the growth in the quarter and total income was up 28%. In Asset & Wealth Management, we continue to combine our key focus areas, digitalization and sustainability. Digital purchases are continuously increasing. Volumes were up 90% year-on-year. Net flows in our sustainability-linked funds represented around 95% of total net flows in the quarter. Our expertise combined with customer demand is creating strong growth. Return on capital at risk improved to 29% and the cost-to-income ratio improved to 47% from 51% a year ago despite a performance-driven increase in variable pay provisions recorded in the quarter. If we take a closer look at one of our focus areas and long-term success factors, sustainability, we see that we are progressing well with the implementation of our strategic plan. During the quarter, total green corporate lending was up 22%. And as mentioned, ESG products represented around 95% of our net fund inflows. This demonstrates our strong position within sustainable investments, which we started to build more than 10 years ago. We are determined to support our customers' transition and ensure progress towards our 2030 emission objectives. Since the beginning of '20, we have reduced our exposures to and emissions associated with some of the most climate-exposed sectors. The transition towards a low-carbon economy presents a business opportunity for us as a bank. But we also want to make sure that we grow our business in a way that is consistent with our 2030 emission targets. This is not a trivial matter but reducing emissions is a societal challenge that we will tackle together with our customers. All in all, an ambitious, realistic and step-by-step approach to the sustainable transition will be good for society and good for our business. This is also our direction as a bank together with our customers. To conclude, we remain well on track to meet our financial targets. Over the past 2 years, we have consistently delivered on our business plan and key priorities to create great customer experiences, to drive income growth initiatives and to optimize operational efficiency. This has led to a solid development in our financial performance which in turn has enabled us to make decisive progress towards our '22 financial targets; a cost-to-income ratio of 50% and a return on equity above 10%. Given this progress, we are now preparing updates to our business plan and financial targets. We intend to publish new financial targets alongside our fourth quarter and full year report in early February next year. Our targets will be updated, but our direction as a bank is not going to change. We want to be a bank that is personal, no matter where or how we meet with our customers. We want to be a responsible bank showing that we deeply care about gaining our customers' trust and supporting a sustainable future. And we are experts at what we do. For more than 200 years, we have played a key role in supporting and growing the Nordic economies. And that will be our role also in the future. Thank you.

Thank you, Frank. We're now ready for your questions. So operator, please go ahead.

[Operator Instructions] And we have our first question from Andreas Hakansson from Danske Bank.

Can I just start with the net interest income, there seem to be 2 drivers there a little bit on the weak side, the Norwegian NII and the Swedish NII. Norway seems to be more temporary. Could you tell us a little bit about how long the negative impact from the rate hike is going to be present and when we're going to start to see the benefit if we start with Norway?

Yes, let's do so. Ian, would you try to update on the mechanics, and it is temporary.

So sure. And good morning, Andreas, nice to talk to you. The key sort of temporary headwind in Norway is a lag in deposit reprice -- sorry, a lag in repricing the mortgage book versus deposits. So we estimate it's around about sort of 5 to 6 weeks in terms of that temporary hike -- sorry, temporary headwind. And of course, as we will see this going into next year as we're expecting a number of hikes, Nordic Bank has indicated that it expects to hike 3 or 4 times next year. But it's temporary and as we work through that, we would expect to see some margin widening in Norway.

And then in Sweden, could you tell us -- because I assume it relates to the mortgages. And is that more a sustainable problem? Or what's your comment there?

Not a big issue. We see some change from shorter-term interest periods to longer term, that brings a little bit lower margin at least as of now. On the auto side, it of course reduced the churn somewhat, potential churn. So all in all, not a big issue. And then in mortgage markets, we have also always seen that like the competition is high now, and it will be high in the future. But all in all, I think it looks -- is not a big issue as of now.

Okay. Then just 1 question on your activity level or the outlook, right? When I look at your brokerage and your ECM and M&A line, it's weak for seasonal reasons, but it's actually quite weak on a year-on-year basis as well. And I would expect it to be somewhat stronger. So what's your outlook for -- I mean we see quite a big activity level on the ECM side and potentially on M&A. What do you see in the market at the moment?

Ian, Please?

I think, Andreas, July and August were quieter than expected. September came back very strongly and back at the sort of levels that we had experienced in Q2. So we're pretty confident about sustained activity levels just having had a slow summer season. And I think we're also seeing that say in comparison to the comparative recovery in Q3 last year, that's that sort of year-on-year effect as well. But pleased to see that September things really got back into action.

We see that one of your competitors, 1 large competitor in Sweden, has actually started to hike, quite aggressive in that space because they realized that they missed out to some smaller players. Do you think you also need to put more money into this space in order to catch up or keep up rather?

I think we are in a good position, and we have been investing quite a lot also in that business. So let's see how it will play out. But we have unchanged high ambitions, and I think we have what we need. Then we're looking at the -- especially the Swedish market, it has been very heated. And then of course, the question is, can it continue to be as heated as it has been? Or will it slow down somewhat? Let's see, but our ambition level is unchanged.

So next question from Magnus Andersson from ABG.

Yes. Just a question -- starting off with a question on capital. As you mentioned, you are in a dialogue with ECB about the follow-up program -- buyback program, and you expect to do a formal application in early '22. Just 1 question there. What kind of size we should expect? Should we expect you to launch EUR 2 billion programs now on an ongoing basis? Or just if you could give us some indication of the amount of share buybacks we could expect in 2022 onwards? And related to that, in your capital planning, I assume you take the potential Norwegian systemic risk factor effect into account of 95 basis points. But is there anything else that we should be aware of?

Magnus, so we were really pleased to get our buyback efforts started with a meaningful first step. And I think having got through that hurdle and being one of the first banks in Europe to do so, we now see follow-on programs as being part of our sort of ongoing business. So you should expect it is a -- we still have a substantial capital excess that we will deal with on a measured basis over time. The follow-on program, you shouldn't expect it to be as large as the first one, but it will be meaningful and will be a next step that we intend to follow regularly. In terms of the capital outlook, capital planning, absolutely. We have factored in potential outcomes on Norwegian SRB. We're still comforted by the fact that the regulatory authorities have put reciprocation on hold for now. So that indicates they're still not convinced. But we have factored into our sort of medium-term capital planning, the impact of the high -- the sort of worst case outcome there, which, as you said, is 95 basis points. In terms of other things with impact, I mean there's a whole bunch of stuff that we've talked about before. We've cleared a number of hurdles with comfort. So the stress test was a big piece of that in terms of capital development. We're progressing well with the submission of new capital models, our MDP program. And of course, we await with interest what may be announced next week by the commission on Basel. But we're very comfortable with the guidance we've given on our medium-term capital levels and an indicator that there is still substantial capital excess to work through.

Okay. And secondly, just on costs, we can see that you continue to take down head count quite significantly quarter-on-quarter. And you've done that, I think it's the ninth quarter in a row or so. When I look into 2022, is this going to be the main lever also going forward in order to offset cost inflation? Or is there anything else? And second, related to that, do you still foresee net cost reductions beyond 2021? Will you leave that for the Q4 report?

Yes. Let me take the first part. And then, Ian, you can take the last part about the cost level. And we, of course, will come back to it as you look to in the Q4. But I should say that, of course, a large part of our cost base is people related. So it is, of course, a big lever to increase operational efficiency. But there are also many other things that we work with consistently. And we are trying, as I have said earlier, also many times, to build a strong cost culture and it starts to work, right? It is challenging all our processes. It is challenging what is not really supporting our customers or is important for our risks. We will challenge. We'll try to figure out how we can do it differently. We are looking into different technology supporting our way of working. And so I think it will be all over. And by that said, we have to also remember that 70 -- around 70%, as I recall it, is people related, as I recall it. But -- and the important part here is that we intend to grow our -- or drive our aim, growing our income faster than costs. So we don't focus on a hard cost level, right? We focus on continuously increasing operational efficiency. That is super important. Ian, any comments on the last part of the question?

I'll just supplement it, Frank, with -- we're always focused on cost efficiency across the board in order to create capacity to invest in our business. And we think it is important to continue to build the muscle. And so I wouldn't be flagging at this stage substantial net cost reductions in 2022.

So next question from Sofie Peterzens from JPMorgan.

Here is Sofie from JPMorgan. So just a follow-up question on the share buyback. You mentioned that the second buyback program might not be as big as the first one. But do you have any view on a directed share buyback versus just doing kind of a general buyback in the market? And maybe if you could just talk about your thoughts here.

Sure, Sofie. So important to understand that our follow-up program will be the second step in a series. So don't be concerned about -- we will keep up progress on managing down our excess capital. In terms of a directed buyback, we're very focused on, I think, offering sort of our shareholders the opportunity -- all shareholders the opportunity to take part in our buyback. If Sampo was to come forward, for example, with an ABB, as they have done in -- on 3 previous occasions, the independent broker that we've appointed will have the opportunity to take part in that. We have no plans beyond deploying our EUR 2 billion capacity in the market and responding to opportunities as they arise, if they're in the interest of Nordea.

Okay. Great. That's clear. And then my second question would be, there are some Bloomberg headlines from Cevian this morning, where they think your ROE targets that you announced next year to be 12% to 14%. Do you have -- do you think this is a reasonable level and kind of what are your thoughts here?

That is a bit early to comment. The statement from Cevian and Cresta is not new. It's repeated -- it has been repeated again and -- this quarter. And as mentioned, we are updating our business plans at the moment and also our financial targets. And we finalized that work or intend to finalize it early February, and we'll publish new financial targets alongside our Q4 result. So let us come back to that when we have more to share.

Okay. That's clear. And then just final question. On M&A, in the past, you have said that you will consider -- you would have to consider kind of a small bolt-on M&A transactions similar to what we have seen with Gjensidige or SG Finans. What are your thoughts on Handelsbanken businesses in Denmark and Finland? Is this something that might be of interest?

We have, of course, noted the news. We will follow the development. We are already a leading bank in Denmark and in Finland and have a strong business momentum in both of these countries. So it's not top of our agenda. And we welcome all potential customers. And as I understand, we already had quite a lot of inbound calls yesterday to our call centers and branches. So I think that's what we can say as of now.