Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Nordea's Fourth Quarter and Full Year 2021 Results Presentation. Here in Helsinki, we have our group CEO, Frank Vang-Jensen; our group CFO, Ian Smith; and my name is Matti Ahokas from Investor Relations. As usual, we'll start with a presentation by Frank, and after that you will have the opportunity to ask questions. In order to ask a question, please remember to dial into the teleconference. With that, I leave the word to you, Frank. Please go ahead.

Thank you, Matti, and good morning. Today, we have published our fourth quarter and full-year results. But before going into the actual results, I would like to take us back to October 2019. That situation was not satisfactory for Nordea at that time. Customers were not satisfied, and our financial performance was clearly lagging behind our ambitions and behind our peers. We had a return on equity of 8.4% and a cost-to-income ratio of 58%. It was clear that we needed to -- we needed a restart. We opened a new chapter for Nordea with a revised strategy and clear priorities and targets. Today, I'm happy to confirm that we have exceeded our 2022 financial targets 1 year ahead of the planned schedule. We are clearly growing our business volumes and gaining market shares while maintaining good cost control. Our return on equity in '21 was 11.2% against a target of 10% for '22. And our cost-to-income ratio was 48%, while our '22 target was 50%. Also, all of our business areas meet their respective targets and improved customer experiences. Now the journey continues, and we are aiming even higher. Today, we have disclosed our new financial target for '25, which is a return on equity above 13%. Our target is focused on growth within prioritized areas and will be supported by a cost-to-income of 45% to 47% and normalized loan loss levels of around 10 basis points. It will also be complemented by competitive and healthy dividend and capital policies. I'll get back to the new business plan and target later in the presentation. But first, I will go through our Q4 and full-year results. '21 was a successful year for Nordea. I'm proud of how we have progressed as a bank together with our customers. And we have been able to do so even though the pandemic continued. Some of the highlights in '21 were our business volumes grew and we gained market shares across the Nordics. Our mortgage lending grew by 6%, SME lending grew by 6%, and assets under management by 17%, reaching all-time high levels. We improved customer experiences, and we reduced customer complaints by 9% year-on-year, and we are now receiving 41% fewer complaints than 3 years ago. Our '21 operating profit was over EUR 4.9 billion, which is 67% higher than in 2020. Our return on equity was 11.2%, up from 7.1% last year. Our credit quality remained strong with low levels of net loan losses and our capital strength has continued to be among the best in Europe. We are pleased with our performance in '21. Of course, the banking industry enjoyed favorable markets last year, but the results of hard work, executing on our strategy are clearly visible. Looking at fourth quarter results, it was again a strong quarter for us keeping in mind that the fourth quarter last year was also a strong one. In Q4, net interest income increased by 7%. We had very strong net fee and commission income growth. NCI was up 16%. Net fair value was up 14%, and our return on equity was 11.3%, and the cost-to-income ratio improved to 47% from 57% a year ago. For the coming strategy period until the end of '25, our key financial focus will remain on growing revenues faster than costs. We will invest in organic growth and remain open to selected inorganic bolt-ons when the right targets are available to support our strategy. We will also continue to invest in digital capabilities, data, ESG areas, and to meet regulatory demand to make the bank better and well equipped for the future. We will create space for these investments by driving structural cost reductions, just as we have done the previous period. For '22, we expect to deliver a return on equity above 11% with continued profitable growth. Our cost-to-income ratio is expected to be 49% to 50%. And remember, in '21, the cost-to-income ratio benefited by a full percentage point from exceptional high financial market income, and we expect to invest for continued growth and also to incur higher regulatory costs this year, including the Swedish bank tax. Our operational efficiency will keep improving, and we expect our cost-to-income ratio to decrease in the coming years. Let me now go deeper into the numbers, starting with the income line. In the fourth quarter, we grew our customer business volumes faster than the overall market, and we continued to gain market share across the Nordics. Our net interest income grew by 7% year-on-year, and this demonstrates the strength of our business model and the solid development of our franchise across the board. We were able to maintain high sales activity with profitable growth in our mortgage business. And as a result, mortgage loan volumes increased by 6% year-on-year, which -- with growth in all markets. We are gaining market shares in Denmark, in Sweden, and in Finland, while in Norway, we are growing roughly in line with the market. During the quarter, we continued to actively support our corporate customers and increased our lending to SMEs by 6% year-on-year. Mortgage margins faced some pressure during the quarter, mainly due to the Norwegian rate hikes, but we were supported by lower funding costs compared with last year. Also, higher deposit margins support the year-on-year net II growth. One of the highlights of the quarter was the growth in our net fee and commission income. The result was very strong with NCI up 16% year-on-year. We were able to grow our savings business throughout the year, and the fourth quarter was no exception, driven by strong net inflows and assets under management, savings fee increased by 24% compared with last year. Brokerage and advisory fee income was supported by continued high customer activity. Payment and fee income has picked up from the subdued levels seen in the fourth quarter of 2020. Our net fair value results was up 14% in the fourth quarter. This increase was driven by high customer activity and supported once again by asset valuations in treasury. The trading result was lower due to unexpected interest rate moves, but income picked up towards the end of the quarter. Moving from income to costs. We continue to increase our operational efficiency and build a strong cost culture. In the fourth quarter, our costs were down 10% compared with last year. The decrease was mainly driven by lower restructuring and IT costs and was supported by a VAT refund. The quarter-on-quarter cost development was flat. Staff costs were down despite the fact that our strong business performance and activity led to a higher variable pay related costs during the year. In 2022, we continue to find further efficiencies, but we'll also invest in growth, in line with our updated business plan. All in all, we remain focused on growing revenues faster than costs, while maintaining strict cost control. Looking at our credit portfolio, the quality of our portfolio remained strong, as has been the case during the entire pandemic, supported by our well-diversified lending portfolio. The full-year '21 net loan losses and similar net result was very low at EUR 35 million or 1 basis point. Net loan losses and similar net results for the fourth quarter amounted to EUR 56 million, or 7 basis points. Loan losses during the quarter included the impact of model changes in our real estate portfolio and the strengthening of provisions for agriculture lending as export markets remained subdued. Even though that portfolio is in a very good shape, we have kept our management judgment buffer unchanged at EUR 610 million. We find this approach prudent since the pandemic-related uncertainty remains. Our capital position is one of the strongest in Europe. This means that we can continue to support our customers, pay out dividends, and deploy excess capital, benefiting both our shareholders and society at large. At the end of the fourth quarter, our CET1 ratio was 17%, which is 6.8 percentage points above the current requirement. Reflecting our very strong financial performance and capital position, our Board has proposed a '21 dividend of EUR 0.69 per share, a significant increase on the dividend of EUR 0.39 per share for 2020. The Board's proposal translates to a payout ratio of 70%, in line with the upper range or other end of our dividend policy. Meanwhile, our share buyback program continues. We consider share buybacks to be an integral part of our capital management for an efficient capital structure. Today, we have deployed 75% of the initial EUR 2 billion buyback and have now bought back 140 million shares from our shareholders. We also submitted our application to ECB in January '22 for a potential follow-on program. Let me now move on to our business areas and their respective results. I'm pleased to see that all business areas have continued to deliver strong performances. The combination of a decisive customer focus, digital and in-person services, high business activity levels, and an efficient way of working has delivered a solid financial performance. In Personal Banking, we continued to strengthen our omnichannel customer experiences. Our availability and digital capabilities drove further increase in mortgage market shares across the entire Nordic region. Due to this activity, mortgage volumes were up 6% in the fourth quarter. Savings growth supported the income in the quarter. We continued to develop our digital channels with digital sales contributing to around 60% of all fund sales during the quarter. Margin pressure, particularly in Norway, partly offset the result. Total income was up 8%. Return on capital at risk improved to 16% compared with 14% a year ago, and the cost-to-income ratio improved to 52% from 54%. In Business Banking, the strong business momentum continued resulting in an improved financial performance. We are clearly the leading Nordic SME bank. I'm pleased to see that we are performing well and have a very strong position throughout the customer segments from startups to the largest Nordic midsized enterprises. Lending volumes were up 6% year-on-year. Business activity was high and especially in Norway and Sweden, and we are growing faster than the overall Nordic market. Net fee and commission income was up 12%, mainly driven by a growth in savings and advisory fee income and recovering payment and card fee income. We saw improvements in all fee types. We are actively and continuously developing our digital capabilities. We have released a new online store in our corporate netbank, and the store will go live in the mobile bank this year as well. Total income was up 12%. Return on capital at risk improved to 16% compared with 13% a year ago. And the cost-to-income ratio improved to 44% from 48%. In large corporates and institutions, the stable performance and high business activity continued in the fourth quarter. In addition, customer satisfaction remained high. We helped customers complete large corporate transactions across many industries in all 4 markets. This drove good growth in advisory fee income. We began the repositioning of our LC&I business in 2019 when we decided to focus on profitable growth. This has meant somewhat lower volumes but better profitability. After the turnaround, the fourth quarter was the first time we grew our large corporate lending volumes since '19. Together, we improved -- together with improving margin development, this supported income growth. Net interest income was up 9%. The trading result in the quarter was lower due to the challenging market conditions, but customer-driven income remained -- activity income remained very high. Economic capital was down 3% year-on-year and return on capital at risk was 12% and the cost-to-income ratio was 47%. All in all, our large corporates and institutional business has demonstrated a significant performance improvement compared with 2019. In Asset & Wealth Management, the fourth quarter was characterized by significant positive net flows in all channels and strong investment performance. Our net inflow was EUR 4.9 billion in the quarter, and I'm particularly happy about the performance of our internal channels, especially in retail funds and private banking, where we continue to grow our business across the Nordic region with the highest growth in Sweden and Norway. This shows that we have been successful in our key focus segments driven by productivity, strong product offerings, and smooth digital services. Assets under management increased by 17% to an all-time high of EUR 411 billion, and total income was up 31%. We are a leading player within ESG investments in a European context. ESG products were the primary driver of our growth, generating close to 100% of net flows in the quarter. The demand for sustainability-linked product offerings is continuously increasing, and we are ready to meet it. In addition to the ESG segment, we continued to expand our offering in many other areas, such as alternative investments. Return on capital at risk improved to 32% and the cost-to-income ratio improved to 41% from 52% a year ago. In October 2019, we launched a new strategy, our strategic direction for Nordea. With ambitions -- with ambitious financial targets for '22 and an updated business plan, our aim was to retake lost ground in business, and improve our financial performance. We decided to focus on 3 key priorities to create great customer experiences, drive income growth initiatives, and optimize operational efficiency. I'm happy that our work has paid off. We have surpassed our '22 financial targets one year ahead of schedule, and all of our 4 business areas have met their respective targets. We have done what we said we would do. We've been very focused on delivering on our targets and priorities. We have put customers at the center of everything we do and have tried to do all things a little bit better every single day. No magic tricks but hard work, consistency and clear follow-up, and most importantly, teamwork. These results could not have been achieved without our skilled, passionate, and very dedicated employees. I couldn't be any prouder. I want to take the opportunity to thank you all. Now's the time to turn the page and take the next steps. Today we have disclosed our new financial target for '25, which is ambitious yet realistic. We are targeting a return on equity above 13%. Our financial focus is clearly on growth and profitability. This will be supported by a cost-to-income ratio of 45% to 47% and normalized loan loss levels of approximately 10 basis points. Our dividend and capital policies remain unchanged. Now we will move forward to deliver best-in-class omnichannel customer experiences, raise the bar on our financial performance, and drive further value creation for our shareholders. We want to be the preferred partner for Nordic customers in need of a broad range of financial services. In 2 weeks' time, on the 17th of February, I would like to welcome you all to join our virtual Capital Markets Day where we'll present our '25 financial targets, respective business area plans, and updated priorities, and discuss a new strategy period in more detail. While we have a new target and updated business plan, our direction as a bank is not going to change. For more than 200 years, we have played a key role in supporting our customers and developing the Nordic societies. That will be our role going forward as well. Thank you and looking forward to meeting you again soon.

Thank you, Frank, and we will soon take your questions. Before that we'll take a brief pause. I would also like to extend the invitation to our Capital Market Day. We have the registration open at nordea.com. But we'll take a brief pause and questions in just a while. Thank you. Operator, we're ready for the questions. Thanks.

[Operator Instructions]. Our first question comes from Magnus Andersson with ABG.

Yes. Just to start with your cost/income ratio target in the short term, the 49%, 50% for 2022. I was just wondering if you could be a bit more specific about the investments you expect to do there, if there are any specific IT initiatives. If you could say something around what kind of headcount development you foresee year-on-year. And related to that, you also write in your statement that you expect profitable growth in 2022? And my question is just how explicit that is? Is it profitable growth in terms of income, in terms of pre-provisioning earnings, or what that is?

Magnus, it's Ian. Thank you for the question. So yes, we're very focused on continuing to grow our business. And the areas that we would expect to see some additional spending, next year in particular, are in our key growth areas. So for example, Private Banking across the Nordics where we'll invest in people, in our Asset and Wealth Management business where we have a heavy product development slate in order to meet the considerable demand for our products, and we also continue to strengthen our regulatory position. So we continue to invest in financial crime prevention and other areas. So those are the key things that we expect to see coming through in '22 in particular and contribute a little bit to the cost/income ratio that we set out. Profitable growth, our key lens is return on capital. And so we think that we can grow across all of our business areas profitably meeting return on capital hurdles that will help to maintain our development in return on equity for the group.

Yes. Okay. And just in terms of headcount there, can you say anything? I mean, you -- in underlying terms, headcount is down I think 10 quarters in a row. Is that expected to continue? Or will it halt in 2022?

Magnus, it's Frank. The expectation is that the number of employees in Nordea will continue downwards. And that is a trend I will see -- I expect to see in the years to come and probably for many years to come, and as digitalization and technology will play an increased role also in the years to come.

Okay. And then secondly, just on capital. You mentioned that you have -- you have asked for another share buyback mandate from the ECB. Is there anything you could share with us at this stage about desired size and/or timing? I guess what I'm after is whether you expect to be able to seamlessly continue to buy back share once you are done. It is quite substantial what you're pursuing right now.

Yes. So Magnus, I think it's much easier to answer the second part of your question. The timing, we would expect to be able to continue our buyback activities pretty much seamlessly. We've chosen to stay silent on the amount. We guided last time that the second program would be a little smaller than the first, and we should have some news fairly soon in terms of how we intend to prosecute that. But you shouldn't expect to see any break in our activity.

Our next question comes from Andreas Hakansson with Danske Bank.

2 questions on the return on equity target, above 13%. First one, could you tell us what do you include in terms of higher interest rates in the future? And also, what do you assume in terms of resolution fees primarily for Finland and Sweden that should be changing over that period of time? That's my first question.

Yes. So Andreas, so our assumption is that we will, towards the end of the strategy period, see some rate increases. I know that there is plenty of speculation at the moment that, that might come a little bit sooner. But our planning assumption is some modest rate increases, leaving aside Norway. I'll come back to Norway. But in our other home countries modest rate increases towards the end of the strategy period. And in Norway, well, I think the Central Bank has set out the rate path pretty clearly there with further rate hikes coming through '22. And in terms of resolution fees, our assumption is that the sort of heavier cost of resolution fees in Finland and Sweden will end after 2024. But, of course, we have -- the Lord giveth and the Lord taketh away, we have the Swedish risk tax coming in that period also. So some abatement in resolution fees from '24 and our efforts on cost efficiency recognize that there are still plenty of regulatory charges out there.

Okay. And then also on return on equity. I mean, it makes no sense, of course, to compare your return on equity target to, for example, Swedbank and SEB since they're pure Swedish banks. But if I look at each of the markets, if I look at ROE target of Danske DNB, in Finland it's harder to find a peer, but overall, you seem to be targeting the above 13% is better than the average of your peers. Do you feel that you now, over the last couple of years, improvement actually start to benefit from having the scale that you have? And are you confident that you can actually beat your competitors locally even though it's a bit different geographic mix?

Yes. Andreas, it's Frank. Yes, we are comfortable that we will beat our competitors in the respective markets. And as you said, we are targeting above 13%. And let me just start with what that means. In Nordea, a financial target is a target with a firm timeline and is a target is set to be met. And I'm confident that we will meet our target above 13% just as we have met our previous target, which was on the [ ROE ] above 10%. And when we are going to the market with a target above 13%, then it's not wishful thinking or aspirations. It is a firm plan that is beneath and it is supported by plans across the bank in all units. It is in group finance, it is in the business areas, and it is the group functions, and all leads up to above 13%. So when we say this now, then we are confident that we are able to deliver on it just as we have delivered on our previous targets and the [ ROE ] was above 10%, and we delivered that 1 year ahead of schedule.

Perfect. And just a quick follow-up on Magnus' question. Could you tell us normally, how long does it take for the ECB to handle an application for buyback?

They have up to 3 months. But having been the first mover in buybacks across the ECB regime, they're used to us, and it will be quicker this time. So I think we should expect something in the next few weeks.

Our next question comes from Johan Ekblom with UBS.

Just to continue maybe on the ROE target for 2025. You talk about a capital requirement of 15% to 16% with an unchanged management buffer. So can you maybe lay out how you get there? I think if we take the systemic risk buffer in Norway and countercyclical back to pre-Covid levels, I'm still struggling to get to those levels. So that's the first thing. And then maybe to follow up on Andreas's question on what's in it for rate gearing and resolution fees, et cetera. Could you -- are you assuming these go to 0, or can you give us some indication as to would you be north of 13% in 2025 even if we don't see a rate hike, for example?

So I guess, your first question, the capital assumptions. So we've talked regularly about seeing capital requirements settle 14% to 15%. And I think when we last talked about this, we've had some focus on the moving parts, which are the macro-prudential buffers go back to pre-COVID levels. And one of the uncertainties is what happens in relation to the Norwegian systemic risk buffer. And I think we said that if that was -- if we were to suffer that in full, we would be towards the upper end of that range. So -- and that remains our best case. That's where we think we should end up. And so what might vary that, first of all, 15% to 16%, I think, is a reasonable and conservative planning assumption. We're talking about 2025 levels here, and we have some moving parts in terms of the pace at which regulators might normalize. We're expecting to see with the already announced changes to countercyclical buffer another sort of 80 to 100 basis points on capital requirements by the end of 2022. But we would -- there are a bunch of other things that sort of factor into our thinking. We have seen, I think, a slight change in tone from regulators about where they might want to go with buffers. Will they go any further than they have in the past? We just don't know. So we think it's a sort of sensible and conservative or prudent planning assumption to sit at 15% to 16%, while our base case, our belief is that where we should be is in that 14% to 15% range we've spoken about for some time. In terms of -- I think your second question was a mixture of resolution fees and rates, wasn't it?

Yes. Just basically saying the target is north of 13%. Can you quantify the impact you expect there or would you still be north of 13% if we didn't see higher rates or lower resolution fees just to get an idea of the magnitude?

Yes. So I won't be drawn on specific figures, but we would certainly expect to see by 2024 an improvement or a reduction in all of the regulatory levies that we currently experience. So that helps. And some -- the rate increases, their impact in our planning assumptions is relatively modest.

Yes. And our approach, just to add here, our approach has not changed to how we have worked in the last couple of years. That is we are not calculating in or incorporating anything that we are not quite convinced about will happen. And when it comes to, for example, net or interest rates, we have been, I should say, on the safe side. Then it can become even higher and potentially have an even better impact, positive impact on the bank, but that is not our start point. Our start point is to find what is a reasonable yet very ambitious, yet realistic level and then with hard work, the right actions enabling us to meet these targets. So we are quite confident when we say above 13% with the information we have as of now.

Our next question comes from Nicolas McBeath with DNB.

So first, another question on the 2025 target for ROE. So I was wondering if you could share any thoughts on what you see in terms of [ REA ] inflation up till 2025? And how large you think that the equity base would be around that point? Do you think that it will be roughly at the similar levels as today? I think it was a bit north of EUR 33 billion. Or do you see substantial movements in the equity base by that point?

Yes. Nicolas, I'm sorry, I'm going to disappoint you a little bit here. We'll talk in a lot more detail at Capital Markets Day in 2 weeks' time on this because it's a topic that needs to be probably laid out. So if you don't mind, we'll wait until then.

Okay. Fair enough. Then one more question for 2022. What kind of loan loss ratio have you assumed in your above 11% ROE ambition or outlook for 2022?

We don't disclose our assumptions for 2022 loan losses at the moment. The way we're thinking about this is that we would see something of a normalization, I guess, in terms of experience on the customer side. We're still cautious around impact of pandemic. The reason -- and that's the main reason we've held on to our management buffer. And we would see that -- I think it's reasonable to assume that from '22, you will see us either start to utilize that management buffer to cover any losses that emerge or if we conclude that it's right to do so perhaps to see some releases. So it's a complicated picture. We haven't guided on '22 for those reasons.

Okay. And then final question on the capital again. So I was wondering if you think -- if you're confident that you will have calibrated down your CET1 ratio to within the range you've indicated as kind of normalized long-term between, I think, 15% to 16% from the current level by '22 year-end?

Again, we'll talk to you a bit more about that on Capital Markets Day. But certainly, our plan is over the coming years to converge our capital level with the normalized capital requirement. And that's been our -- that's been our promise all along, which is to deal with the excess capital in a -- on a sort of measured pace over the next 2 to 3 years.

Our next question comes from Maria Semikhatova with Citi.

A couple of questions. First of all, on your 2025 targets, this improvement in cost-to-income ratio, do you include any benefit from the IT overhaul by 2025? And just wanted to check if you're going to present divisional targets at the Capital Markets Day? Does this shift towards a single ROE target, means that you won't impose cost-to-income thresholds for specific divisions? The other question is, can you remind your sensitivity to a 25-basis-point hike? If possible, provide a bit more color by geography given the clear rate hikes in Norway? And just a small clarification, if there is any impact of Basel IV assumed in your CET1 level of between 15% and 16%?

All right. Thank you for the questions. Let me start and then over to you afterwards, Ian. On the cost-to-income ratio, what we do now is that we are having one financial target, that is the return on equity. That's actually the most important financial target, and it includes everything; capital efficiency, credit losses and include also, you can say, the relation between cost and income. So that is the most important metrics and that is what -- that's why we have it as a financial target. Then cost-to-income is -- we see cost-to-income as an enabler. And, of course, that points also to how cost-efficient we are running our operations. And there we are guiding for or we are estimating 45% to 47% and some few comments here. The 45% to 47%, and this is just a service information, there you have to remember that we are booking our resolution fee as a cost while our Swedish and Norwegian peers are booking as a deduction in income. And if we were to apply the same method booking the resolution cost -- fee cost as a deduction in income, it will improve our cost-to-income ratio with 1 percentage point. It's just the service information. Then it will still be a very, very important metrics, and we will be carefully watching this one. And it will, of course, be applied to all divisions across the bank. And they have, of course, also a very clear follow-up on how they improve -- consistently improve their cost-to-income ratio. And we expect, as we also are stating, that the cost-to-income ratio of Nordea will continue to come down over the years to come. Over to you, Ian.

Yes. So -- and just to supplement what Frank said, what we'll talk about on Capital Markets Day is what the BAs are targeting both from a cost-to-income ratio and a return on capital perspective. And those are 2 important lenses. But the sole group target is how we bring all of that together to deliver an ROE above 13%. You had a question about Basel IV. Our thinking on capital requirements and REA development does include the first phase of Basel IV, which is in relation to the fundamental review of trading book and the new operational risk capital requirements. So yes, that's baked in because that will be in by 2025.

And he had a question on rate sensitivity.

Yes, rate sensitivity. So...

And just to follow up on sensitivity and if there is any benefit from IT overhaul?

Yes. That's not the case. We have not included any benefits during this period from our, you can say, investments to continuously strengthen the core. Where -- what is the real important part that is on growth when it comes to -- and there digital is the enabler.