Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Good morning, and welcome to Nordea's Third Quarter '22 Results Presentation. Here in Helsinki, we have our CEO, Frank Vang-Jensen; our Group CFO, Ian Smith; and 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 leave the floor to our CEO, Frank Vang-Jensen.

Good morning. Today, we have published our third quarter results. The autumn has started with high uncertainty, the continued war in Ukraine, weakened macroeconomic picture, rising inflation, higher interest rates and reduced consumer confidence. All of these are putting pressure on private individuals, businesses and societies. We should expect that this uncertainty will be significant also in the coming quarters. As a bank, Nordea is well placed to weather more difficult conditions. Our business model has been tested many times and proven to be very resilient, and we have all the tools and solutions needed to support our customers. In the third quarter, we maintained high momentum and solid business volume growth in line with our business plan and key priorities. We continue to grow lending volumes despite the volatile environment. This was led by solid growth across the board, especially in the corporate sector. Mortgage volumes were up 4% and corporate lending grew by 12% year-on-year. Operating profit increased by 2% to EUR 1.3 billion. Q3 is usually seasonally quite, yet we delivered 7% income growth. Net interest income increased by 15%, supported by strong growth in corporate lending volumes and higher deposit margins. Net commission income was down by 6% due to the market turmoil, which led to a 13% decrease in assets under management and capital markets activity remained subdued. Net inflow remained positive in internal channels. Net fair value result was up by 18%, driven by strong customer activity. Return on equity increased to 12.7% from 10.8% last year. And the cost-to-income ratio, excluding regulatory fees, improved to 45% from 47% a year ago. Including regulatory fees, it was 48%. Our credit quality remains very strong with very low realized loan losses. Loan losses and similar net result amount to EUR 58 million, affected by model-based fair value adjustments in our Danish mortgage portfolio. Our capital position continues to be strong, among the best in Europe. Our CET1 ratio decreased to 15.8% from 16.6% in the previous quarter, following approval of our third buyback program. The ratio is now 5 percentage points above the regulatory requirement. So overall, a strong set of results driven by the active customer focus of our employees and our decisive action to continuously improve our business momentum. Our strong performance over the first 3 quarters of this year means that we have updated our outlook for '22. The cost-to-income ratio for the full year of '22 is now expected to be 48% to 49%. Previously, the range was 49% to 50%. Our return on equity outlook for '22 is unchanged and will be above 11%. And let's now look at the results in more detail, starting with the income lines. In the third quarter, we maintained higher customer activity and business momentum to drive volume growth across the business areas. Net interest income grew by 15% year-on-year, greater economic uncertainty and increased interest rates had a negative impact on mortgage and SME lending volume growth during the quarter. Despite this, we continued to win market shares across the region with mortgage lending up 4% and corporate lending up 12%. SME lending grew by 6%, while large corporate lending grew by 25%. We saw an uptick in event-driven financing from large corporates seeking acquisitions to capitalize on the current valuations. We also saw a significant increase in short-term liquidity financing needs, for example, in the energy sector in the Nordics. We're well positioned to meet and to capture the increased demand on the corporate side. Alongside lending growth, the increase in net interest income was supported by higher deposit margins. On the other hand, there was visibly lower consumer activity in the Nordic housing market during the quarter. Market growth is slowing down, but we're still growing and increasing our market shares across the Nordics. The margin pressure on lending continued in the current fast-moving rates environment. During the third quarter, Central Bank policy rates in Denmark and in Finland turned positive following those of Norway and Sweden in previous quarters. We adjusted customer deposit rates to support our deposit saving offering across the Nordics. Although the higher interest rates will dampen economic activity in the midterm, that should also be seen as healthy adjustments gradually returning us to more normalized market conditions in the long term. For many years, only 2 of our 3 engines have been working, the lending and the fee engine, but now the deposit engine is back as the third one. Higher deposit margins have clearly started to contribute to our income growth. We expect this trend and a clear positive impact on our results to continue. For bank, this signals a healthy return to more normal market conditions. Continued economic uncertainty and weaker financial market impacted net fee and commission income. Net fee and commission income was down by 6% year-on-year. Savings fees were down following the reduction in asset on the management, which were 13% lower in the quarter. Even in more challenging markets, the strength in our -- of our business is visible. For example, private banking had a continued strong positive net flow in the quarter. Brokerage and corporate finance fees are still subdued due to lower customer activity. We have a strong pipeline, and this is an area that is likely to recover when there is more confidence in the markets. The NCI result was supported by higher payment and card income, which increased by 11%. This was due to higher customer activity especially in consumer cards. The net fair value result was supported by our high customer activity in the quarter. The contribution from customer areas improved by 21%. The volatile market conditions have increased the demand for FX and interest rate hedging products and our product and service offering is meeting the high demand well. Making operations was also up driven by FX rates and equity trading and supporting the overall positive result development. The overall net fair value result was up 18% year-on-year. Cost increased by 4% year-on-year, in line with our plan. Costs excluding regulatory fees increased by 3%, driven by investments in line with our business plan, which prioritizes growth in specific areas. Staff costs were flat. Going forward, we will remain focused on maintaining strict cost control and growing revenues faster than costs. Our credit quality remains strong. We have the most diversified portfolio among banks in the Nordic region, both in terms of countries and sectors. In the third quarter, net loan losses and similar net result amounted to 7 basis points or EUR 58 million. Realized loan losses were very low across the sectors during the quarter. New net provisions for loan losses increased slightly to EUR 29 million. We also booked a EUR 29 million model-based fair value adjustment due to lower house prices on our mortgage loans in Denmark. We kept our management judgment buffer unchanged at EUR 565 million. This allowance continues to ensure a strong reserve to cover both credit losses and planned improvements to provisioning models. Our capital position continues to be very strong and among the strongest in Europe. Our CET1 ratio was 15.8%, down from 16.6% in the previous quarter. This followed the reductions due to the third share buyback program. As expected, our CET1 requirement increased to 10.8% during the quarter due to increased counter-cyclical buffers in Denmark and in Sweden. Our CET1 ratio is 5.0 percentage points above the current requirement and as outlined at our Capital Markets Day earlier this year, we continue to implement an efficient capital structure and distribute excess capital to our shareholders. Let me now move on to our business area results. Our business areas continued to deliver a strong performance in the quarter. In Personal Banking, we maintained high levels of activity and continue to provide proactive advice and support our customers during the financial market turbulence. Due to the market environment, our customers' investment activity decreased while their interest in deposit products increased. Payment and card fee income also saw positive developments. The rate hikes improved our deposit margins, whereas mortgage margins remained under pressure in Sweden and in Norway due to higher funding costs. With positive central bank rates across the Nordic region, we now also provide our customers a broad deposit saving offering in all countries. Mortgage lending volumes grew by 4% despite the lower housing market activity, we continue to gain market shares across the board. During the quarter, we launched a new version of our mobile app in Finland, completing our full Nordic rollout. The new app was created based on customer feedback and provides an even more personalized experience -- personalized experience and further tools for customers' financial well-being. Overall feedback on the new app has been very positive. We have also continued to see a steady increase in the number of mobile users, up 6% year-on-year. Total income was up 6%. Return on capital at risk improved to 19% compared with 18% a year ago, and the cost-to-income ratio improved to 49% from 51%. Business Banking continued its solid growth as is in previous quarters and lending volumes increased by 6%. The net interest income increased by 23% year-on-year, driven by higher volumes and improved deposit margins following the rate hikes. Meanwhile, equity and debt capital market income remained subdued due to the macroeconomic uncertainty. Credit quality remained strong with low realized loan losses. We're continuously developing new digital features for our SME customers in order to make banking smoother and easier. For instance, we pilot our digital cash management solution within corporate Netbank, enabling our customers to speed up, streamline and simplify their internal treasury and payment processes. We also continue to support the transition to a more sustainable future. Our green loans portfolio increased by 80% year-on-year, and green deposits more than doubled from the previous quarter. We see a clear upside in sustainability linked products and services. Return on capital at risk in Business Banking increased to 18% compared with 15% a year ago, and the cost-to-income ratio improved to 42% from 48%. Large Corporate & Institutions continued to drive up customer activity. The combination of high productivity and cost of demand led to a significant lending growth in the quarter. Lending volumes increased by 25% as corporates increasingly turned to us for their financing needs. As mentioned earlier, we saw an uptick in event-driven financing from corporates seeking to capitalize on current valuations. There was also a significant increase in short-term liquidity financing needs, for example, in the Nordic energy sector. The weakening markets meant that brokerage and corporate financing or finance remained muted and capital markets activity was lower. Credit quality remained strong with net reversals in the quarter. Within sustainability, we are on track with our target to facilitate EUR 200 billion in sustainable financing by '25. In addition, we were once again ranked #1 for Nordic financial sustainable bonds. Economic capital was up 10% year-on-year due to the increased lending and higher requirements for market risk capital in a more volatile business environment. Return on capital at risk increased to 16% compared with 13% a year ago, and the cost-to-income ratio improved to 41% from 46%. In Asset and Wealth Management, the quarter was heavily impacted by the weak financial markets. We maintained very good business momentum in private banking. Net flows were at the highest level ever for the third quarter amounting to EUR 1.1 billion. This was mainly driven by increased new customer acquisition. We continue to leverage our internal network to attract new customers. For example, we focused on new wealth generated through sales of businesses. These efforts contributed to increases of 9% in lending volumes and 15% in deposit volumes in private banking. Our private assets offering had an inflow of around EUR 500 million in the first 9 months, gaining further traction during the third quarter. We also continued to strengthen our digital capabilities to become the digital leader within savings. Naturally, market conditions were challenging during the quarter. Total income decreased by 1% following the development in the asset under management, AUM were at EUR 341 million in the quarter, down 13% year-on-year. Despite the challenges, return on capital at risk improved to 34% compared with 28% a year ago and the cost-to-income ratio improved to 45% from 47%. To sum up, Nordea showed a strong performance in the third quarter, and we made progress in executing our business plan and delivering on our financial targets. The Nordic countries have faced increased macroeconomic uncertainty following the higher inflation and lower GDP forecasts. Visibility is currently low, and we expect the challenging environment to continue during the coming quarters. The times ahead may be tough, but the Nordic societies are strong and well prepared to weather more difficult conditions. At Nordea, we are well positioned for this environment and we have a resilient business model. We expect to benefit from the strength and the breadth of our business as well as from the higher interest rates, and we are committed to reaching our '25 financial target of a ROE above 13%. In order to performance -- in order to improve our performance and reach our financial target, we will continue to deliver on our 3 key priorities: creating the best omnichannel customer experience, driving focused and profitable growth and increasing operational and capital efficiency. We're also delivering on our 2 key levers across the entire bank, being a digital leader among our peers and integrating sustainability into the core of our business. Nordea is a strong and safe bank. We are here to support our customers and the societies where we operate. And that is our way forward to be the preferred financial partner for our customers in both good and challenging times. Thank you.

Operator, we're now ready for the questions. Thank you.

[Operator Instructions] We will take our first question from our participants.

Yes. This is Magnus Andersson at ABG. I have 3 questions on NII. Just thanks for providing that NII or interest rate sensitivity on Slide 17. I was just wondering about the interval there for 2023. You have an interval of EUR 300 million, which is roughly 5% of the probable outcome for 2022. So I was just wondering what the main uncertainties are there. Is it actually various degrees of pass-through between account types, et cetera, you're out about there on the slide? Or is there something else? Secondly, I was just wondering about the negative lending margin impact here you had of EUR 72 million in Q3. How much of that is due to floors in euro-denominated lending, i.e., how much will disappear now when we go from positive territory to positive -- even more positive in Q4? And thirdly, just on your volumes. As you say, you have a very strong corporate lending volume growth year-on-year. But when I look at the sequential development, it looks like it slows down a bit here in Q3 versus Q2. Whether there are any temporary bridges, et cetera, rolling off? Or if it's just lower demand?

Ian, would you take it, please?

I'll tackle your first 2, and then maybe you can repeat the third because I was busy scribbling. So in terms of the NII sensitivity slide, I think you indicated you understand it's the gross impact of solely policy rate rises. And there are a bunch of things that will also impact the NII development next year. In terms of the interval, very specifically, I think there's still a degree whenever you project the future of uncertainty as to timing and quantum. And so that's why we have a bit of variation there in our estimate. On the negative lending margin, specifically, around about EUR 40 million of that related to the erosion of the floor boost. And so the pressure we saw on the lending side came from that. And also still a little bit of catching up in Sweden and Norway with customer pricing versus what we've seen in terms of increased funding costs. So those are the components there. And of course, the floor boost is now -- or the floor boost impact, the negative, is now largely eliminated. So that won't be a feature going forward. Your third question?

Yes. Yes. May I just follow up first on the NII sensitivity there? Is it fair to say then that -- I mean, I see your assumed policy rate path. Is it fair to assume that some of the uncertainty is due to the fact that you also have to estimate the IBOR rate moves around that, so that might be timing differences, et cetera?

Yes, a little bit of that. So -- and yes. So that's why we give a range.

Yes. Okay. Yes, just on the volumes. I mean, you have a strong growth year-on-year there. But I noted on the business areas that the volume-driven NII part is lower in Q3 than in Q2 on the corporate side. Whether that's due to anything temporary rolling off in this quarter? Or if it's more -- if this is a more reasonable underlying growth, quarterly growth on the corporate side?

I think the key driver there is about mix. So for example, where we are providing additional lending to very highly rated corporates, there's a little bit of margin mix on that. So mix related rather than anything else.

Okay. Finally, just if I may. It looks like your appetite for property management loans in Sweden is much lower than some of your peers. It's been like that for the last couple of quarters. You have -- Handelsbanken and Swedbank has ramped up within that segment. We'll see if that has continued in Swedbank next week, while you are down to almost 0 growth there. Is that a deliberate decision of you to be more cautious within that segment rather than taking the opportunity and perhaps add on some good...

Magnus, this is Frank. We have been cautious for quite a long time, and I think that is very helpful now, to be honest. Then it is not that we are closed for new lending, right? We just want to ensure that the customers do have the repayment capacity if we're in the new business. So you would -- you should not expect us to have like a big step-up or increase here on the commercial real estate for the coming quarters. But if there's high-quality business where we can support, of course, we would be positive to look into it. But we have to remember, it's always what you have done up to a crisis. That is important. And then you can do some management within the crisis or during the crisis. But if you enter with like a solid quality and low exposure, then, of course, it becomes a little bit easier.

We will take our next question from our participants.

It's Andreas Hakansson from Danske. Two questions. Coming back to my next questions on the NII sensitivity on Page 17. It's a gross number that you talked about this EUR 1 billion to EUR 1.3 billion, and then you give 4 other drivers of NII. And could you give us a little bit of feel on these other 4 drivers? Would you say that those are going to add positively or negatively to the 1 to 1.3 so the overall NII is going to be better or worse than 1 to 1.3?

Do you want me to take that one or do you want to do your second question?

You can take that one first, if you want.

Yes. Okay. So yes, we highlight, as you say, Andreas, this is sort of solely related to the rate impact. Clearly, volumes, and we expect to see some growth will help. Wholesale funding costs should be pretty clear that they're going up, and we will -- we also have, I guess, a small headwind from the rolling off of deposit hedges, certainly in '23 and a little bit into 2024. So those are things that go against us. The one that is very difficult to call is what happens on the pricing side, on lending and particularly the impact of competition. And so difficult to understand where that will end up. Our estimate is certainly that volume benefits outweigh the 2 negatives of funding cost increases and deposit hedging, and the big unknown is asset pricing. And Andreas, we have to leave some things for you guys to guess.

I appreciate that. Thanks for that. Then I have a question on costs because clearly, now you're guiding for what seems to be a very attractive revenue momentum, and you have very much talked about cost income now in this year. And if I just put in the revenues into consensus, we start to see a cost-income ratio coming down quite low already down to where you're really targeting for 2025. Could you give us any sort of guidance where we should expect cost income to move next year compared to the 48% roughly this year?

I think it's a little too early to call that, Andreas. We're all dealing with some uncertainty in relation to inflation, not that the inflation -- there's no uncertainty as to the existence of inflation. But we're about to enter into negotiations in relation to salary increases and other costs for the coming year. And there's no question there is some pressure on those costs and that will, I think, feed through into the cost base. It's hard at the moment until those are concluded to give any clear guidance. So that's something we'll come back to in Q4. But the key message is that we do expect to see some pressure on the cost base from inflation.

Yes. Perfect. And then just a quick question just on commercial real estate. We saw that Stage 3 loans fell in the quarter, but we don't see how Stage 2 is developing. We saw that your provisions in Stage 2 fell for commercial real estate. Could you tell us what was the movement in the CRE Stage 2?

I don't have that in front of me, if Matti, we don't have...

I can take it with Matti later on, that's fine.

You can take afterwards, yes.

[Operator Instructions]. We will take our next question from our participants.

Maths Liljedahl, SEB here. Some follow-ups on the corporate side, LC&I, was a huge deposit growth as well. If you can shed some light on whether that was driven by FX or dollars or if it is companies actually preparing here prefunding and preparing for tough times. That is question #1. And then 2, if you could also give us some more insight to the loan losses in Denmark. Should we see this as a one-off adjustment due to the lowering house prices? Or could we expect this to continue?

So yes, the LC&I deposit effect was heavily influenced by deposits and companies in the energy sector who are both stocking up on liquidity but also have seen strong cash inflows. And those deposits are held to cover amongst other things, increased margin calls on collateral, et cetera. So there's a degree of both general deposit growth and then a significant impact in relation to companies in the energy sector for the reasons I've described. So an element of that is -- and we would, to some extent, expect that to be with us for a while because energy companies do face those challenges around liquidity for the next sort of 12 to 18 months or so in relation to their forward commitments. In terms of the Danish fair value model valuation adjustment, very much front-end loaded. So we've seen the negative development in house prices in Denmark over the last couple of quarters. And we wouldn't expect to see much sensitivity to that going forward. We've taken that upfront.

Okay. Then maybe one follow-up, returning to our favorite beloved slide here, Slide 17 on the NII sensitivity. If I look into the rate path there, are you using your own macro team? Because I see there's no tilt. If I look at market expectations, we start to actually drop the interest rate in the end of 2023, so that we start to see lowering of interest rates? Or what is this based on? Is that the macro team? Or how do you see it?

Yes, that's the Nordea's house view. And I guess, as you've implied, things are moving around quite a lot. But yes, it's the Nordea's house view.

Let me just add, they're not that different from the kind of general development. We have a terminal rate in Euroland 225, Denmark 215 and Norway 325. But these are the assumptions that we based it on, and of course, they change on a daily or even weekly basis. But we've given what we believe is the case.

We will take our next questions from our participants.

Yes. This is Maria Semikhatova from Citi. A couple of questions. First, again, on Slide 17, thank you so much, that's quite useful. Just wanted to get a better understanding on your assumptions. First of all, what you assume as a pass-through on savings and transactional accounts. And maybe if you could remind us the split between these accounts as of the end of the third quarter? Then on contribution from central banks, I believe you held EUR 45 billion, ECB. I just wanted to check, given the current debate on tiering, what is included in your assumptions on benefit from Central Bank and if it's included in the Finish part. And then outside of NII outlook, just would appreciate your thoughts on challenges that households are facing. I know you have a relatively small part of consumer loans, around 8% of your total book. But do you see any signs of stress across your portfolio? And then with regards to mortgage exposure, if you have received any request to suspend amortization or any other kind of issues that you see from your own customers?

I'll deal with the questions on NII and hand to Frank on the perspective of households at the moment. So we're not giving our assumed pass-through here. It's broadly based on how things have been to date and our assumptions going forward are quite sensitive, I think, in terms of both sort of competitive views. So we'll keep that to ourselves for the moment. But it's a fairly balanced approach. And in terms of just our split on deposits, you can work on sort of roughly 50-50 between transaction accounts and savings accounts at the moment. Now that profile may change, but that's how we look at it. And in terms of our assumptions on what happens with money at central banks and particularly ECB, we haven't baked in any assumptions or scenarios on reserve tiering or anything of that nature. We're planning on the basis of current arrangements proceeding. And I guess what I would point out is in relation to TLTRO, which is where a great deal of this sensitivity and speculation comes from, we were amongst the lowest users of TLTRO. There are many estimates out there of impact of TLTRO in the current environment, I think some published by your own house and its lowest impact for us if anything changes there compared to some of our peers across Europe.

Good. Regarding the household side, it's a very strong portfolio we have. And nothing has changed, and there are no signs as of now of any weakening of the portfolio. Looking at the Personal Banking business of ours, the total lending is around EUR 170 billion, of which EUR 150 million is mortgages. And mortgages is having, in general, a quite low LTV, stable and people pay their mortgage. That is how it has played out many, many, many last years, and that is also our clear assessment that will happen this time. The last 20, or the last part of the portfolio is collateralized and non-collateralized. The total amount is EUR 20 million. So out of the EUR 170 billion, EUR 20 million is, you can say, auto lending. Around EUR 14 billion, as you recall, EUR 14 billion or EUR 15 billion of that EUR 20 million is collateralized lending. That would be mortgages booked in the banking book. It could be card, financing, these sort of things. And then there are some EUR 5 billion, EUR 6 billion left within consumer lending, if you can say, non-collateralized, it could be credit cards, it could be sort of top-up loans, these sort of things. And there's no signs in these portfolios that points to a weakening credit quality as of now. And I should say we don't expect to see any major credit losses within the private portfolio.

Just a quick follow-up on the transactional and savings account split. This is applicable for both business banking and private banking deposits, you refer to total?

Yes, it's a high-level assumption, but it's reasonable.

We will move to our next question from our participants.

It's Namita Samtani from Barclays. I've got a few questions, please. Firstly, what percentage of your cost base is directly linked to inflation? Secondly, could you tell us what you're seeing with respect to household deposit movement in Sweden and Norway, in particular, are customers changing behavior and moving their deposits from transaction accounts to stable accounts? And also just on the corporate deposits, what is Nordea paying to corporate customers? And lastly, how is the LTV on the commercial real estate book change from the last quarter? I think you said it was 55% in the second quarter.

So in terms of -- Namita, sorry, the -- I mean, broadly speaking, our principal sensitivity on inflation is what happens with wages and salaries. And that's pretty clearly sort of 60% or 60-ish percent of our cost base. And that is something that we will determine over the course of the next couple of months in terms of wage and salary settlements. The other items in there that have some sensitivity, clearly, there is the general inflationary pressure on all costs at the moment. The one that feeds through immediately is lease agreements, property lease agreements with indexation clauses. That's actually relatively small in the cost base. So the main focus is on payroll. In terms of household deposits, we're not yet seeing a shift between transactions and savings account balances. I think the more relevant observation is customers taking much more interest in remunerated deposits and channeling savings that perhaps would otherwise have gone into fund investments into deposit accounts because we've got some good offers on those. So nothing in terms of movement between transactions and savings, but a real focus on remunerated deposit products as opposed to fund investments. On corporate deposits, off the top of my head, I don't have what we're paying on those. But Matti, can you add that?

Well, they're very much linked to obviously, the money market rates and also individual pricing. So there is no price list on corporate deposits that we could give. Whereas for retail deposits, you can actually track them on our local websites, so what do we pay on savings account. For example, in Sweden, we're paying 2.9% for 2-year money at the moment. So that is an important also kind of addition now, as Frank mentioned, to the savings offering on the retail side. But corporates it's linked to money market rates and individual pricing.

Yes. And then your last question, just on LTV movements in commercial real estate, nothing substantial there. And we indicated back at Q2 that it was a bit above 50% LTV. So nothing substantial in terms of movement.

We will move to our next participant.

It's Omar Keenan Credit Suisse. Could I ask a follow-up question on the rate sensitivity? Thank you for the EUR 350 million to EUR 400 million. I was wondering if you could elaborate on the pass-through assumptions that are in that number. And I wondered whether you could perhaps elaborate on the deposit hedging a little bit and which geographies that impact, presumably, I guess, that I guess, deflate some of the rate sensitivity down to EUR 350 million to EUR 400 million, that means that there might be an ongoing margin benefit a couple of years out? And secondly, I just wanted to ask your thoughts about lending margins and where you see front versus back book lending margin trends in key product segments and geographies?