Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

All right. Welcome, everyone, to this fireside chat with Nordea's CFO, Ian Smith. As usual, we'll be having a chat for maybe about half an hour, then open up for questions from the audience and take it from there. But before we go into the chat itself, let's have the poll question, and you all have the screen voting machines, I believe, on your desk or around your chair there. So the poll question here is what do you see as the most important determinant of Nordea's share price development over the next 12 months? And you have five options to choose from there with those screen voting machines. So if you can get the voting going. [Voting]

Quite even. We'll come to those.

My mic is hopefully working. Do I need to take it up?

I can hear you.

Very good.

That's the most important. There we are. Ian, thank you for joining us. I was going to start with a [ Roskilde ] related question, but given the events, maybe the audience would be curious to hear your thoughts on the Silicon Valley Bank market volatility. What are your thoughts? Any analysis you've done internally? Any takeaway so far that's worth sharing?

Morning, Paco, and hello everyone. Nice to be here. So when you started that, I thought you meant that given events was about Scotland losing to Ireland on Sunday, but...

No, I was actually going to refer to the England-France match from a couple of weeks ago, but anyhow...

But -- yes, so Silicon Valley Bank was, I think, a real shock to the system. It reminded us of a bunch of things. I think it's -- so first of all, Nordea has no exposure to Silicon Valley Bank or any U.S. regionals, but that's not unexpected. Despite much of the commentary talking about how there were many idiosyncratic circumstances that are related to Silicon Valley, it's obviously pause for thought as to one of the most important things to underpin confidence in the banking sector. And of course, if you look at the parallels, Nordea has none of those. So for example, we mark our investment securities to market. We have strong LCR and NSFR metrics in place. We have a diversified deposit base that is very stable and sticky. So a bunch of things that are completely different. But it does demand that we sort of stop and think about what's important. And what's important is strong risk management, strong liquidity, diversification in your funding base, both deposit and wholesale funding, and strong capital. And Nordea has all of those, but it certainly makes us pause and think and check and just make sure we're in the right place.

Very good. That's encouraging to hear. Now stepping back and thinking about the sentiment overall, but more in the real economy, if you like. You are the only true pan-Nordic bank. You have 10 million customers across the four Nordic markets. So you have your finger on the pulse of all those economies. Now with the turn on uncertainty in markets, and I suppose more broadly, consumers being squeezed by energy prices, interest rates and so on, how are your customers responding? Do you see any changes in savings or consumption patterns? Are those impacting your business?

So I think that the most obvious consequence of the turmoil we've seen over the last few quarters has been the lack of activity in the mortgage market. And that's understandable when consumer confidence is low, when there is significant volatility in house prices, and also concerns about the strain on household budgets, whether that comes from energy costs or higher interest rates or other things. That's the primary symptom, I guess, that we see. And it's not surprising to note that in Denmark and Finland, the mortgage market is very flat. We see some growth in Norway and Sweden, and Nordea is capturing a strong share of that. But that's the most obvious symptom. Elsewhere -- and I think we all understand the monetary policy feeds into the real economy with a bit of a lag. And we're not yet seeing signs, for example, of significant reductions in consumer expenditure on credit cards. The latest credit card data across the Nordics showed that we're, in real terms, about the same level of spending as this time last year. And the corporate sector is still keeping us busy. The demand for credit is still there, perhaps not to the same extent that we saw in 2022, and there were some special factors in 2022 that helped drive credit growth, not least in energy and power production companies. But corporates are still feeling good about their prospects, they're in good shape and they're doing business. So I know that 2023 will be more challenging, particularly for consumers, and particularly in certain businesses that are exposed to those consumers. But at the moment, I think things feel quite stable mortgage market notwithstanding.

And picking up on the comment on mortgage market in particular, if rates continue to grind higher from here, what's your take on the outlook for that market? Will it sort of, at some point, stabilize and then continue to grow from there? Or is it really so rate sensitive that essentially things will be muted or activity will be muted for an extended period time?

So I think it is -- I mean, clearly, rate sensitivity is important and it's customer's largest financial outgoing. So that is important. So I think it will be difficult to see -- we need things to settle down. We need customers or consumers to feel confident, whether you're buying or selling a property, about levels of pricing and also levels of affordability. So that suggests that, I think, 2023 will continue to be fairly quiet. We're confident that we'll continue to lead in terms of market share gain in the way we have over the last 2 to 3 years. But it will definitely be a smaller market, and that might make things a little bit more competitive. I think thereafter, if we can see a bit of stability in the rate environment, and customers start to get that sense of stability coming through in their own daily lives, then people will start to think again about entering the mortgage market. So perhaps later in 2023.

Okay. Moving then on the other side of volumes, or perhaps your business on the savings side. You obviously have a large and very successful asset in the wealth management business. What changes have you seen in your customers' allocation so far? And indeed, how do you expect that to evolve from here given that the equity bull market probably and the bank fixed income and other forms of savings might be more attractive now?

Yes. And I think that's the real conversation. When -- a lot of questions from investors and discussions around what's happening in deposits, and in particular, whether there are movements between, say, transaction account balances and savings, that's actually not the picture we're seeing. And it's much more -- the customer conversations on the retail side are around where do people want to place their savings? Is it in, now, the deposit products that are paying healthy rates? Or into a market-based investment? And certainly, we're seeing customers opt much more for deposits. It's a balance. And I think it's understandable that customers will trade volatility right now.

And on your comment on customers putting now more on deposits, is that indication you see inflows also more broadly? Or is that more of a shift within your own sort of asset AUM mix, if you like?

I mean, I think -- I guess, in the current environment, inflows are lower, and we're seeing that across the board. And I suspect those conversations around where to place savings are occurring across the industry.

Okay. Now continuing on the deposits, that's been one of the topic here at the conference, and especially after the SVB events, but also increasingly also on various public forums. This deposit data, i.e., how much of the rate increase that you pass or do not pass to customers, it's very topical. Why do you think deposit data has been so low so far in the cycle? And how do you then supply the deposit cycle from here? Is it any different? Or how do you see that?

So I think that banks rebuilding their deposit margins and certainly in the sort of early stages of rate hiking is understandable and natural. And I think that, that was always expected. There were a couple of exceptions. So for example, Nordea led the way in Denmark as rates moved from negative to 0, where essentially, we passed all of that on to the customer. We thought that was the right thing to do. But thereafter, I think it's been about rebuilding sensible levels of deposit margins. And there's been -- so far, we haven't seen a great deal of competition for supply in the deposit market. And obviously, that's one of the things that will determine levels of pass-through or beta. But that might change later this year. And I think our broad expectation is that -- it wouldn't surprise you that deposit betas will increase a little bit from here. But I think there's been a general understanding that banks have needed to rebuild deposit margins so far.

You mentioned Denmark as a market where you led the market, if you like. How do you see your positioning in different markets? And how do you determine where you're more of a reactive party, where you're proactive or leading market, if I could get to any example? What determines that?

So I think, sometimes it's a little bit easier, where you're not the market leader in terms of scale, to fly below the radar a little bit. And that's certainly been to our advantage in Sweden, where we've never been the cheapest player in any of our products. So it differs from market to market. Finland, where we're clearly the market leader, it might be a little bit different. But there aren't huge sort of geographical variations in how we behave.

And do you see any difference in the market themselves? Is one market more competitive than the other? Or it's just a relative positioning that you have that determines it?

I think we tend to focus on Sweden. It's difficult to call Sweden a more crowded market, where in Denmark you have more than 50 banks operating. But Sweden has always felt a little bit more competitive. But I don't think -- we're not seeing anybody doing anything unexpected so far.

Okay. Very good. Staying on the margins, but moving then onto the lending side. The competitor of yours has been highlighting on various occasions, I think, the pressure in the Swedish market on mortgages, where I believe they compare it to the wholesale funding cost. Sweden is obviously one part of your footprint. But how do you more broadly compare the dynamics in your different markets? And also, how do you determine the profitability of mortgages, and therefore the margin you want to go after, and play the trade-off on profitability versus growth?

So in two of our markets, repricing is -- in Denmark and Finland, repricing is automatic and margins are very stable. So it isn't a huge conversation there. It is much more about market activity and transaction volumes. And then in Sweden and Norway, there is sort of active repricing that's required. In Sweden, it's hard to sell to customers. The mortgage rates need to increase because covered bond costs have gone up. That conversation is always easier when you see the Central Bank raising rates, because I think that feeds through into customer understanding a little bit better. And so it's been a real challenge trying to keep pace in asset pricing with the cost of raw materials. So that has put the pressure on in Sweden that you referred to. And that continues. And when you add in lower sort of levels of market activity, that means it's a bit more competitive and we're seeing some margin pressure. Norway has a little bit of that, perhaps just sort of less aggressive competition. And the challenge in Norway for Nordea has actually been just more around our sort of structural funding position, where we have a lower level of deposit funding. And so we're always trying to sort of catch up with rate hikes and the notice periods that hold us back a little bit there. So Sweden remains our most competitive space for the reasons I outlined, and it will continue to be so. And I can't see the major mortgage players in Sweden doing something really aggressive, but I think it will remain competitive.

And on the point around how the different players react, from your perspective, when you think of profitability and we think of what margin is acceptable, is that based on the margin of wholesale funding cost, even if that's not what you can tell the customer? Or do you sort of cross-subsidize deposit markets wherein now you think you have more room to give on the mortgage side? Or how do you think that trade off?

Look, I think we take all of that stuff into account. And I think that sort of blended approach is probably going to be more relevant from here onwards. I talked about the need to rebuild deposit margins. And I think now it will be much more of a blended approach.

Okay. And do you see -- on the competitive dynamics or competitive landscape, do you see any players that would be particularly aggressive, whether it's on lending side or deposit side? I think anecdotally, there's a perception that there are some so-called challenger banks, for instance, on deposit side being aggressive. But is that sort of marginal from your perspective or something that you are worried about?

Very much marginal. The things that matter most to us are what the players with significant market shares will do. And nobody's looking like they're breaking ranks on that. So no. The unusual moves have come in from the smaller players because of their particular circumstances.

Very good. Moving then on to the cost side. You've obviously had great success in the last couple of years bringing down your cost to income ratio. Now in an inflationary environment, and particularly strong income tailwinds, where do you focus on your cost discipline? And how do you indeed maintain that discipline when in some ways the income side is taking care of itself somewhat more easily?

Well, I think it's easy to -- or it's tempting to perhaps be a little bit looser on costs when we're seeing such a favorable income environment. We absolutely can't accept that in Nordea. So our focus on cost continues. Frank and I have a favorite saying, which is that, it's a very high bar to be allowed to increase your costs in Nordea, and we continue with that. That being said, we've got three things that contribute to our cost development. The first is investment, and we talked about that in our Capital Markets Day about where we wanted to invest. And that was particularly in sort of wealth management, about increasing our market presence in Sweden and a few other critical areas, particularly digital. That's still on the cards. But I think perhaps we take a little bit of the heat out of that, the pace out of that just given market conditions. And then the two other areas are where we have had -- where we face inflation, difficult to offset in the short term with cost actions. But I think we're getting to some sensible outcomes on collective agreements. We've seen progress in Denmark with an agreement sort of 4.5%, '23; 3.7%, '24. In Finland, we've actually concluded the agreement, which is 3.5% in '23 and 2.5% in '24 with some elements of discretion and one-off payments in that. And I think those are constructive. But we see inflationary pressures everywhere else. And then thirdly, as you saw in our fourth quarter, we have opted to invest more in a couple of particular areas. So technology and also financial crime prevention, where we see regulators continue to raise the bar, whether it be in sanctions. We saw 1,800 different new sanctions requirements coming in 2022 in relation to Russia and Belarus. We see the EU add to the list of high-risk countries on a regular basis. And recently added the UAE and Gibraltar, and that just increases activity levels for us. We have more stuff to do. And in the short term, we can't automate that, so we have to hire people. So all of those things sort of taken together, we're working very, very hard to keep a lid on costs. But that's what's driving us to think that we'll see maybe 5% cost growth this year.

Okay. And you mentioned some of the investments there. How do you prioritize those, because there is quite sort of broad range. It's wealth management that can be done digital. It's some of the crime prevention you mentioned.

Yes. So I think that the absolute non-negotiables are things like financial crime prevention, because I think we all understand what happens when you fall behind an investment there, and we won't let that happen. And then we just apply rigorous sort of business cases to thinking about how do we -- in wealth management, the best way for us to drive growth is to hire more advisers. But there's this constant trade-off between show me the money. Show me you can deliver the growth, then we'll allow the investments. And there's quite a tension there because, as I say, the bar for spending money in Nordea is quite high.