Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Good morning, and welcome to Nordea's Third Quarter 2024 Results Presentation. I'm Ilkka Ottoila, Head of Investor Relations. Here in Helsinki, I'm joined by our President and CEO, Frank Vang-Jensen; and our Group CFO, Ian Smith. As usual, we'll start with the presentation by Frank, followed by Q&A session. [Operator Instructions]. With that, let's get going. Over to you, Frank.

Good morning. Today, we have published our results for the third quarter. This was another good performance from Nordea with profitability again at a high level. Returns on equity was 16.7%. Business volumes were stable during the quarter, and customer activity was good especially in savings and investments. This supported a year-on-year increase in our income. Our return on equity has clearly exceeded 15% for the past 8 quarters, which demonstrates the bank's sustainable improvement in profitability. Since our repositioning in 2019, we have lifted Nordea to a new level through lasting efficiencies and adjusted business mix and focused profitable growth, and we firmly believe we can sustain our position as one of the best-performing universal banks in Europe. For the full year 2024, we expect return on equity to be above 16%. So a very solid position to be in, and it means we have a strong capacity to support our customers and grow our business. We have been by the side during the more challenging times for the Nordic economies in recent years, and we will continue to take a leading role in supporting them as the outlook brightens. Inflation has declined significantly, and this has raised the prospect of further reductions in policy interest rates, which is boosting confidence. We saw signs of that in household and corporate activity during the third quarter. Looking at some of the highlights for Q3. Total income for the quarter increased by 2% year-on-year, led by 4% growth in net fee and commission income and a 26% increase in our net fair value result. Net interest income was lower but resilient, decreasing 1%. Operating profit was EUR 1.6 billion. Our return on equity, as noted, was strong at 16.7%. Lending volumes were relatively stable with little change in mortgage lending and a slight decrease in corporate lending. Deposit volumes were up with retail increasing by 2% and corporate by 9%. Asset under management increased by 15%. Costs developed in line with our operating plan, driven by our strategic investments. Our cost-to-income ratio with amortized resolution fees and excluding the settlement of a regulatory investigation in the U.S. was 43.4%. Our credit performance remains solid with strong asset quality. Net loan losses were EUR 51 million or 6 basis points. We maintain a strong capital position and continue to generate capital. At the end of Q3, our CET1 ratio was 15.8%, as expected. Our strong capital performance supports strong returns to Nordea's shareholders. And today, we announced that this month we will begin a new share buyback program. Furthermore, given our strong results this year, we have today updated our outlook. We expect full year 2024 return on equity to be above 16%. With that summary, let's now take a closer look at the results starting with the income lines. Net interest income decreased by 1%, a solid outcome versus the strong Q3 last year. The decrease was driven by lower deposit margins, in line with our expectation in an environment of lower policy rates, and was partly offset by higher household lending margins, the higher deposit volumes as well as a positive impact from our deposit hedge. As a result, our net interest margin for the quarter was 1.77%. The lending market remained slow in Q3, though there were some signs that activity is picking up, for example, with increased loan applications and promises. We maintained our mortgage lending volumes at a stable level. We also sustained a good level of corporate lending volumes in a market where customers were more focused on refinancings rather than increasing their borrowing. However, we have seen some signs of improvement in our deal pipeline. Corporate lending was 1% lower for the quarter. Net fee and commission income grew by 4% year-on-year driven by increased customer activity in savings and investments and higher activity in cards and payments. Our savings fee income was supported by higher assets under management, which grew by 15% year-on-year to an all-time high of EUR 412 billion. In Nordic channels, we had very strong momentum in Private Banking and Life & Pension, in particular, with net flows amounting to EUR 4.2 billion in the quarter. Net flows in internal channel and international channels remained negative. In wholesale distribution, we have seen outflow declining each quarter this year, in line with interest rates beginning to come down. However, with rates not yet normalized and geopolitical uncertainty still high, clients on the whole continue to favor other products like fixed term or money market funds. In international institutional distribution, we are winning mandates, though it takes some time for those to be funded. So still a challenging environment but some positive developments. During the quarter, the stronger market also supported a year-on-year increase in brokerage and advisory fees. Net fair value result was up 26% year-on-year, mainly driven by higher customer activity in interest rates and foreign exchange hedging. Demand for our FX and rates products has been solid, demonstrating our ability to effectively support customers in their risk management activities. Market making was at a good level, while treasury and auto was positive driven by improved valuations and hedging results. Cost development was as planned with an increase of 9% compared with Q3 last year. The increase was driven by higher-than-normal inflation rates and the significant strategic investments we have been making into technology, data and AI and other key capabilities. These are important investments and will enable us to tap into the benefit of our unique Nordic scale, providing differentiation that cannot easily be copied and growing our business income. We are working to build scale in product development, applications and processes. We also aim to make better use of our large data resources and AI to strengthen the efficiency and improve the customer experience. Ultimately, through these investments, we will be able to serve customers even better and deliver increased income growth and financial results that put us top of the league in the Nordics and Europe. Costs associated with the integration of our Norwegian acquisition were also a driver of higher expenses in the quarter. We have been investing to grow our position in Norway, including through our Latvia acquisition, which is expected to close next month with immediate P&L benefits from December 1. We are taking all Danske Bank Norwegian personal customer and Private Banking business along with associated asset management portfolios in a move that will strengthen our market position in Norway among personal and private banking customers. Our investments have driven significant progress, and we will continue to invest. Looking ahead a little bit. We see core cost growth, that is excluding regulatory fees, being significantly lower in full year 2025 than what we had in the third quarter. We will provide our usual guidance for 2025 costs next quarter. During Q3, we also booked a EUR 32 million charge from the settlement of the regulatory investigation in the United States. The cost-to-income ratio with amortized resolution fees and excluding the U.S. settlement was 43.4% in the third quarter compared with 42.4% a year ago. Credit quality remained strong with Q3 net loan losses and similar net results of EUR 51 million or 6 basis points. The losses were driven by a small number of individual cases in the SME space. Reflecting the more positive macroeconomic outlook, we released a further EUR 30 million from our management adjustment buffer. The buffer now stands at EUR 435 million in local currencies. Capital generation and our capital position continued to be strong. Our CET1 ratio stood at 15.8% at the end of the quarter, 2.3 percentage points above our capital requirement. The decrease from 17.5% in the previous quarter was as expected after we implemented our new capital models for retail exposures during the third quarter. Having implemented the retail models, we are resuming share buybacks with our next program beginning this month and concluding in February. We continue to be focused on shareholder return and using buybacks as a tool to distribute excess capital to our shareholders. As we have now calibrated our capital position, we will execute smaller and more frequent programs enabled by our strong capital generation. Our 4 business areas all delivered solid results for the third quarter. In Personal Banking, customers continue to increase activity in savings and investments, indicating stability and confidence in the financial position. Net fee and commission income grew by 5% driven by increasing customer investment activity. Deposit volumes grew by 2% year-on-year driven by Denmark and Norway. Mortgage lending was at a stable level overall with lower mortgage volumes in Denmark and Finland, offset by higher volumes in Norway and Sweden. Overall lending, including stable non-mortgage lending, was slightly lower year-on-year. However, for the second consecutive quarter, we have continued to see some positive signs, including an increase in demand for new loan promises. This does suggest that the Nordic housing market are starting to pick up after a couple of years of sales and prices being subdued. Again, our mortgage and savings advisers were very proactive and continue to use leads from our digital channels to connect with customers and offer assistance. In Denmark, for example, digitally generated leads for our mortgage advisers grew by 47% year-on-year, an example of how we are combining digital and advisory to provide a better experience for our customers. Customers use of our digital channels in Q3 was again at a high level with a number of mobile users and log-ins both growing by 5% year-on-year. Total income for the quarter was up 1%, driven by the higher savings income, net insurance result and deposit volumes and partly offset by lower deposit margins. Return on allocated equity was 18% compared with 21% in the same quarter last year, and the cost-to-income ratio was 48%, up from 45% a year ago. In Business Banking, we delivered solid income growth despite the subdued markets. We continue to engage with customers, supporting them as activity levels increased and demand for fee-based products and services group. Deposit volumes increased by 3% year-on-year in local currencies at lower margins. Lending volumes remained stable. Total income for Q3 was up 1% year-on-year driven by higher payment and fees income, offset by lower net interest income. Return on allocated equity was 17%, while the cost-to-income ratio was 41% compared with 40% a year ago. In Large Corporates & Institutions, we had solid income growth as we supported our customers in the gradually improving macroeconomic environment. Net interest income was stable with a positive overall volume development. Market sentiment was strong in the capital markets and this was reflected in higher deposit volumes, which grew by 14% year-on-year, and in income from bond issuance. Lending was 3% lower year-on-year with loan volume still largely focused on refinancings. Debt capital markets activity continued at high levels across the entire franchise. The total number of transactions we have arranged this year has now surpassed 500. Equity capital markets and mergers and acquisition has also seen good momentum in deal activity. One of them is DSV's planned acquisition of Schenker, one of the largest ever M&A deals by a Nordic company, where we acted as Joint Global Coordinator and Joint Bookrunner in the associated share issue. Total income was up 4% year-on-year, mainly driven by increased net result from items at fair value. Return on allocated equity was 17%, up from 16% a year ago. The cost-to-income ratio improved to 37% from 40% a year ago. Asset & Wealth Management had a solid quarter too, with strong momentum in our Private Banking business. We grew in all four of our home markets and onboarded a high number of new Private Banking customers, which contributed to overall positive net flows of EUR 3.6 billion. Net flow in Private Banking was positive in all countries, with Sweden and Finland being the main contributors this quarter. The strong growth in our assets under management was supported by the stronger equity and fixed income market performance and positive flows in our Nordic channels of EUR 4.2 billion. International channels, which represent about 13% of our total assets under management, had outflow of EUR 1.8 billion. Performance in our life insurance and pension business was also solid with gross written premiums reaching EUR 2.6 billion compared with EUR 1.8 billion a year ago. Total income was up 3%, driven by higher assets under management and a higher net fair value result. Return on allocated equity was 34%, down from 38% a year earlier, driven by increased capital allocations. The total -- the cost-to-income ratio improved by 1 percentage point to 42%. In summary, this was a good quarter for Nordea, and it extends the strong performance we have seen so far in 2024. Our structurally improved profitability and continued strong capital generation demonstrates that we are on a good path. We continue to deliver superior returns and generate capital for shareholders and are pleased to resume share buybacks with our next program kicking off this month. We have updated our outlook for the full year 2024. We expect return on equity to be above 16%. We also remain confident in our ability to deliver a return on equity of above 15% for the full year 2025. Nordea has a strong foundation. We have shown that our well-diversified and pan-Nordic business model is working well and delivering sustained superior profitability and income growth. We are supported by the significant investments we are making and the scaled benefits they enable both in terms of income and costs. From this strong foundation, we look forward to demonstrating continued progress. Thank you.

Operator, we are now ready for the questions.

[Operator Instructions] The next question comes from Gulnara Saitkulova from Morgan Stanley.

This is Gulnara from Morgan Stanley. My first question is on competition. How would you describe the evolution of the competitive environment across your key markets and especially in Sweden and Norway when it comes to the pricing of loans and savings products? Do you see any changes in the competitive behavior among banks versus what you've seen in the second quarter and versus what you've seen with the start of the year? And which levers are they pulling to keep up with the competition? And the second question, on the NII. Can you please talk about the outlook for lending and deposit margins for the coming quarters across your different markets? We saw that the contribution from the lending margin was slightly negative over the last quarters. When would you expect some visible improvements in the asset margins to come through? And when do you think the pressure on the deposit margins could potentially subside?

All right. Thank you for the question. It's Frank speaking. So let me take the first part and then Ian will take the second part. So on competition, it's playing out exactly as we have thought it would play out. And basically, it plays out as it usually does in the Nordics that when the markets go slow post sort of like a crisis or a period that had lead to much lower activity in societies, it takes some time to get it up to speed. And while we are waiting, though we have very clear indications now that more loan applications, much more discussions about investments, more savings and investments decisions taken, and we do see that in our income lines as well, then the competition on the lending side is super hard. And it has been the case, I would say, most of the year. I won't say that -- I will not say that there are any big changes in Q3. Very limited growth in the two markets that you mentioned, Sweden and Norway. And there is a bloody fight on the small sort of like volume growth in the markets. And what we see is -- what we usually see is that even though it's very -- especially in Sweden, rational banks, when it comes to capital consumption and return the margins are pushed downwards. But usually, what happens is that then when the market start to be more active, the margins will recover. So we have seen that so many times and it's sort of like very likely also what will happen this time. There are some that has been struggling for long in Sweden that really are using price right now to gain some traction, especially on the mortgage sides. And then we have one particular in the Nordics that are, to a very large extent, using price -- very low price to get some volume growth, and that is covering basically most of our four markets. When it comes to Norway, I don't think there is any special situation right now in Norway. Norway has always as a country been a growth -- volume growth focused when you look at the banks. And when you have slow economies, low growth on the mortgage side, then there will be a fight leading to pressure on the margins. So I would say as expected, and we are managing in, as usual, Nordea, a balanced way, we keep winning on the front book market share in Sweden. We are, I think, on par, slightly below, I would say, probably in Norway, but somewhere around our back book. And on the corporate side, we are, of course, selective. We don't want to lose good customers, so that we defend. But we are also selective, not doing too many mistakes on the pricing. So I think that's my picture. Did that answer your first question?

Yes.

Ian please.

Gulnara, it's Ian here. So on the NII and margin outlook, I guess this is how we see it. So Nordea will still be compared to our Nordic peers. Relatively resilient on NII even in a reducing rate environment, and that's because we have the two advantages of diversification across four home markets and then the support we get from the deposit hedge. In terms of specifics on what we're seeing on the margin side, in Q3. Actually in a couple of our markets, I think we saw some slight improvement in lending margins, so in Finland and in Sweden and flat in Denmark and, as Frank alluded to, some short-term pressure in Norway, but nothing to be concerned about. So I think there are some small positive signs coming out of Q3. And we've seen in the past that as rates have come down, then lending margins have strengthened, particularly as we start to see normal demand come back into household lending markets. On the business banking side and corporates in general, relatively stable, I think, in Q3. And then on deposit margins, obviously with the initial rate cuts, we start to see those come down a little bit. And we have previously guided that initial rate reductions would be -- would have a sort of relatively low impact on the net interest margin. And we're seeing that. Our NIM is down 6 basis points quarter-on-quarter, and that's as expected. In terms of the outlook, I think this is mostly a function of how quickly the rate cuts come. Generally speaking, I think we've always guided that we're comfortable around the sort of 2%, 2.5% endpoint on rates. And I don't think there's a particular difference of view out there now in terms of where we end up. But it's a question of how quickly we get there. When we were sitting talking to you guys back in Q2, there was a view on rate cuts. I think now the expectation is that we'll see perhaps one more rate cut this year than expected. And so in Q4, if we do see a couple of rate cuts, then the deposit margin contraction that you saw in Q3 will be there again in Q4, perhaps a little bit higher. All in all, though, for Q4 -- or for 2024, I should say, we've been consistently saying that we expect NII to be higher for the full year than 2023, and we expect that to continue to be the case. And then into '25 I think what we will see is a few things. Continued cuts, it's difficult to tell at which pace they'll come. And I think that dynamic on improving London margins while we see contraction on the deposit side will continue through 2025, and that's been the expectation all along. We'll see some support from the deposit hedge. We saw a positive contribution in terms of a lower headwind in Q3 as expected. And as we see rate cuts come through, the deposit hedge will prove its value and give us some support. And as a good example there is just, I think, the resilience of our performance in Sweden on the household side in Q3, is a good example of the deposit hedge providing some support. I think there's a couple of other things to throw into the mix for next year's outlook. We believe that as rates start to come down and households start to feel that positive difference in their budgets, we'll see a bit more confidence come back. That should help stimulate activity both in housing markets but also elsewhere in the economy. And that should provide a helpful offset to some of the rate pressure. So I think overall, we remain constructive about Nordea's relative resilience on the NII front. We think that we will see some higher activity levels that helped to offset some of the NII pressure going into next year. But of course, I think we will see the rate cuts perhaps come a little bit quicker than anticipated, might put a little bit more pressure on the net interest margin. But overall, I think relative resilience for Nordea.

The next question comes from Magnus Andersson from ABGSC.

Just the first question on costs. Frank, you said you won't come back with a more explicit cost guidance for full year '25 in conjunction with the Q4 report. But I was just wondering, when I read your CEO statement in the report, you say that you expect a lower cost growth in 2025, significantly lower than you had in '24. Should I read that as you're still expecting a positive cost growth on a like-for-like basis in '25 versus '24, excluding the fine and excluding the consolidation of Norway? That's the first question. Secondly, just on the hedge question, whether you have considered telling us what the impact would be in '25 with your interest rate scenario. And finally, just on loan losses. You continue to release your management overlay. I think consensus expectations still look quite high going forward. When do you think you will have released most of the overlay given the current macro scenario?

All right. Thank you, Magnus, for the question. So let me take the first one, it's Frank speaking, and then Ian will take the other ones. So regarding cost, what we are trying to say is that when you look at the cost rate growth for Q3 over Q3 last year, it's 9% when you exclude the U.S. settlement we made. And if you divide the 9% in basically three baskets -- or two baskets, let's start there, then the run cost is -- the underlying run cost is roughly 4% increase to last year, which is inflation driven. It comes from sort of like the tail of high inflation last year with salaries and contracts. And so that's one. The other one is strategic investments that we are doing. They are doing -- they are done with, as you know, in Norway, where we're buying -- acquiring Danske Bank's private and personal banking business. That corresponds to, in rough figures, let's say, 1.5%. And then we have roughly 3% for covering the strategic investments that we are doing within technology, data, AI and auto capabilities. That's why it's -- and that's why it increased to sort of like to 9% run rate for this quarter. What we are saying is we expect that 9% to be significantly lower next year, but we don't guide on the exact numbers. So yes, you are right that we expect some cost growth next year, but we also said in that signal that the ramp-up we did on investment this year is not happening next year, but we will keep investing, of course. And then if that sort of give you at least something -- some answer, then we will come back to the exact cost guidance for when we announced our Q4. Did that answer your question? Or...

Yes, yes. Very clear.

Magnus, it's Ian here. The hedge impact into 2025, yes, we'll reflect on that request. I mean, I think given the increased -- the expectation for quicker rate cuts, I think it's probably helpful to do that. So we'll reflect on providing that disclosure. What we said before is that we expect that in '25 and '26, we'll see substantial support from the hedge in the lower rate environment. And that still stands. But I appreciate the ask for a bit more detail. So we'll look at that one. On loan losses, this is something that is a constantly evolving situation. And we always sort of look at the requirement for the additional management judgment. As we've seen, I think, a bit of a strengthening of the macro environment, that's been a positive. Our stress test on the portfolio indicate a lower provisioning need. And I think what we've done again this quarter is indicate our willingness to release when we don't think we need it anymore. We've always said that we'll either deploy it when we see higher loan losses or, to the extent that we think it's not needed, we'll release. It's very hard to judge the pace of that. But I think we've been pretty clear that certainly over the next sort of 12, 18, 24 months, we would expect that management judgment to be deployed to offset higher loan losses should they eventuate or release. But it's -- what we can't really do is project the pace of that at the moment. But we don't expect it to be there for the medium term.

The next question comes from Shrey Srivastava from Citi.

I have two today. So the first one is, what do you see as the key drivers for the step-up in ROE guidance for 2024 to greater than 16%? Would you say this is mainly lower provisions than you expected? Or if not, what specific line items do you see is driving this increase and why? The second one is on your deposit hedge again. This seems to be the fourth consecutive quarter where the deposit hedge notional has declined. What's behind this? Is it continued mix shift that you're seeing from noninterest-bearing or more of a conscious decision on your part? And where can we see a floor for the notional here?

Shrey, it's Ian here. I think as we're getting much closer to the year-end and we've seen the strength of performance this year, we thought it was the right thing to do to upgrade the guidance. And the driver for that, I think, has been from a couple of areas. One is relative income strength. We continue to perform very well on the income line and, again probably slightly better than we had budgeted for but not materially. And then I think we are seeing more benign loan loss environment than everybody expected. That being said, I think we're tracking pretty much in line with expectations, perhaps a little bit better. And therefore, we felt we should provide stronger guidance for this year. In terms of deposit hedge notional, what I've described before is that we've got a sort of core element of hedge volume. And then you see some variation around it, which really is depending on market conditions and, in particular, what we might see in terms of swap pricing and other things. And that can ebb and flow a little bit. Our core deposit hedge of around about sort of EUR 30 billion of volume. That shouldn't change. So we're not running this off in any way. It's principally a risk management tool. And the normal operating level is around the EUR 30 billion mark.

Cool. And if I could have one more. Shifting gears slightly to Private Banking. So the net flow numbers, a notable step-up from any quarter in the last few years. Once this headwind you have from wholesale distribution recedes, what do you think is the sustainable sort of net flows percentage per annum in Asset & Wealth Management?

Ian, that's a tricky one. It will be high. But what is the number? What is the number, Ian?

So I think Q3 was exceptionally strong. We picked up some -- we had some brilliant customer wins in Private Banking in Q3. So I'd guide -- and particularly if my business area colleagues were here, they'd be saying, tone it down, tone it down. I think we expect our flows in Nordic channels to remain strong. We're switched on to all our businesses there. Q3 was a little bit exceptional. As we've talked about before with the international business, there are two things that have driven those net outflows over the past sort of 6, 7 quarters. One has been that the products we had that were geared to a low rate environment, obviously, much lower interest in those and demand for those. As we see the rate environment turn, I think we'll see that come back. The other factor has been lower interest in our sort of market-leading ESG products, and it's difficult to know when that will turn. We're working very diligently to develop alternatives. Those take time. So I think it's reasonable to expect those net outflows to abate as we've seen really over the last few quarters. They've come down a little bit into '25. But I think that the area to concentrate on for 2025 is our Nordic channels.

Yes. And they are performing very well. And as you know, they are having a very key role to play in our strategy. So -- and we have stepped up and we have actually strengthened in all countries. So we are quite comfortable having a strong inflow. But this quarter, it was higher than we have seen before. So I don't think you should put that into the -- sort of like the forecast, but it will be strong. And nothing less is sort of like what we are achieving for.

The next question comes from Nicolas McBeath from DNB.

So first question on capital and buybacks. So now you resume the buybacks in October, which is a bit earlier than you previously indicated. So just wondering if anything has changed since you earlier was speaking about early next year. And related to that, if you could also please update and remind us about your expectations for changes in your capital requirements such as the Norwegian risk weight floor, the Danske acquisition, the impact on those. Anything changed in terms of capital impact since you provided the outlook in Q2?

Thank you, Nicolas. So let me take the first part on the timing and then Ian take the latter part. So what -- sort of like the reason for why we are announcing now and launching a buyback now is that we have had a successful implementation of our new models. And remember, we have completely reworked our model. So it's new models. And we just want them to get a good start. That, they have gotten. And we are very confident with what we have seen. And then we're just true through our -- what we have said all the time. We don't want to sit on excess capital. Excess capital, we intend to distribute to our owners. And there was no reason for waiting for that to happen and announcing it in connection to the Q4 result, for example. So that's why we're going out now. So a successful implementation of models, a clear forecast now and visibility as we knew would happen, but now we also have seen it with the new models in place. And then we start the buybacks.

So Nicolas, in terms of the moving parts, they're broadly as we've guided. I think maybe what is different is we had talked about a net 20 basis points improvement at the start of next year from the interaction of the floors in Norway. With the Norwegian FSA removing the LGD floor requirement earlier, that's really just been pulled forward. I think we continue to track pretty well in terms of our estimate on the Danske acquisition. So we've guided to 40 basis points on that. That still holds. And then in terms of regulatory requirements and where those go, just to complete the picture. I think the main thing is that the Finnish FSA announced they would reciprocate the Danish commercial real estate [ syrup ]. That's an increase to our capital requirements of a little bit below 10 basis points, and that comes into force from 1 January next year. Otherwise, I think broadly, the picture is as we presented in Q2.

All right. And then a second question on the NII outlook. So appreciate the comments you made, Ian, about the NII drivers, deposit margin pressure, potentially high lending margins from the higher activity and the deposit hedge. So when you take all of these drivers into account, do you think that the net effect of those suggest that the pressure sequentially on the net interest margin should be substantially higher or lower than the pressure we saw on the net interest margin here in Q3?

So I think in the short term, it's about the arithmetic on rate cuts. If we see an extra rate cut in Q4, that will take a little bit of the Q4 impact. But as I said, we still will deliver higher NII in 2024 than we did in 2023. Looking into next year, again I think it's about pace. So we might just see the expected reduction in NIM roll through a little bit quicker into 2025. But that's a market-wide phenomenon and something that I think we can manage our way through. So I think that's sort of the key impact. It will bring that net interest margin compression a little bit sooner. But the endpoint is, as I say, if we're working with rates around sort of 2 positive, around 2%, 2.5%, I think that's a decent environment And we can expect to maintain, I think, a good level of profitability on that. We're focused very much on sustainability of our ROE given the improvements we've made over the years. And as we say in our report, still confident about delivering above 15% next year.

The next question comes from Patrik Nilsson from Goldman Sachs.

I just had a follow-up on the capital picture as well. So you announced the buyback today, which is a bit earlier than previously communicated. But it was a little bit smaller than what you previously have done. Is this because you want to maintain this sort of as a quarterly run rate in terms of the buybacks? Or is there anything else we can expect in terms of distributions and frequency going forward?

Patrik, what we said before and I think what we're doing today is very much consistent with that. What I said before is, as you know, we acted quickly to deal with our spot excess, if you like, that sort of obvious excess capital and got out in front of everybody else in Europe in terms of dealing with that and returning it to shareholders. And we said that having done that, we would move into what I think you can think of as a sort of steady cycle of superior capital generation and then deploying that in our business at strong returns or returning it to shareholders. And that's our mantra. And it's what you're seeing today. So I think I've used the words little and often or however that may be. Please, I'm not telling you that we'll do a buyback every quarter at the same level and things like that. But what we will do is constantly and consistently review our excess capital generation. And if we don't have a good basis for deploying that profitably in our business, our first thought is that we would return that to shareholders. So I think what you can take from today is that's the first step in that new phase, I guess, of generate, deploy, distribute.

And more frequent and smaller programs, as you see here. And this one is running between 3 to 4 months, and that we -- so we like that, right? And then if nothing happens, then we will likely do a new. Let's see. But if you can find something that will be very beneficial for our shareholders, then, of course, we will do that. I prefer that. But I think that we have been showing sort of like what we -- when we say that buybacks is an integral part of our capital distribution toolbox, then we mean it, right? And I think this is #5 share buyback. Now we are 6. Or is it?

5.

It's 5, right? So does that answer your question, Patrik?

Yes. Very clear.

The next question comes from Namita Samtani from Barclays.

Firstly, just on the net interest income. Do you think it can trough at some point in 2025 if rates falls around 2%? And -- or do you think we'll have to wait until 2026 to see the low point? I think, Frank, you've previously said that a competitor conference '25 NII to be stable versus '23. It sounds like this isn't really the case anymore given the pace of rate cuts you expect. And secondly, my second question is I just wonder why you aren't more aggressive on M&A, especially versus other European banks. They're doing cross-border M&A, others are using the Danish compromise. And buybacks aren't really accretive given your valuation. Do you still stitch your bolt-on Nordic strategy? Or do you think expanding that mandate, especially in certain areas, for example, your insurance revenues are quite small versus other revenue lines, could be helpful.

So let me take the latter part first and then let's take the D&I afterwards. So on the strategy, so we have a clear -- so remember, we are in '22 to '25 sort of period strategy. So '25, our current strategy runs out. So meaning that next year, we'll give an update on our updated strategy and probably also host our Capital Markets Day at that time. So -- but we are Nordic-focused. We are super good at what we are doing in the Nordics. That's where we have grown up. That's where we have been running banks for 200 years. And we have so much more that we can do in the Nordics, both when it comes to subscale in some countries, subscale in some business areas and segments. And then we have yet to show that we have so much more that we can deliver on the scale -- unique scale benefits that we have. That is what we are working on to show every single day. When we find targets in the Nordics, we are very interested. And in basically the last 5 years, we have done one in average each year. And this year, it's Danske acquisition, closing here expected in November. It is a bolt-on, yes. But we like bolt-ons. And the reason is that they come with low risk, and they are very -- not easy. No M&A deal is easy. But they are easy -- quite easy relatively to add to the business we have already in place, and then it brings strong shareholder value. If there comes larger top [indiscernible] items or targets for sale, of course, we are positive but, it is a Nordic focus that we have. So going outside the Nordics, just buy something to sort of like employ our capital and then get a bank that is average, much more or less profitable and much lower quality in average, this is not sort of like what we have in our current strategy. So that's where you have us. And then we will come back to sort of like the new strategy period during next year when we are ready to launch the strategy and announce our targets and so.

And Namita, on net interest income, it's difficult to call when we'll see the trough. And it's a function of three things: it's pace of rate cuts, it's about volume growth and also competitive behavior. And if we take competitive behavior first. I suspect that when we see a bit of growth and a bit of activity come back, you'll see some moderation of competitive behavior, certainly in terms of some of the more aggressive stuff that you see in the Fin market. So I wouldn't expect that to be a determining factor. So much more about pace of rate cuts and volumes. The quicker we see the rate cuts, the sooner we'll see the trough. And that could be in '25. Given the sort of spillover effect of rate cuts, may go over into 2026. Volumes. I think when we start to see people really believe in a lower rate environment, that will stimulate some growth. How quickly that comes in 2025 is difficult to call. I think our sense is that NII should probably trough in '25 because volumes and rates will cause that to happen. But it's difficult to know. Taking a step back, though, from that, I do think that overall income resilience looks good. I think that we see encouraging signs along in terms of deal pipeline in our corporate business, the increased volume of mortgage loan promises and applications in the household business. So it feels like that the pump is primed for things to start moving again. We just need to see that happen. And I think the key to that is people's belief in a lower rate environment.

The next question comes from Sofie Peterzens from JPMorgan.

This is Sofie from JPMorgan. So just going back on the capital headwinds. So you got the 50 basis point improvement this quarter from the LGD floor removal in Norway. So is it fair to assume that over the next 6 quarters, we should expect around 100 basis points capital headwinds, which would be 15 basis points from the share buyback, 40 basis points from Danske, 30 basis points is the Norwegian real estate risk floor go ahead and an additional 20 basis points from Basel IV? So if you could just clarify that the kind of expected the capital headwinds are around 100 basis points over the next 6 months. And then the second question would be related in your report, I can see that there is almost a EUR 300 million IRB capital shortfall deducted from capital. Can you just discuss what this IRB shortfall is and why is it deducted from capital, why didn't you have the provisions to cover this shortfall? And then the final question would be on going back to net interest income. If I got to annualize the hedge impact, that is roughly EUR 30 billion that I think -- or 3 months average for the third quarter of 3.5%. And then the 5-year swap rate of around 1.3%. I get that mark-to-market of the hedge would be somewhere around EUR 400 million or potentially slightly less drag to net interest income kind of annualized in the third quarter. Is this correct? And how should we think about the net interest income impact if rates go well below 2% in '25 or '26?

Sofie, lots of detail there. Thank you. I think in terms of your list of sort of gross headwinds on capital because as you -- we generate capital very strongly to deal with those. I think you've got three of them pretty much spot on in terms of the share buyback, the Danske acquisition and the Basel IV impact. The one that we don't expect to bite is commercial real estate in Norway because we're subject to floors on commercial real estate portfolio anyway. And so the Norway -- and those floors are ones that we've agreed with the ECB and will be there until our corporate models come into effect. So that commercial real estate floor in Norway, if it comes to pass, is not going to have any impact on us.

Sorry, it was the real estate -- residential real estate. So that's what you wrote in your second quarter presentation, that, that was minus 30 basis points. But that's then not happening?

Well, so what we guided to in Q2 was a 20 -- a net 20 basis points improvement, which was from the -- I guess, the residential real estate risk weight floor that's proposed and also the benefit of the LGD floor removal. We are indifferent to the real estate proposal from a risk weight perspective because more important to us is the add-ons that we have in our new retail models that we're working on to remove. And so whether or not that resi real estate floor comes in, it isn't going to have a negative impact on us. That 20 basis points net improvement is now here today. So that's it on those sort of capital moving parts. On NII, I'm not going to be able to help you much with your arithmetic there, Sofie. We said, I think, fairly clearly that we expect substantial support from the hedge in 2025. That remains the case. We'll reflect on whether we can provide a bit more detailed guidance on that going forward. And if we were to see much more dramatic rate cuts, well then, that's where the hedge also plays a really important part in dampening that impact and certainly versus those peers that are unhedged. I think that's all I can say for now.

Okay. And what about the IRB shortfall of almost EUR 300 million deducted?

Yes. I beg your pardon, Sofie. You did ask that. So the shortfall is the difference between the sort of regulatory provision requirements that are driven from capital models and our assessment of actual provision requirements. And so what we see with the implementation of those new retail models is because it drives higher risk weights and high capital requirements, it also automatically drives a higher regulatory assessment to provisions. Of course, when we then step into, I don't want to say the real world, but that world where we look at actually what our exposure to potential losses are, we come up with a lower number. You have to plug that gap. And that number has come down a bit with some provision releases and other things. So it's been the switchover to those new models with a higher regulatory provision requirement that has driven the increase to the shortfall deduction. It's a mechanical regulatory process, one that we anticipated and baked into our capital forecasts. So nothing untoward there.

Operator, we take the last question now.

The next question comes from Andreas Hakansson from SEB.

Two questions -- or let me start with a comment. Someone asked about your, why you're not doing a pan-European M&A. And let me just say thanks very much for staying in the Nordic region, and I hope that's going to be the strategy also in the coming plan. But then if I just follow up. I mean, we covered most on NII. But Frank, you made an interesting comment that you are one player that's pricing irrationally across the board. And I think you referred to retail banking. And can I just ask, the same player given that they seem to have a strategy to grow also now very much on the large corporate side, do you see that they start to act irrationally also on that side?

Andreas, it's Frank. So thank you for the support to our strategy. And no, the Nordics is a great place to run a bank in, and we have absolutely no intention to change that. But let's come back to that question, when we will explain how it will look for the new strategy. But this is a good place. When it comes to pricing, so yes, I don't want to go too much into the details, but banks have different strategies. They have different tactics and different behavior. And very often, it's about culture or strategy. And as I mentioned, we see a bit different behavior right now. And some of them are acting across the board with the same appetite and some are sort of like isolating it to one particular country, for example, Sweden. I don't think I should go any further here, Andreas.

Yes. Just to follow up, since you're buying one operation from one of those banks that are -- or the only other bank that's really pan-Nordic, do you think that the upside in our Norwegian retail business that you're just not buying, is that pricing a little bit more on a disciplined way? Or is cross-selling, which the former own and never really seem to have done there?

Both. So yes, Norway is a nice case in the way that we have something to work with. So it's both the price discipline and so -- but it's also to ensure that we dress up the customers. So we are a universal bank, and we have good services, good products. And we are a relationship bank. So what it is about is that when you are with us, you're just not just getting these shirts. You also get the trousers and underwear and the glasses and the shoes and the socks and the blouse and sort of like the jacket and the coat. And when you have all these things, all these needs covered, it is a very sort of like interesting and also a profitable business. And here, we do see an upside in that business. And we are just happy to -- and waiting to get it onboarded.

Sorry, just one quick question for Ian. You mentioned the corporate IRB models. Any update of the size of the potential benefits that you expect in 2026? Any update on that?

Andreas, no, we don't have anything more to share with you today. And you can expect, I think, us to talk about that a bit more when we -- after we submit our application, which is in the first half of next year, and we'll start to get some feedback on that. But no update for today.

Okay. We have reached the end of the meeting. So thank you so much, guys. Great to talk to you. And as always, we are here for you. So just call whenever you want to discuss anything. Thank you. Have a nice day.