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Edited Transcript of NDASE.ST earnings conference call or presentation 6-Feb-20 7:00am GMT

Q4 2019 Nordea Bank Abp Earnings Call

Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Nordea Bank Abp earnings conference call or presentation Thursday, February 6, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Rees

Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury

* Frank Vang-Jensen

Nordea Bank Abp - President & Group CEO

* Rodney Alfvén

Nordea Bank Abp - Head of IR

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Conference Call Participants

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* Andreas Hakansson

Danske Bank Markets Equity Research - Research Analyst

* Chris Hartley

Redburn (Europe) Limited, Research Division - Analyst

* Jacob Max Kruse

Autonomous Research LLP - Partner, Scandinavian Banks

* Magnus Andersson

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Martin Leitgeb

Goldman Sachs Group Inc., Research Division - Analyst

* Peter Kessiakoff

SEB, Research Division - Research Analyst

* Riccardo Rovere

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Robin Rane

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Sofie Caroline Elisabet Peterzens

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Rodney Alfvén, Nordea Bank Abp - Head of IR [1]

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Good morning, and welcome to this webcast where we give the fourth quarter and full year 2019 results. My name is Rodney Alfvén, and I'm heading the Investor Relations at Nordea. We will start with a presentation by the President and Group CEO, Frank Vang-Jensen. That will then be followed by a Q&A session with Frank; the group CFO, Christopher Rees and myself.

So Frank, please.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [2]

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Thank you, Rodney. So good morning. Today, we have published our fourth quarter and full year results for 2019. Moreover, this has been the first quarter of the new phase of Nordea, and we have taken the first steps to deliver on our business plans and financial targets. The Q4 results reflects our priorities are now very much as planned. As a part of the first steps in our updated business plan, we announced a new organizational structure with clear roles and responsibilities and full accountability in the business areas. It means that the business areas now have greater influence over the size and cost of internal processes and tools, as well as the level of support functions they need and can afford.

In relation to the new organization structure, I'm happy to announce that we have now established the new group leadership team, with new senior leaders being appointed. The team is committed to our targets and is ready to deliver. There are several promising signs that we are delivering towards the financial targets for '22 with higher income and business volume and lower costs. But of course, we have a lot of hard work ahead of us to get to where we want to be. Therefore, we will continue to focus on our 3 key priorities to deliver on our '22 financial targets. And these are to optimize operational efficiency, to drive income growth initiatives and to create great customer experiences.

In the last quarter of the year, we started executing on the updated business plan. We continued to grow in all markets and gain market shares. We had good business activity and solid lending growth, especially in the private and SME segments. One good example of how we are exploring opportunities, to strengthen our customer offerings, build a stronger market position and grow income took place in December last year, when we announced the acquisition of SG Finans. The company runs a successful business with very satisfied customers in 3 of our 4 home markets. The acquisition strengthens us and our ability to advise and help small and mid-sized corporates with their financial needs.

In Q4, cost-to-income ratio was down to 57%. We are targeting 50% in '22. The key drivers for the improved cost-to-income ratio are our customer focus and income initiatives. It is now starting to be evident in the top line. Compared to the fourth quarter of '18, revenue increased by 6%. We have also been able to improve our efficiency and delivered on our '19 cost plans. The number of people was down in Q4. The number of external consultants was down 9%, and internal traveling was clearly lower. We have taken the first steps to establish a new cost culture. We are proceeding as planned and as communicated at the Capital Markets Day in October.

In the fourth quarter, our net loan losses were somewhat higher than normal. And the reason for that -- for this was additional provisions on a couple of large corporate exposures. Our expectations for the coming quarters is that the credit quality will remain largely unchanged. The common equity tier 1 ratio increased to 16.3%, which is 120 basis points above our management buffer. This strong capital position enables us to meet any potential changes in regulatory requirements and capture growth opportunities. We had a return on equity of 7.6%. We are targeting above 10%, which means that we have a lot of work ahead of us.

To deliver on our targets, we need to take steps forward to create better customer experiences, and we have started to make gradual progress. We have managed to shorten waiting times significantly in our 24/7 contact centers. The number of customer complaints have decreased by 20%, and we have better stability in our systems.

In '19, we launched our new Nordic mobile banking platform, which has been very well received by our customers. Of course, we are far from being satisfied in particular customers in the broader segments, they should expect more of us. But at least, we have a positive trend in the customer satisfaction across all business areas.

As announced and communicated in connection with our financial targets, in October, the Board proposes EUR 0.40 dividend to the AGM.

Let me now go deeper into the fourth quarter results. I'll talk about these items individually in a moment. But I'm encouraged by the fact that we are making progress on cost to income, both compared to the previous quarter and to the same quarter last year. We have a long way to go, but it's good to see the direction. Total revenues were up 6%, while costs were down 5% compared to the same quarter in '18. Return on equity increased compared to the fourth quarter of '18.

To compare the full year results, '19 to '18, total income was 1% lower than last year, but also cost declines by 1%, reaching our '19 absolute cost targets of EUR 4.9 billion. The cost-to-income ratio was thus unchanged compared to '18, and return on equity was 8.1%.

When we compare with same quarter last year, you can see that net interest income is not contributing to the group's income growth of 6%, since margin pressure had a negative impact. However, we see an encouraging development when comparing with Q3. The net interest income was up 2% or 3% in local currencies, supported by increased volumes in all business areas. Lending margins were under pressure throughout '19, but stabilized somewhat in the latter part of '19. Interest rate movements in the same period had a negative impact on deposit margins in both Denmark and Finland. Compared to Q3, our funding cost improved, leading to an unchanged total margin for the group. Other income compared to the previous quarter was stable over the year.

Business volumes grew in '19 after several years of decline. Personal Banking volumes increased in all countries. In Business Banking, volumes showed a positive trend in large corporates and institutions. We gained volume growth in Finland and in Sweden. Lending volumes were up 5% year-on-year and 1% quarter-on-quarter. We regained market shares in mortgages and grew volume in all countries. Our customer focus and income initiatives improved performance.

Deposit volumes were higher, both year-on-year and quarter-on-quarter. Assets under management were at an all-time high, up 16% year-on-year despite the difficult start of the year. We had a total net inflow of EUR 9 billion in '19 -- or in 2019. We expect the net inflow to continue in '20.

Net fee and commission income was a major driver of our solid income growth in the quarter. Compared to the same quarter last year, net fee and commission income increased by 9% in local currencies. Assets and wealth management was the main contributor and generates half of the group's fee and commission income. Lending activity remained at a high level, driving -- driven by our debt capital markets and from high refinancing activities in Denmark.

In the fourth quarter, we had a broad-based improvement in customer-driven net fair value, which was up 46% compared to the same quarter last year. Corporate activity in Business Banking was especially strong, driven by both FX and interest rates. In large corporates and institutions, customer activity increased somewhat and market-making activities improved during the end of the year but are still at subdued levels. Asset management, where most of the net fair value result stems from, life and pensions, was seasonally strong in the fourth quarter.

Time to move on to the business areas results. In Personal Banking, total income was 2% higher compared to a year ago, since we have seen tough margin pressure in the last 12 months. So we have more to do in Personal Banking to develop the results we aim for and expect. In setting this, we also see signs of stabilizing margins, which makes us slightly more comfortable regarding revenue development. Costs were largely unchanged, and the cost-to-income ratio improved by 1 percentage point to 58%.

Our volume trend in mortgages represents higher customer activity for us. There is a positive volume growth quarter-on-quarter in all markets. During '19, we incrementally increased our activities within this business, and we are now seeing a much stronger momentum compared to earlier years. Our omni-channel and service offering supports business development by creating a better customer experience and offering the scale we need to improve our sales.

In Business Banking, key ratios continued to improve, driven by better business activity and our initiative is to free up more time for our advisers. Sweden was the key income driver with double-digit growth, and Norway also had a solid growth. Revenue increased by 5% and costs decreased by 5%, leading to a 4 percentage point improvement in the cost-to-income ratio to 49%. Pressured deposit margins are partly offsetting the results.

The acquisition of SG Finans is now in the closing progress -- process. SG Finans has a diversified customer base of about 50,000 corporates in Norway, in Sweden and in Denmark, that will get access to Nordea's full product offering throughout this acquisition.

In our newly named business area, Large Corporates & Institutions, we started our strategic repositioning during latter part of '19. We are in early stage of the execution, but the first actions has been taking effect. Total costs came down by 4% in the quarter, including a minus 6% in the number of staff. Economic capital has been reduced by EUR 400 million compared to the previous quarter in '19. Of the reduction of economic capital, approximately EUR 250 million comes from the ECB decision to lower the risk weights from 100% to 50% on commercial real estate in Sweden and in Norway. The Swedish FSA decision to increase risk weights for Swedish banks to 25% to 35% improves our ability to compete on a more level playing field in Sweden. However, our risk weights are still higher than our Swedish peers. So it is important for us to improve the internal-based risk models.

On the income side, net fair value was up 19% compared to Q3, and net interest income up 3% quarter-on-quarter, following higher lending volumes and customer margins. With improving revenues and cost discipline, the cost-to-income ratio improved from 66% to 51% compared to a year ago. However, the return is still far away from a satisfactory level, but we are determined to meet the '22 targets, which is the first milestone.

Asset & Wealth Management continued to deliver good investment performance and reported positive net inflows for the fourth consecutive quarter. 85% of funds have outperformed indices over the last 3 years, which we are very satisfied with, given our focus on actively managed assets.

Our ESG funds attracted a lot of interest, and the value of these assets increased by 140% over the year and represent 40% of net inflow during '19. Net flows were lower compared to the previous quarter, but stronger in retail and private banking. The total net inflow during '19 was EUR 9 billion. Revenues increased by 7% compared to the fourth quarter of '18. And costs decreased by 13%. It's promising that the cost-to-income ratio decreased to 40% in Q4.

Let me come back to the group results. First, let's look at costs. Our actions in '19 followed the cost plan. Costs were reduced by 4% compared to '18. In Q4, the number of staffs was down by 2%. Depreciation amounted to EUR 156 million. All of this led to a cost-to-income ratio of 57%. In '20, we expect to reduce costs by approximately EUR 200 million and reach a cost base of below EUR 4.7 billion, with planned continued net cost reductions beyond 2020. All of this is in line with our communicated cost plan, and we are proceeding as planned towards our '22 targets.

At our Capital Markets Day, we said that the cost target would require some EUR 700 million to EUR 800 million in gross savings. I would like to emphasize that, one thing is short term to take down a structurally too high cost base. Another thing is our long-term way of working. For me, it is critical that we build a strong cost culture. This work will take several years. We are fully committed to scrutinize all corners of our business and group functions to find ways to operate smarter and more efficient toward complex solutions. We should be proud of always improving our cost efficiency.

This work has started. And as I said in the beginning, the number of people is falling, the number of consultants is falling and traveling spend is declining. In Q4, we identified over 70 cost savings initiatives, and the first ones have already been implemented. For example, we have consolidated expenses for legal services with a small number of preferred legal firms and strengthening our internal procedures to optimize value for money. We have also been able to simplify our product offering and closed 80 account products. We will proceed with a wide range of cost initiatives also in '20.

Our cost plan will have staff impacts. We need to be fewer people going forward. And we will do our utmost to support our people and assist those impacted by changes. We will also make sure that the changes will not hurt our business. Today, we have better solutions and tools to face this new business environment. Our asset quality continues to be solid and impaired loans have been stable throughout the year.

As mentioned before, additional provisions on a couple of specific corporate exposures in Q4 increased loan losses provisions somewhat to reach 17 basis points for the quarter. Based on the current macroeconomic environment, our expectations for the coming years -- or coming quarters, sorry, is that the credit quality will remain largely unchanged.

With the current, somewhat weaker macroeconomic environment and geopolitical risks, trade tensions and now even potential health risks, business needs solid grounds under their feet. Our balance sheet gives us a very strong foundation in an uncertain environment. In 2019, total assets amounted to EUR 555 billion. The group's common equity tier 1 capital ratio increased to 16.3%, at the end of the Q4 2019, which is 120 basis points above our management buffer. This increase was mainly driven by the reduction in risk weights of -- on commercial real estate in Sweden and in Norway from 100% to 50%, following an updated decision from the ECB as a part of the annual supervisory dialogue.

The acquisition of SG Finans will consume some 40 basis points of the excess capital. We have a strong balance sheet that enables us to meet potential changes in regulatory requirements and to continue to capture growth opportunities.

In Nordea, we are here to help people to realize their dreams and everyday aspirations. Our balance sheet provides good opportunities to handle the unknown and grow business. Eventually, our success is dependent on our customers. At the end of the day, it is the only way to achieve sustainable growth. Everything we do starts and ends with the customers. Our target is to meet and exceed our customers' expectations. We will do that with a proactive approach. We understand that we need to step up, and we have started to make progress. We have invested throughout the organization to improve our customer experiences. We have increased advisers availability and reduced the time spent on administrative tasks. Waiting times in our contact centers have decreased significantly. We have increased flexibility to open our doors wider with extended opening hours on evenings and weekends. Nordea is truly available anywhere and anytime 24/7.

We want to do banking smoother and easier for our customers. With the major investments we are making in technology, we are continuously expanding our digital offers. We have launched a new Nordic mobile platform, which has been very well received by our customers. And our digital platform has now 1 billion touchpoints per year. More recently, we have introduced an easy digital solution to help our customers track their carbon footprint on the mobile.

We want to lead the way by taking actions. We are keen to lead a sustainable banking operation. We integrate sustainability throughout the bank, benefiting both our customers and the societies around us. This is a clear strength in the industry, and we want to accelerate our actions to help customers make sustainable choices. And in '19, we had a wide range of new initiatives, including 11 new funds, expanding green corporate loans and mortgages as well as offering green car loans. I expect this development to continue throughout '20.

We published our new financial targets in the Q3 report. Our new capital and dividend policy states that we should have a management buffer of 150 to 200 basis points above the requirements, and a dividend payout ratio of 60% to 70% of net profit. We intend to distribute excess capital through our buybacks. The Board proposes a dividend per share of EUR 0.40, in line with the communication in Q3.

When we decided on our 3 years' financial targets, we analyzed the current macroeconomic and operational environment. We also analyzed the big trends of the banking industry. For example, the low rate environment, low cost-based services in assets and wealth management, a megatrend of digitalization as well as new competition with big tech and fintechs. We are convinced that we will meet our targets by focusing on 3 priorities: to optimize operational efficiency, to drive income growth initiatives and to create great customer experiences. We are focused on execution, and we are committed to moving forward in the right direction step-by-step and determined to deliver. Thank you for your attention.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [3]

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Thank you for that, Frank. We now close this webcast, and we will start an audio telephone conference where you can ask questions to Frank; to Christopher Rees, the CFO; and to myself. So please move over to the audio.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have is from the line of Peter Kessiakoff from SEB.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [2]

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Peter Kessiakoff from SEB here. Just a short -- a few short questions to you, Frank. I mean first of all, looking at the capital ratio, which clearly was strong in the quarter, what's your kind of updated view on the likelihood of buybacks now perhaps coming during the early parts of 2020? And also how do you pair that with the potential for further acquisitions? I mean you've made a few smaller bolt-on acquisitions like SG Finans recently. Could they be coming more in the short term? Or are you basically integrating this? Those are my first 2 questions.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [3]

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Thank you for the question. We have a very strong capital base. And we have a policy having a 150 to 200 basis points above requirement. And at the moment, we are running 320 basis points above. There are some incoming factors we need to be aware of. The one is, of course, SG Finans. That will -- for that, we will use around 40 basis points -- no, 40 percentage points -- 40 basis points, yes, of course. And then we have incoming, you can say, local buffer demands. For example, in Denmark, we have an increased countercyclical buffer. All in all, some 60 basis points we expect to have an impact from these actions. And then what will happen in -- during '20, we, of course, will carefully follow. But of course, the law -- our intention is not to run the bank with too much capital. We want to basically stay within our buffers. That is our intentions. But the timing of when we will be ready for buybacks is still an open question.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [4]

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All right. And then just on risk exposure amount and the reduction that we saw in this quarter, which is then, to some extent, perhaps, front-loading some of the benefits from model approvals with ECB that you've mentioned might come during the end of this year. What's the updated communication around that? Should we still expect some benefits coming through during the end of this year?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [5]

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Chris, would you take that one?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [6]

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Yes, thank you. As you've pointed out, we had a reduction in risk-weighted assets this quarter. And as Frank mentioned in his speech, that is mainly due to the dialogue we've had in our ongoing discussions with the ECB as part of the SREP, in terms of reducing the risk weight floors on the corporate real estate portfolios in Norway and Sweden. That's the main reason for that. So that is actually not necessarily a model change per se. So as we continue and progress according to plans with our model development program, which we have previously announced, we would submit those applications during this year. Then, ECB will take a certain amount of time in terms of reverting back to us with respect to the outcome of those models. And as such, that timing is unclear and uncertain for us. So I expect we deliver this year, and then we'll see where the ECB comes back. But I suspect that will go into '21.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [7]

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Okay. Any comments on kind of the magnitude of that?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [8]

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No, we can't comment on the magnitude of that, I'm afraid.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [9]

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Okay. I thought I'd try. Then just a final question. On margins, where it seems like you have a bit more optimistic message around margins that the pressures are leveling off and so on. Is that -- are those comments based on kind of the trends you're seeing on the lending margin side? Or is it mainly impacted by that we have had kind of ECB tiering, implementation of negative deposit rates in Denmark and so on, which could, to some extent, be seen as kind of one-off improvements? So what's your view on the margin trend throughout 2020?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [10]

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If I should start, Chris. So on the mortgage side, I think we have seen stabilizing trends now recent quarter. And of course, the difference between the countries, but Denmark quite stable, a little bit up in Sweden. Finland and Norway, yes, a little bit down. But all in all, I think we -- it seems more stable than it did a quarter ago. Then we have the deposit side and deposit side, you can say is, of course, we had an impact earlier, or it was in Q3, after the change of the ECB rate. And remember that the changes or adjustments we have done in Denmark, charging negative interest rates for deposits above EUR 100,000 has not been implemented. Actually, it has been implemented, but from 1st of February. So all in all, including the corporate segment, we -- with the information we have right now at the end of Q4, I think it looks more stable than in Q3.

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Operator [11]

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The next question we have is from Robin Rane from Kepler Cheuvreux.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [12]

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So if I start with, in the quarter, staff costs were down partly due to lower variable costs. But now as the business momentum seems to improve, how sustainable is the lower staff cost that we saw in the quarter? That's my first question.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [13]

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Yes, thank you for the question. We -- as you pointed out, yes, variable compensation was lower. That is, of course, related to the fact that performance for the firm was lower. But you also look at the salaries for the staff, the fixed salaries, and they were also lower this quarter. And this quarter, we've also reduced head count by 500 FTEs. So we do think that we need to work with both the income line, continue focusing on the priorities that Frank set out, and some of the activities as well as the cost line. We can see that the run rate of our fixed salary costs have actually come down quite a lot in the second half of this year, and we expect a continuation of that.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [14]

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All right. And then on fees. So in Denmark, as -- in 2019, as rates have come down, there has been a lot of remortgaging activity, to my understanding. How has that -- this impacted fees in 2019?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [15]

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Yes. Chris?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [16]

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In Denmark, as you know, we have a very specific mortgage market. And there, yes, we have had a lot of activity in Q3, and that impacted revenues and fees in a good way, particularly in Q3, both for Personal Banking and for Business Banking. We also had a good level of that activity in Q4, not quite as good as Q3, but still good. As we look forward, I would suspect that, that will come down and soften up a little bit as we move into Q1. But overall, that has been a good revenue generator in the second half of this year -- or last year, '19, I guess.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [17]

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All right. And then last question. As the risk weights on corporate real estate was lowered now at the end of the quarter, will you -- will this, in a way, affect your pricing in this segment?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [18]

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No, it will not. It will lead to that our, you can say, competitiveness will -- has been -- will increase. But remember, we came from 100% to 50%, and we are still competing in the Swedish market with banks having lower risk weights within the segment. So it will not impact our prices, at least not by design from here.

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Operator [19]

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The next question we have is from the line of Andreas Hakansson from Danske Bank.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [20]

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Two follow-up questions really. On the NII, I mean we saw in the fourth quarter that finally -- that the lending volume impact was bigger than the lending margin impact, but that you had a negative deposit margin impact. But given the items you talked about with Danish negative rates, but then we also had the Swedish rate hike and ECB tiering, do you think that the deposit margin will actually turn into a positive in Q1? That's the first question.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [21]

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Thank you, Andreas. Chris, will you take that one, please.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [22]

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Andreas, as we look forward...

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [23]

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We can hardly hear you.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [24]

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Sorry. Thanks, Andreas. Yes, I think if we look forward, of course, the deposit margin this quarter -- or last quarter was impacted by the rate movements, and in particular, the deposit margin in Denmark and Finland, therefore. I think there will be some, not fully adjustments in Denmark, as Frank pointed out. So I think there's still some pressure on deposit margins there. I think we have a tailwind in Sweden, but we also have a headwind in Finland. So I would still suspect a subdued deposit margin as we go forward in Q1.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [25]

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But not the same magnitude, right, or...

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [26]

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Not the same magnitude, but it still would be a headwind.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [27]

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Sure. And then on the staff cost side. You talked about quite large FTE reductions. Could you tell us how did that develop over the quarter, and -- i.e., did -- was the impact really small in the fourth quarter in terms of costs since people were fired in the end of the year? And how much of the restructuring charge have you used by now?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [28]

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So your first question with respect to staff, I think over the year, we're broadly flattish in staff. We've reduced the Nordics somewhat. But of course, we've also hired in Poland. If you look at the quarter, the last quarter, we saw a clear reduction in net staff of 500 FTEs approximately. That was also including the fact that we hired 250 in Poland as part of that shift. We expected a lot of that...

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [29]

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Yes, but I meant when did the net reduction happen in the quarter? So -- because it didn't happen on the first day of the quarter and it rather happened towards the end since you launched the plan. So is the cost savings rather going to come through in Q1?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [30]

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So it happens throughout the -- evenly throughout the quarter. And so you will see -- if you look at large corporate institution, where a large part of that was, costs came down by 4%, but FTEs were down by 6%. So yes, you will see some of that effect coming into Q1.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [31]

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And how much of a restructuring charge have you used up by now?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [32]

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That we can't comment upon, yes, but of course, we have utilized the restructuring charges that we took in Q3 as part of this. But it is -- remember, the restructuring charge is for the whole of '20 and beyond. So that is something that we will be using continuously throughout next year.

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Operator [33]

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The next question we have is from the line of Magnus Andersson from ABG.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [34]

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If I can follow-up on Andreas' questions, just on the head count. It's, of course, encouraging to see the FTEs down by 500 quarter-on-quarter and also that is quite broad-based, both in Personal Banking, large corporate institutions and group functions. Can you say anything about what we should expect in terms of head count progression during 2020?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [35]

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Yes, I can take that. No, no, we don't guide on the number of FTEs. Of course, I understand why you're asking, but we don't do that. So we focus on the cost to income. And as we have a -- as we don't have the right balance between cost and income, and 70% of our cost base is related to people, of course, it will lead to -- unfortunately, to be towards having fewer people. And I think what we have seen in Q4 is as planned.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [36]

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Okay. But given that you took a restructuring charge of more than EUR 200 million in Q3, I guess it's fair to assume that this number should continue to decline every quarter until your plan is fulfilled, right?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [37]

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That would be fair to believe, yes.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [38]

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Yes. Okay. And then just on NII. Is there anything that prevents you from introducing negative rates in Finland, on the deposit side, like you've done in Denmark?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [39]

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We have no such plans. It is -- you can say basically, the question is relevant in 2 countries. It is Denmark and it is Finland. These are either euro countries or connected to the euro. And in Denmark, you know where we are. And in Finland, I should say that the structure, you could say, structural question, of course, it's the same, but you also need to have a market that are -- that is ready to handle the negative interest rates. And as I see it now, that is not the case at the moment.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [40]

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Okay. But it is -- I think the Finnish FSA was out saying that it would be okay before Christmas, right?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [41]

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The information I have is not showing any hinder technically to do it. But of course, the question is more complex than just using a technical approach. So at the moment, we don't have any plans to introduce negative interest rates in Finland.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [42]

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Okay. And then just on your acquisition on SG Finans. I just have a question there. Since in the press release you said you expect an income impact of EUR 140 million, but if I annualize the 9-month '19 number, I get to EUR 155 million, and they've had quite good growth historically. So what am I missing here? I'm arriving at a larger impact than you suggest. Do you expect any client runoff? Any clients to stay with SG? Or are you not buying the whole company? Or what's the reason for your estimate there relative to what they are actually reporting?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [43]

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Yes, thank you. I guess it's a positive question, so but a very relevant question. So Chris, any information around that question.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [44]

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Yes. I mean we obviously purchased them and had a discussion with them before the -- earlier in the year. And there is a little bit of crossover, but not that much. And then, of course, we hope to be able to leverage that acquisition even further as -- and their client base because we do think that they has a very good complement to our business, both geographically and technology, and also the way they do the business and how they approach credit. So in that sense, it's a good acquisition for us. And we hope to leverage it as we go forward into '21.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [45]

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Yes. But I mean, my question was really, why do you estimate the income impact to be EUR 140 million? And that's -- the acquisition will go through in Q4 2020 perhaps. So that should be 2021 or so, while they are already now making EUR 155 million and growing quite rapidly. Shouldn't that number be significantly higher?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [46]

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I think that is the number that we have used. There is a little bit of a crossover on clients and so contracts that we overlap with. So there will be some reduction. And I think that's the estimate. But of course, as we go forward, we would like to grow that business as well when it's on board.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [47]

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Okay. But you're buying the whole company. There's no carve-out or anything?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [48]

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No. Behind the Nordic business, yes.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [49]

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Yes. Okay. And finally, just a detailed question, follow-up on Robin's question on net commission income. Your lending fees remained very strong in Q4. Is that mainly remortgaging fees?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [50]

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Remortgaging was positive, as I mentioned, in Q3 and Q4. And as I said, it might become a little bit softer as we go into Q1. But it was also related to the capital markets business that we've had, that's been very strong in the second half of the year. And we -- that momentum, we have been -- we hope to continue. So it's not just mortgaging fees. It's also lending PCM.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [51]

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Okay. And just on income, so just the EUR 150 million you mentioned at the Capital Markets Day as a potential decline in what you formerly called wholesale banking because of your reduction there. Is that estimate still valid? And how should we think about it in terms of timing?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [52]

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Yes. The -- if you remember what we said in the Capital Markets Day, what our targets were for wholesale banking and what we need to improve, both our operational efficiency as well, and most importantly, our returns. And that number was part of the fact that we do need to reduce risk-weighted assets for wholesale banking. And those targets communicated in the Capital Markets Day remain the same now as well. So there's no change in that. And that timing will obviously be over the next few years to achieve those targets in '22.

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Operator [53]

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The next question we have is from the line of Sofie Peterzens from JPMorgan.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [54]

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Here is Sofie from JPMorgan. I just had a question on net interest income. Some of the -- when we look at a divisional level, most of the quarter-on-quarter improvement actually comes from group functions. And also got a new LC and I division and still you always have a higher fourth quarter NII, given that you have some bridge financing and other things. How should we think about kind of NII in the first quarter? Are there any like group functions? Should it remain at the current level of plus EUR 8 million? Or will it change? Or how should we basically think about that going forward? That's my question.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [55]

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Chris, please?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [56]

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In terms of the group functions, there were a couple of specific events, tiering -- ECB tiering came in, in November. That is actually going to be stable income that we are going to distribute, and that should be in the business areas. So that will be supportive for the business areas. Then we also had a call of some sub-debt that improved our cost of funds, which is more of a one-off. As we look forward on that line, I would expect that line to, again, be more in the negative territory, call it, EUR 0 to EUR 10 million negative. So this is a positive quarter with respect to that. But going forward, it would be more normalized.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [57]

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Okay. That's very clear. And then my second question would be on your intangibles. They increased by EUR 100 million in the quarter. Could you just explain what drove the EUR 100 million increase in intangibles this quarter? And could you also confirm that you're not taking any kind of restructuring costs through the balance sheet?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [58]

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I mean the intangibles was basically part of our continued investments in our -- both our digital platforms and our core banking platforms. So that's relatively normal. And I can confirm that. Of course, we have -- we -- on a semiannual basis, we do look at our assets, but we looked -- we had a change in our business plans, as you know, in Q3, and made a large impairment then. So I expect those to be very much more significantly smaller, if at all, going forward.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [59]

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Okay. Yes. Last question, sorry. On the credit quality, you say that it should remain broadly unchanged, that is versus loan losses, that was the previous guidance. How should we think about the kind of loan losses going forward? So when you talk about stable credit quality, should we use the fourth quarter as the base? Or should we use 2019 as a base? Or what would be a good base for kind of stable asset quality?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [60]

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Rod, do you want to take that one?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [61]

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Yes. Thanks, Sofie. The reason we moved from loan loss guidance to credit quality guidance is simply the fact that the loan losses are as low as they have been in previous years, and we expect them to continue to be low. Also small movements make big changes in percentage points. So therefore, we want to refer to the credit quality instead. Then if you're looking at the loan losses, I would like to answer it this way. If you look at our website, we have published consensus on loan losses of EUR 354 million, and that's not the number that makes us nervous.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [62]

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So you -- basically, you're saying, consensus estimates on loan losses look reasonable, do you?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [63]

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They look sensible. Yes.

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Operator [64]

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The next question we have is from the line of Jacob Kruse from Autonomous.

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Jacob Max Kruse, Autonomous Research LLP - Partner, Scandinavian Banks [65]

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So 2 questions, I guess. Firstly, on the capital side. When it comes to buybacks and the discussion there, do you need to apply with regulators? And if so, have you done that? And also, your capital policy, I thought was pretty clear if there was excess capital and no clear use for it, you would return it to shareholders. So assuming you run through this year and you don't deplete that 60 basis points on top of your management buffer upper end, should we expect that to be, almost by definition, used as a special distribution to shareholders? And then I just wanted to follow-up on Sofie's question on the credit guidance. Should we basically take this to be a change in how you want to define it rather than a change in your expectation for the outlook for credit losses?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [66]

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Can you take it, Chris, please?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [67]

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Yes, I can start with the first question. So if I -- there were 3 questions here. If I recall the first one correctly, it was regarding approvals? Yes. We do need to have approvals both from our -- from the AGM, but also from our regulators in terms of executing on buybacks. And as I mentioned also in the CMD, but also now, we will and have -- are actually having conversations throughout -- now and throughout this year on that particular topic with our regulators. And I want to be clear here. We are, of course, very happy that we have a very strong balance sheet, that gives us the opportunity to grow the business, also take other opportunities that may or may not come along. And, of course, manage the potential regulatory change that Frank talked about earlier on as well as consume SG Finans. But as we go through this, we are not in the position to hoard capital. So excess capital that we don't have these uses for, when we have clarity, we will -- we intend to use the tool of buybacks to distribute excess capital to shareholders.

And then I think the third question was loan losses. Yes, we want to point out that Phase 3 losses were actually down this quarter. So we are very comfortable with the credit quality. So it's more a way how we talk about it, given that 1 quarter to the next, 1 specific event can actually have a big percentage change. So we want to be comfortable that our underlying credit quality in our business is and remains strong.

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Operator [68]

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The next question we have is from the line of Martin Leitgeb from Goldman Sachs.

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Martin Leitgeb, Goldman Sachs Group Inc., Research Division - Analyst [69]

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First, just a follow-up on the various capital questions. And I was just thinking more broader, I would like to know how you think about capital for the bank on a kind of more medium-term perspective? Do you think, given how the balance sheet is now, that there is the right level of capital you're running the bank at? Or do you see scope for either the capital base you have to underline to that business to be the higher or lower over kind of more medium term, 3, 4, 5 years period? And then secondly, I was just keen to understand, in terms of grow ambitions, and obviously, your comments on how regaining market share, which grow areas are you most excited about at this moment in time?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [70]

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Yes, thank you for the question. So let me take the second question and start with that one. So we have 4 business areas, and the by far largest business areas in Nordea is Personal Banking and Business Banking. That is a traditional household business, and it is an SME business. And we grow -- grew last year in both business areas and actually for a very long time, since -- and that's the first time since several years of quite flat development. So we, of course, would like to continue to develop that business in line with the market growth, you can say. And I think what we see now after having struggled there some years in the mortgage business, for example, which is very important for Nordea, is that we are back in business, we have turned it around, and we are both growing and have increased the growth rate during the year in all countries, and actually is now more or less meeting our back book now. And the same goes actually for the SME market share. So at least, there is -- there you see and find our -- you can say, our -- one of -- some of our focus areas. Then of course, we have large corporate institutions, that is also a very important business area, and we want to develop that one. But of course, we want to develop the business within areas where it's profitable. So how that will play out, it's not to be seen.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [71]

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Before Chris takes the next question, in Helsinki it's 10:00 a.m. now in the morning. And unfortunately, Frank needs to leave us for interviews. But me and Chris will be here, so we continue the Q&A here. Thank you, Frank.

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [72]

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Yes. Thank you.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [73]

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So thank you, Frank. Now you mentioned -- you asked about the growth, but you also had a first question. Would you mind just repeating that question for me?

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Martin Leitgeb, Goldman Sachs Group Inc., Research Division - Analyst [74]

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Yes. I was just wondering on capital. So just kind of the medium -- I mean obviously, we're aware of the more immediate moving parts for capital requirements going forward. But I was just trying to understand what your expectation would be for the bank going forward? So would you -- do you see essentially that capital targets, the capital levels you run the bank at will stay broadly similar in terms of -- if you just think about the absolute quantum of core tier 1 capital you run the bank with? Or do you see the upward or downward pressure to that capital requirement base?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [75]

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Yes. I mean, as I said, we're happy that we have a strong balance sheet now. And then, of course, we are utilizing some of that already for SG, and then we'll see what the regulatory requirements are throughout this year. But if you look beyond that, we have a management buffer and a capital policy of 150 to 200 basis points above the requirement. And long term, of course, our intent is to be within that. And hence, that -- and then, of course, really, long term, it's very difficult to see how Basel IV plays out and so on and so forth. There's so many changing things in the regulatory landscape. But given the current capital policy, the buffer that we have, if that remains the same, we would like to remain -- be within that buffer. And hence, again, any excess capital that we don't see utilization for, we will distribute to shareholders.

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Operator [76]

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The next question we have is from the line of Chris Hartley from Redburn.

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Chris Hartley, Redburn (Europe) Limited, Research Division - Analyst [77]

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Just a quick 1 for me, actually. Just -- I was looking at your net fair value line and you used to give us a chart in your presentation that split that out between sort of customer activity and then market-making, some derivative valuations, et cetera. I couldn't see that this time around. If I have missed it, do let me know. But if not, are you able to give us a sense of how the EUR 266 million this quarter is split up amongst those categories, please?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [78]

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Yes, well spotted. I think what is -- how we see the business going forward in the net fair value line, particularly on what is very clearly customer related, and that is that it is a customer business, and we need to focus on the customers. So all the flows that we get is to support the customer franchise. And also, given recent changes in regulation, it is very difficult to what is exactly trading and what is customer. To us, it is a customer business, and that is why we want to show the customer business more in totality. Then, if you look at the various lines in this quarter, we did have some revaluations in treasury, which is -- which we've had in the previous quarter as well, which is roughly around EUR 30 million of that. I do also want to point out that we sold LR Realkredit in the back end of last quarter, which is a capital gain of EUR 138 million, and that one we've actually booked in other income lines.

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Chris Hartley, Redburn (Europe) Limited, Research Division - Analyst [79]

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Okay. And there isn't anything significant from the derivative valuations in there, is there? In either direction?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [80]

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There is a positive compared to Q3 in terms of the valuation adjustments. So there is -- there was some tailwind in this quarter on that.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [81]

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They were EUR 10 million higher compared to Q3.

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Operator [82]

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Final question we have is from Riccardo, I think it's from Mediabank -- or Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [83]

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I'm sorry, I had to connect to the call with a little bit of delay. Sorry, if someone has already asked this question. The first one is on the guidance you provide in credit losses. When I read the boarding, it sounds to me, it sounds a little bit more conservative than the previous one. But I'm not 100% sure, this is your mindset, this is the way you're thinking about it. And the second question I have is, in this set of numbers, in the quarter -- fourth quarter numbers, do you see anything that you would consider really one-off or by nature or by magnitude, let's say?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [84]

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Let me maybe comment on the first question, I think we have -- as you said, you connected late. We talked a bit about this. We've changed it to, call it -- talk about the underlying credit quality. And as you see, last quarter, actually, our Stage 3 came down somewhat, and that is because when loan losses are at this low, and you have 1 or 2 specific events that may or may not occur, which happened in Q4, so specific exposure, the percentage change is quite significant. So we are very comfortable with our underlying credit quality. And I'd also like to just highlight the consensus that we have published, and we are very comfortable with that consensus number. So there's nothing I intend to say that will change any of that outlook. And then I'm sorry, I didn't quite catch your second question.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [85]

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It was just to get an idea from you, if you think there is anything one-off in the fourth quarter results, by nature, right? Or maybe by magnitude? And not by -- let's say, not a one-off in itself, but just the magnitude of some lines could be a little bit above normal or below normality? Or what you think could be a normality level?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [86]

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See, The only real item affecting comparability, if you talk in accounting terms, is our sale of LR Realkredit at the end of last quarter, which was a gain of EUR 138 million that we have in other income lines. Then there are some smaller things that is more normal course of business that happens. But that is the main, let's call it, one-off in Q4.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [87]

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Okay, okay. No, no, no. I was mentioned -- I was thinking about except that, of course. Very clear.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [88]

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I think, Riccardo, what you can see is that, when you do your models now for 2020, the starting point on all lines are fair to start with, so to say.

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Operator [89]

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At this time, there are no further questions in the queue.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [90]

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As there are no further questions, so we conclude this call. Thank you very much for attending and asking questions. And as you know, the IR team, we are available 24/7, if you have more calls. Thank you.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [91]

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Thank you very much. Have a good day.

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Operator [92]

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Thank you, ladies and gentlemen. That concludes your call for today. We thank you for joining and ask that you disconnect your lines.