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Edited Transcript of NDASE.ST earnings conference call or presentation 24-Oct-19 6:00am GMT

Q3 2019 Nordea Bank Abp Earnings Call

Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Nordea Bank Abp earnings conference call or presentation Thursday, October 24, 2019 at 6:00:00am 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

* Jacob Max Kruse

Autonomous Research LLP - Partner, Scandinavian Banks

* Johan Ekblom

UBS Investment Bank, Research Division - Equity Research Analyst of Benelux and Nordic Banks

* Magnus Andersson

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Peter Kessiakoff

SEB, 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 presentation of the third quarter results for Nordea. We will also present the new financial targets for Nordea, which we will go through in detail at the Capital Markets Day in London tomorrow.

My name is Rodney Alfvén, and I am heading up the Investor Relations at Nordea. So today we will start with a presentation by the President and Group CEO, Mr. Frank Vang-Jensen. That will then be followed by 2 high-level questions that you can ask to him. Then there will be a Q&A session together with me and the Group CFO, Mr. Christopher Rees.

So with that, Frank, please.

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

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Thank you, Rodney, and good morning. Today we have published our Q3 results. We have also decided on our strategic priorities, updated business plans and new financial targets. These decisions have clearly impacted the result. This is the day when Nordea starts a new phase, which we will go through in our Capital Markets Day tomorrow in London.

Before getting into the details of the new financial targets I would like to start by addressing our quarterly results. In the third quarter both net interest income and net commission income increased from higher business volumes. We have encouraging signs of improving business momentum. Net fair value decreased following significant interest rate movements during the summer. Total revenue are down 2% in local currencies.

Underlying, we have delivered on our cost targets. Our underlying costs were down by 1% in local currencies. This quarter is special as we have had several one-offs. In total, these amount to EUR 1.3 billion, whereby an impairment of EUR 735 million related to the new business plan. An expense of EUR 75 million related to the divestment of shares in Luminor. And it also leads to a restructuring provision of EUR 204 million in relation to our new business plan.

The credit quality remains solid. However, after dialogues with ECB we have decided to increase provisions by a total of EUR 229 million. In addition, we have reviewed our collective provisioning models resulting in an increase of EUR 53 million in collective provisions. Underlying, we reported at cost-to-income ratio of 58% and a return of equity of 8.4% in Q3.

For a while now our financial performance has not been where it should be. We have therefore done a strategic review and we have developed a new business plan to ensure stronger results, meeting new targets. The new plan will significantly improve our operating performance. We will optimize operational efficiency with strong cost discipline. We'll find the right balance between cost and income. We will concentrate on driving growth initiatives and creating great customer experiences.

We have the readiness and we will invest in our core business. Our new phase is about execution and to retake lost ground in the markets. So our new financial targets are a return on equity above 10% in '22, a cost-to-income ratio of 50% in '22.

With regards to expectations for next year, we expect our cost base to be below EUR 4.7 billion in '20. With planned continued net cost reductions beyond that. The new capital policy from '20 is to have a management buffer of 150 to 200 basis points above the regulatory CET1 requirement, and a dividend payout ratio of 60% to 70%.

This new dividend policy in a good way should balance the [WIS] to reset the dividend-to-market expectations, including those from the regulators. The target with payout ratio is to create flexibility, to capture both organic growth opportunities as well as potential bolt-on acquisitions, like we did last summer before with Gjensidige Bank in Norway. If we have excess capital, we intend to distribute to the shareholders. We have share buybacks as a tool for this. In '19 we target a dividend of $0.40 per share.

And let me now spend time or more time focusing on the third quarter results. In the quarter we have seen improved signs of business momentum in most business areas. However, the income growth is reduced by the weak result on the net fair value, which has impacted the interest rate -- impacted by the interest rate drop during the summer. This has resulted in 2% lower income in the quarter compared to Q2. Cost is 1% lower and operating profit 2% lower than in the second quarter when excluding these one-offs.

When it comes to net interest income, the higher activity level with customers has supported volume growth and net interest income. We are improving our mortgage business. We experience to some extent margin pressure in Sweden. But overall, margins has been largely stable in the quarter. Higher volumes give a solid contribution. In total, volumes and margins are 12 million or at 12 million to the NII in the quarter. All in all, we have 2% higher net interest income compared to the second quarter.

Let me highlight the development in the mortgage market. We are now growing in all markets. The Danish market has seen very high activity in mortgage refinancing in the third quarter. And we have been capturing a larger part of that new volume. In Finland, the market has been (inaudible) for some time, but we have now had 2 quarters at a row with volume growth. We have had good volume growth in Norway. I'm also satisfied with the development in Sweden where we had strong volume recovery.

So overall, mortgage lending volumes are picking up and we are also improving our market share of new mortgages in all countries. Fee and commission income was 2% stronger compared to the second quarter. Fees in asset management, the biggest contributor in NCI, had a solid development in the quarter. The higher net inflow have had a limited impact on fee income in the quarter. In brokerage and corporate finance the third quarter is seasonally low but it was still higher than the third quarter last year. The main driver in this quarter was the strong mortgage refinancing activities in Denmark.

Overall, we see the result of the increased activity level, reflecting our efforts.

The second highlight of this quarter is our strong development in assets under management. Net inflow in the third quarter amounted to EUR 3.7 billion, which corresponds to 5% annualized growth. This means that we are back on our growth track, and in line with our long-term targets. In particular, I'm particularly happy to see inflows in all of our segments and channels.

Assets under management is now EUR 314 billion, which underlying is all-time high. Investment performance continues to be strong. And year-to-date 88% of our funds are outperforming the benchmarks.

On net fair value, market conditions were challenging in July and August, followed by a recovery in September. The result in treasury is lower compared to the strong second quarter, which was unusually high. Despite this, the net fair value was higher than in Q3 last year.

Underlying customer activity is normally a bit lower in a third quarter and it is in line with last year's third quarter results.

So let's go to the business areas as usual. In personal banking, we reported the highest quarterly profit since the third quarter of 2018. The strong trend in customer-driven activity continued in the third quarter. I don't want to repeat myself too much, but now the promising signs of mortgage sales are starting to realize step-by-step in all countries.

Lending volumes grew slightly compared to the previous quarter, and is up 4% compared to last year. In local currencies, it is up by 6%.

Customer satisfaction is key for us. And while we can see positive signs, we are moving in the right direction here. We still have to do a lot more. I cannot stress enough that growth initiatives and better customer experiences are the top of our agenda. And the key driver to create business momentum is being available for our customers.

If we move on to commercial and business banking, the underlying positive income trend was maintained in the third quarter, and operating profit was up 7% compared to same quarter last year.

Norway and Sweden are still our main growth areas. In wholesale banking, the challenging trading environment continued in the third quarter. This has been a challenging quarter for all markets operations with significant interest rate drops in July and in August, where interest rates fell even more into negative territory, impacting fair value in our markets business.

We had a good recovery in September. Meaning that the quarter results is actually a bit better than Q3 last year. On the positive side, we have a better momentum in both equity and debt capital markets. The wholesale banking result was negatively impacted by the additional loan loss provision of EUR 207 million, following the dialogue with the ECB.

Assets and wealth management continues to experience strong momentum. As I mentioned, we had net inflow off EUR 3.7 billion in the quarter. This is the third quarter in a row with positive flows. We have a leading position in assets and wealth management, with assets under management now at EUR 314 billion.

Investment performance has been exceptionally strong during '19. Year-to-date, 88% of our funds are outperforming the benchmark, demonstrating the strength of our active asset management strategy.

Let me come back to the group results. I'd like to start by costs, where we are underlying deliver on our targets. Underlying costs continued downwards compared to the previous quarter. As mentioned, there were several one-offs in the quarter on the cost side. This amounts to around EUR 1 billion.

Our underlying cost-to-income ratio in the third quarter was 58%. For '20, we expect to reach a cost base of below EUR 4.7 billion with planned continued net cost reductions beyond that.

Our solid credit quality gives us a strong foundation to build our future business. In the third quarter, underlying net loan losses amounted to EUR 49 million. So track record of loan losses, of low loan losses continued. Following the ECB dialogues we have decided to increase provisions by a total of EUR 229 million.

Additionally, we have reviewed the collective provisioning models. And this model update generates a EUR 53 million increase in collective provisions in the third quarter.

Our expectations for the coming quarters is that net loan losses will be low and around the average level of '18. However, this comes with a somewhat more uncertain macroeconomic outlook.

Common equity tier 1 in the third quarter saw positive development, and increased from 14.8% to 15.4%. The increase is partly driven by the decreased ownership in Luminor. CET1 capital was also increased by the lower accrued dividend for 2019.

The capital requirement which ECB is setting for us will not be valued until first of January 2020. So in this quarter we are still following requirements by the Swedish FSA. And for the third quarter our capital requirement is 14.3%. A CET ratio of 15.4% give us a management buffer of 110 basis points above requirement.

We have received our future capital requirements from the ECB. And our new capital policy is to have a management buffer of 150 to 200 basis points above this requirement. The dividend payout ratio will be 60% to 70%. And for 2019, we target a dividend of 40% per share.

The dividend policy has been to set -- to set to reflect -- or has been set to reflect the current environment. Our target is clear, stable and competitive dividend to our shareholders in the future, but also creating flexibility to grow our business.

So Nordea's new financial targets for '22 are a return on equity above 10%, a cost-to-income target of 50%. Our full focus is now on execution and delivering on these targets. Once that has been achieved, we decide what the next steps will be.

Our capital and dividend policy is as follows, starting in '20. Management buffer of 150 to 200 basis points above the regularly CET1 requirement; a 60% to 70% payout of profits to shareholder; excess capital is intended to be distributed to shareholders through buybacks. And as I mentioned, this also leaves room to drive growth initiatives organically and readiness for tactically bolt-on acquisitions.

With these targets we will bring the cost efficiency and the profitability to healthy levels.

Nordea is entering a new phase. It's about execution and to retake lost ground. It is our way of working and how we run the bank today and tomorrow.

In the new phase we have clear target, clear priorities. The 3 key priorities are: one, optimize operational efficiency; two, drive income growth initiatives; and three, create great customer experiences. We will return relentlessly focus on execution, follow up and make sure that the necessary actions are taken.

Thank you. And see you tomorrow at our Capital Markets Day.

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Questions and Answers

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

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Frank, thank you very much for this. So we will now open up for a few high-level strategic questions. Please remember that the financial targets we will elaborate upon tomorrow. So please focus on the third quarter and strategic questions. And the first question comes from Mr. Peter Kessiakoff from SEB. Please?

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

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First of all, I would like to ask you on the dividend, when you mentioned that you potentially could do bolt-on acquisitions similar to that of Gjensidige Bank. Is it possible to elaborate that based on what you would potentially be looking for? Any criteria? And how you view -- would view that versus buybacks when, for instance, your share price is trading 1x below book? That's my first out of 2 questions.

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

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Yes. Thank you. Good question. Our point is that now we have a dividend policy that will make us able to create a stable return for our shareholders. We will primarily focus of course on organic growth. We see do -- we do see good opportunities. We will invest and make sure that we can invest in our core segments. And it's -- the priorities, the way we choose where to invest is in the BAs, in the business areas, in the segments that lead to an improved return of what we are doing.

When we then -- or if we then see bolt-on acquisition possibilities within these segments and also of course being sure that they will add value to the bank and our shareholders, we of course are positive of looking into these and following these possibilities.

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

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But we're talking acquisitions in the Nordics, that's a main focus.

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

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Yes, that's a good point. We are a Nordic-focused bank. We have 4 business areas, 4 countries. And that is what we are dreaming about every single day.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [6]

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Then my second question, just on the IT write-downs. Could you perhaps elaborate on what that actually relates to? And how is the IT modernization program progressing? And should we read anything into the write-down today on how it progresses?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [7]

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No, I don't think so. When we this morning decided on our new business plan, our financial plan and our financial targets, it is and has led to a review of our intangibles. And the new business plan, the new financial targets lead to an acceleration to move to common platforms. And when we then do that test looking into the -- you can say the lifetime or the duration of the lifetime on the legacy systems, among lots of things, it leads to an impairment. And that is what we show today.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [8]

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Okay. So it's only solely to the old systems?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [9]

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It's for very, very, very, very large part related to the old systems. Yes.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [10]

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So we have room for one more question. So if you have that, please dial 01 on your telephone. So operator, do we have one more question?

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Operator [11]

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The next question is from Andreas Hakansson, Danske Bank.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [12]

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But I have 2 quick questions then. First one was that you talk about the new capital buffer, that was higher than previously. But could you tell us what is the requirement that we should measure that against?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [13]

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All right. I didn't get the question. I couldn't actually hear it.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [14]

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Yes, sorry. So you were talking about your new management buffer on the capital side. But could you tell us what's the capital requirement we should measure that buffer against?

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

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Yes, as we said then that the buffer is, for the time being it's a 13.4% requirement. And at the time being we are under Swedish you can say regulations. We have had the, you can say the, the feedback from ECB, and we haven't publicized that yet. But what we have decided here is a path for going forward. And we will of course come back when we have new information to inform about.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [16]

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Okay. And the second question. Could you just tell us when you take the restructuring charge? How many FTEs are you planning to reduce on the back of that?

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Frank Vang-Jensen, Nordea Bank Abp - President & Group CEO [17]

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Yes. We have not set the final figure yet. That is up to us now to decide and discuss, to get with unions. And we will then move forward in a good collaborative way as we always do in Nordea, together with our unions and our people.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [18]

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Thank you, Andreas. And thank you, Frank, for this. We will now close down this webcast. And then we will open up an audio conference for all the number crunchers together with me and our CFO, Christopher Rees. Thank you, Frank. And thank you everyone for calling in.

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Operator [19]

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(Operator Instructions)

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Rodney Alfvén, Nordea Bank Abp - Head of IR [20]

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Okay. So let's continue now with the questions. It's me and Christopher Rees here. (Operator Instructions) So operator, do we have any questions?

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Operator [21]

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Our first question is Peter Kessiakoff from SEB.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [22]

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First question again. Lucky me. Well, so just on the trading side, I mean with trading now being kind of below the guided normalized level for a while, is there anything new to say on the normalized guidance that you've given of EUR 275 million to EUR 325 million per quarter? That's my first question.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [23]

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Hi, Peter. And good morning. As we go forward, I -- we -- this is the only line that we have guided for. And now we are tomorrow going to talk about the future. And we will in that respect seize to guide as we have before. What I can do is talk about the trends. And as we go forward here in the next quarter, given where rates are and where volatility is, I would expect the trend to, what we've seen in the last few quarters to continue. So as we go looking into the future, it will be clearly lower than what we have guided for. But we will talk a bit more about that tomorrow. But as we see the trends right now, they are similar to what they have been in the last few quarters, looking ahead.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [24]

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Okay. And then on the margin side. When I look at your NII bridge, yet again the margins on the lending side continue down. And it's almost as large as the volume growth that you're seeing in the quarter. Is -- and this trend has been continuing for roughly 2 years when we for instance strip out Gjensidige Bank and acquisition. What's kind of your view there going forward in terms of how much of the volume growth that you're actually seeing will be removed by margin drifts?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [25]

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Yes. So I think we said in Q2, Peter, that the margins will still outweigh the volumes. But in this quarter we've seen volumes offset that lending margin pressure, which is I guess a -- for us a positive sign of that. We feel that the margins overall have been more stable this quarter. However, the outlook is still challenging. For example, in Sweden we saw more stable margins, but of course there is fierce competition still out there that are making price moves. So we feel this quarter has seen a sign that volumes are now starting to outpace margin, but we still have a cautious outlook on that.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [26]

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But when I look at the absolute number in terms of margin headwind that you're seeing in this quarter, do you think that that reflects what you would expect for say the coming 4 quarters or the coming year?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [27]

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I think for the next few quarters that is probably a fair assessment, Peter.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [28]

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I mean, if you split up there you have 3 components with margins. Lending margins reduces NII by EUR 9 million. And I think that's pretty fair assumption that that will continue at that pace. Then deposit margin improved NII by EUR 3 million. And that is then a lot subject to interest rate movements. And then we had a very good trend on cost of funds that improved NII by EUR 9 million in this quarter. And that is not realistic to expect to continue.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [29]

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But it is worth noting that the margins have been more stable than Q2. And the drama -- the impact of the lending margin is lower in Q2 than in -- Q3 than it was in Q2.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [30]

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Okay. And then just last question and perhaps nitty-gritty, but of the write-downs of the IT intangibles, as Frank mentioned, a vast majority relates to legacy systems. But is it possible to strip out how much relates to new systems?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [31]

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It is a very, very small part. And that is mainly because we are putting some components into use earlier than expected. This is more about the fact that we are taking -- making some strategic changes to some of the businesses. It is to what Frank said, we're accelerating moving to some of the global platforms because now actually some of them are available. For example, some of the local internet sites will -- are now being replaced with the global. And that is the main reasons for this. And we are also changing some of the governance in terms of the speed of amortization and the tenure of the amortization periods, given the development of IT in the world.

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Operator [32]

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Next question is Andreas.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [33]

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So I'm coming back to the second question as before actually, because when I read in the report you talk about the ECB SREP draft of 13%. Do we need to make further adjustment to that? Is it [P2GEU] or something? Or what should we really be expecting from the ECB later on?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [34]

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Thanks, Andreas. I think, I mean if you look at the Q3, first of all, we're still under the transition period. However, the legal requirement is now greater than the capital commitment. So our overall requirement this quarter is 14.3%. As we go forward, we have a draft SREP. So we have an expectation of the [P2R] around 1.75. And if you do the math then, we would in Q1 be around 13.1% in CET1 requirement. And that would effectively be our [MDA] level.

Then, as we look forward into 2020, you will see that there are some further increases of local counter cyclical buffers that would of course have a impact on our CET1 requirement throughout 2020 and onwards.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [35]

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But that means that already today if I take the 13.1% with today's core tier one ratio, you have a 230 bps management buffer. And then you have a slight increase in the counter cyclical buffers next year, but you're also building capital. So you're very early on going to be above the management target you're giving. Of course you can do acquisitions early. But would that mean that on top of the 60% to 70% payout you could actually start to do buy back already next year? Is that how we should actually see that? We used to be -- we saw banks talking about management buffer of let's say 100 to 200. But even if they were 300 above, there is certainly too much uncertainty. We're still not going to do anything. But is this management buffer you're talking about a real buffer? So everything above will actually be distributed?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [36]

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So the management buffer is very similar to how other SSM banks have their buffers. I -- we also have a P2G from the SSM that is part of this is buffer of course. And we will enter the SSM. The SREP will effectively come into force when we announce the final one end of this year and will come into force in the beginning of January. And then we will make sure that we continue to have a healthy buffer and the flexibility to drive our business. And we will continuously assess the possibilities for shareholder return through the buybacks. And of course that is -- will be subject to the regulatory approval. But so that is the [internal panel].

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Operator [37]

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The next question is Magnus from ABG.

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

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Just on capital, the way forward. Now you got the requirement in place. Is it still the case that we should expect the result of model approvals coming in, in late 2020. And can you give us any feeling what that might result in?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [39]

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Thank you. First of all it is, the final SREP is not in place, just to be clear on that. This is -- we are guiding for where we expected to land. And then yes, we are also working on a model development program and we will submit models in 2020. Then of course the ECB will evaluate that and revert back to us in due course. I can't specify the timing of when they will do so. But we will give the models to them next year. The impact of which is very hard to say at this point. So we can't comment on that.

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

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Okay. But it could also be in 2021 then we get the result of that (inaudible).

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [41]

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In terms of the result, it could be in '21, absolutely. We need to deliver them at '20. And then of course ECB needs to revert back to us following their processes. And that could very well be in '21.

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

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Okay, good. And then secondly, this one-off loan losses you took now related to what you say is a dialogue with ECB. Is that a yearly dialogue that can result in both positives and negatives? Or how will this work going forward?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [43]

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Yes, this particular point is effectively one as part of the comprehensive assessment. And all banks who enter into the banking union go through a comprehensive assessment. So this is, for us, the first time that we will do that.

And as part of the comprehensive assessment you do a so-called AQR. And that -- and we did it with their new manual as we're incorporating the new IFRS and their interpretation of it. And that has led us to review some specific sectors where their outlook is a little bit worse, realigning our -- aligning that outlook according to the AQR prevention methodology. So this is a one-off. We think that the credit quality that we have and actually risk that we have on the book is solid as we go forward in the other areas.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [44]

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So what is this related to? Is it possible to say anything about that? Any areas or any -- what -- or is it just a…

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [45]

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Yes. I can guide that the majority of it was related to the off-shore portfolios where some of the collateral values were reevaluated to align with the outlook that we have. And we're taking onboard the ECB AQR methodology to align to that. And hence we are making these -- taking these decisions to make these additional provisions with respect to that.

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Operator [46]

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Next question is Robin.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [47]

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Robin from Kepler Cheuvreux here. A follow-up on the Magnus' question. So the increase in the collective provision, is that also something that is to be considered as a one-off? Or is that a review that's ongoing? For example, now we had worsening macro outlook during the quarter. Could that also have an impact in next quarter?

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

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The collective provision was actually an update of some of the key parameters also taken into account. So feedback from the SSM in our collective provisioning models. It is an item affecting comparability as we go forward. And of course, so it's a model update effectively.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [49]

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And then on the capital. How much do you generate about for the capital now with the new dividend accrual, CET1 capital?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [50]

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Robin, please repeat that question.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [51]

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How much CET1 capital do you generate per quarter with the new dividend accrual?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [52]

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I mean, for this year we have so far accrued EUR 0.30 after 3 quarters, i.e. 75% of the EUR 0.40. Then next year I actually have to come back on that. It's a very good question. So I need to look how we will accrue that. But I mean we will pay out 60% to 70% of the profit. So I assume that we every quarter will accrue 70% of. That's the rules from ECB, that we need to accrue the higher part. So but I will double-check. That's my initial finding.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [53]

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It is such that 30% therefore of our distributable earnings will be retained and accrued into the CET1 ratio.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [54]

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And how much during this year, per quarter how much in CET1 capital or in terms of basis points have you generated per quarter?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [55]

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Well we have accrued EUR 0.30 so far after 3 quarters. And bear with me a second, I don't think the profit is much more than that. We have so far generated EUR 0.19 in profit. But then also you need to remember that this IT -- the write-down, the impairment charge we take of 7.35, then you have a tax shield of 24%. So that gives you some EUR 170 million in extra capital. And then we also have, given the AQR we no longer need to have a shortfall deduction of EUR 90 million. So you should add some EUR 260 million due to those 2 actions. But we have accrued EUR 0.30 and we have earned EUR 0.19 year-to-date.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [56]

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And then lastly on negative deposit rates in poor countries with negative interest rates in general, and Denmark in particular. What have you -- what's your thinking about introducing a negative deposit rate in households?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [57]

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Good question. Obviously all the countries, I mean, Norway has got positive, but the other 3 countries have got negative. (inaudible) the dynamics in the countries are different. And in certain countries we are watching the situation very, very carefully and analyzing it. At the moment, as of today, we're not charging customers for the negative rates. But we are analyzing the situation and following very carefully.

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Operator [58]

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Next question is Sofie from JPMorgan.

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

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Here is Sofie from JPMorgan. In terms of the capital impact, do you expect any impact from TRIM's?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [60]

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I'm sorry, would you mind? Repeat the question for me please.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [61]

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The ECB has a targeted review of internal models, which is called TRIM, which a number of European banks have seen quite big capital hits. And when you say big European banks, they in general select -- expect more to come on these ongoing TRIM reviews. So the question is should we expect any impact on core equity tier 1 or Nordea from the ongoing TRIM reviews?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [62]

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I mean, you could say that our transition into the banking union last year, when we did that we effectively did a mini TRIM when they reviewed our internal models. And we got this temporary acceptance of our internal models. As part of that, we are therefore reviewing and redoing some of our models to adjust to the SSM's requirement or from the Swedish regulatory requirements. And those models we are working on and we'll be delivering next year to the ECB. So effectively this whole process is, you could say, our TRIM, i.e. the regional review of our models that we need to adjust them to the SSM requirements and we are delivering them next year. So that is a part of, you could say, the TRIM exercise. But it's a specific situation given we have moved to the banking union recently.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [63]

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Okay. That's very clear. But is it fair to assume that we are not going to have (inaudible) negative surprise on core equity tier 1 next year due the AQR hit that you did this quarter?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [64]

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I think in terms of models, as I mentioned earlier, we -- when we moved into the SSM, our risk-weighted assets went up mainly because they are pillar 1 regime and we came from a pillar 2 regime. Our models that we deliver will then set the new risk weights. And I can't comment whether they are going to be positive or negative. But given that we have had a lot of significant increase in the risk weights, we hope to at least improve as we go forward.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [65]

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And in terms of the IT amortization and depreciation line, with the third quarter numbers you guided that the IT amortization will peak in 2020. But given the one-off IT costs that you took this quarter, is it fair to assume that this doesn't hold anymore? Or how should we think about IT amortization going forward?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [66]

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Sorry, the question was on 2020 did you say?

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [67]

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Yes, with the second quarter numbers you guided that IT amortization will be in 2020. So I was just wondering how we should think about IT amortization going forward? I guess given that you already took very high IT amortization costs or one-off costs this quarter, is it fair to assume that this guidance doesn't hold anymore? Or how should we think about the kind of amortization and depreciation line that you have?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [68]

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Going forward, we're going to give -- and you will hear it tomorrow in the Capital Markets Day, guidance for the forecasts of total costs, actually including the regulatory fees as well. In terms of the amortizations, over time of course we are -- we have had huge IT programs. And over time they will start coming down. This impairment that we're making is of course helpful with respect to that. But we are also shortening and changing some of the governance with respect to our capitalization. So we expect the capitalizations to go down. And some of this increasing depreciation offset this impairment as we go forward. So you can't assume that it's a one-for-one relationship here on this one.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [69]

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Okay. And one final question. In terms of the loan loss that you saw this quarter, was there anything related to [Tomaskuk]?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [70]

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We cannot comment on individual provisions. But as you see, if you take out these AQR related one-off provisions, the loan losses were very low.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [71]

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Okay. But you didn't have any large single name exposures this quarter?

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Rodney Alfvén, Nordea Bank Abp - Head of IR [72]

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No, exactly, exactly. Remember also that we are a Nordic bank, except for oil and offshore. So we are a Nordic-focused bank. And the name you referred to, to my knowledge is not Nordic.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [73]

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Yes, I know, but they had quite big operations in Scandinavia.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [74]

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Who is not in bankruptcy?

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [75]

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Yes.

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Operator [76]

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The next question is Jacob from Autonomous.

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Jacob Max Kruse, Autonomous Research LLP - Partner, Scandinavian Banks [77]

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I just had 2 questions, I guess. Firstly, I know you can't say very much about the risk-weighted asset model approvals. But do you think you will be able to provide more granular data about how your current risk-weights look and how the how the parameters look on a more granular basis? So for the commercial real estate books or things like that, so we can do our own estimates of how it might look.

And I guess my second question was just following up on this amortization discussion. Do you -- when you say you want to accelerate the amortization program, could you talk about that overall what kind of, moving from what to what? Or is that something that we will get to tomorrow?

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

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So just coming to your last question first. We -- that has not been fully gone through the relevant processes in terms of where we exactly will land given that we have just gone through the Q3 in terms of the actual systems and impairments. So we will revert back to that and then unlikely we will do that by tomorrow either. With respect to the first point, you will see in, in some of our previous reporting that we have shown the risk weights in certain classes. When we have further clarity we can have those conversations. But you referred to corporate real-estate, for example. In some aspects, given the transition, they've actually been at 100%. And that is the discussion that we have as we go forward with the SSM with respect to the models.

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Jacob Max Kruse, Autonomous Research LLP - Partner, Scandinavian Banks [79]

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I guess my question will be -- so you say it's 100%, would you be able to provide for example, the risk classes of that book in the PD and LGD parameters so that we could see what the theoretical IRB risk weight would be?

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

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We will report the relevant numbers in the pillar 3 report that we come out with every year. So I would refer to that one as we go forward.

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Operator [81]

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Our next question is from Johan, UBS.

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Johan Ekblom, UBS Investment Bank, Research Division - Equity Research Analyst of Benelux and Nordic Banks [82]

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Just 2 questions, please. In the Q2 report you stated that following the AQR you were comfortable with the level of provision. So I guess trying to understand what changed since then in your discussions with the ECB. Does this have anything to do with calendar provisioning? Or is that the potential future headwind in terms of building additional buffers? And the second question is just whether you've had any concrete discussions with ECB about buybacks? I mean I think there is few examples and no large cap banks that have really done any material buybacks under SSM supervision.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [83]

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Yes. And with respect to the AQR, I think we say also in the Q2 that we have an ongoing discussion with them going forward into the second half of the year. And this is part of that ongoing discussion. We are comfortable, as I said, with our credit outlook. Frank said the macroeconomic is a bit more uncertain as we go forward and we expect credit provisioning to be, as said, average to 2018 as we go forward. But following the discussions with the SSM and slight challenge -- subdued market outlook in certain sectors as I mentioned earlier on the call, we are reevaluating some of our -- the way they look at the collateral values in line with the AQR [prudential] methodology. And hence we make the decision to take these provisions.

But in terms of credit outlook for the rest of the book and for the overall loan loss provisions based on accounting principles, we are indeed comfortable looking going forward subject to the overall macroeconomic environment being a bit more uncertain. That was question one.

Then you had a second question, which I've now forgotten.

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Rodney Alfvén, Nordea Bank Abp - Head of IR [84]

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The buybacks.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [85]

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The buybacks.

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Johan Ekblom, UBS Investment Bank, Research Division - Equity Research Analyst of Benelux and Nordic Banks [86]

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Just whether you've had a concrete discussion around buybacks, right, it's not a tool that has been used by the larger banks in Europe under SSM supervision in the past?

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [87]

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Yes. We have had discussions about the possibility of buybacks under the SSM. But of course any buyback would be subject to their approval going forward.

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Johan Ekblom, UBS Investment Bank, Research Division - Equity Research Analyst of Benelux and Nordic Banks [88]

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But they haven't come up and said this is not a tool we like.

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Christopher Rees, Nordea Bank Abp - Group CFO, Head of Group Finance & Treasury [89]

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No. It needs to fulfill their requirement in terms of the overall capital position that they feel comfortable, but they have not said anything with respect to the tool itself.

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Operator [90]

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(Operator Instructions)

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Rodney Alfvén, Nordea Bank Abp - Head of IR [91]

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Okay. So doesn't seem to be any further questions on the call. Thank you very much for calling in and for all the questions. We would very much like to see you in London tomorrow at the Capital Markets Day. We start at 9:00 a.m. and ends with a management buffet. Not management buffer, but the management buffet at 12:30. So we're very much -- and of course please feel free to call me or Axel at any time. We will fly to London, but otherwise we are all open. Thank you very much.