Nordea Bank Abp (NRDBY) Q2 2023 Earnings Call Transcript

Nordea Bank Abp (OTCPK:NRDBY) Q2 2023 Earnings Conference Call July 17, 2023 4:00 AM ET

Company Participants

Matti Ahokas - IR

Frank Vang-Jensen - CEO

Ian Smith - CFO

Conference Call Participants

Magnus Andersson - ABG SC

Nicolas McBeath - DNB

Andreas Hakansson - Danske Bank

Namita Samtani - Barclays

Sofie Peterzens - JPMorgan

Jacob Hesslevik - SEB

Nick Davey - BNP Paribas Exane

Jens Hallen - Carnegie Investment Bank

Riccardo Rovere - Mediobanca

Matti Ahokas

Good morning, and welcome to Nordea's Second Quarter 2023 Results Presentation. Here in Helsinki, we have our CEO, Frank Vang-Jensen; our CFO, Ian Smith; and my name is Matti Ahokas, from Investor Relations. As usual, we'll start with a presentation by Frank, and after that, you will have a chance to ask questions. To ask a question, please remember to dial into the teleconference.

With those words, I'll leave the floor to our CEO, Frank Vang-Jensen.

Frank Vang-Jensen

Good morning. Today we have published our half-year and second quarter results for 2023. During the first half of the year, the geopolitical landscape has remained fragile. Moreover, macroeconomic uncertainty and persistently high inflation have put pressure on both private individuals and corporates. We have also seen turbulence in the financial markets.

In this challenging environment, banks are expected to be solid and trustworthy corporate citizens in society. Nordea is one of the most stable and profitable banks in Europe. Our role and aim are the same as always, we're here to support our customers while delivering stable and predictable financial performance. Our franchise is resilient. We are the only Nordic bank, with a very well diversified pan-Nordic business model. And we have a solid financial risk position and a strong balance sheet.

On top of that, the Nordic Region is a very stable and profitable banking market. All this gives us a unique position and makes us a safe and strong partner for customers, shareholders and broader society.

Over the past four years, we have consistently improved our performance and are pleased to report yet another strong set of results in the second quarter. We continue to drive high levels of customer activity and strong results. This led to our return on equity of 18.4%. Let me go through some other highlights in Q2.

Total income increased by 22%, mainly driven by a 40% increase in net interest income, despite significant negative effects from the weakened Norwegian, and Swedish currencies. Net fee and commission income decreased by 6%, mainly due to subdued capital markets activity and lower savings income. Net fair value result and net insurance result were up 14% and 28% respectively.

Costs are developing according to plan and the cost income ratio improved to 40% from 46%. Operating profit was up 26% year-on-year. The economic slowdown and interest rate increases have had a negative impact on business volumes, mainly on mortgages, which were stable year-on-year. Corporate lending was up 4% and continues to be the main lending growth driver of 2023.

Retail deposits grew by 1% year-on-year, and corporate deposits decreased due to seasonal effects from dividend payouts and the normalization of deposit levels in some sectors such as the energy sector. Asset under management were up 2%. All four of our divisions and all 18 of our business units delivered a good performance and positive jaws. The overall performance shows the strength of our franchise. It is evident that the backbone of our business is strong. Our credit quality remains solid with low net loan losses. Also our capital position continues to be among the best in Europe.

Building on our current performance and assessing the business development for the rest of the year, we have upgraded our outlook for the full year. We are expecting return on equity to be comfortable above 15% this year, compared with the earlier outlook of above 13%. I will get back to the target updates at the end of the presentation.

Let's now look at the second quarter results in more detail starting with the income lines. Net interest income was the main growth driver in the second quarter. The NII result reflects both the macroeconomic development and changes in customer behavior. Net interest income increased by 40% year-on-year. Monetary policy rate hikes are resulting in improved deposit margins across business areas and countries creating a tailwind for net interest income. Retail deposit grew by 1% and corporate deposits decreased by 7% year-on-year. While the deposit margins are supporting the result. It is clear that the economic slowdown and interest rate increases have had a negative impact on business volumes.

Higher living costs and lower consumer confidence have been reflected in lower demand for housing loans and investment products. Mortgage lending remained stable year-on-year. Despite the economic slowdown on corporate lending volumes have continued to grow, particularly Norway, and Sweden.

Corporate lending grew by 4% and continues to be the main lending growth driver of 2023. Lending margins have come down, mainly driven by lower mortgage margins, particular in Sweden. It is also worth noting that the weaken Norwegian and Swedish currencies had an impact of approximately €145 million on our net interest income.

Rising rates are understandable putting pressure on our customers. However, I am glad to see that our customers have in general adapted well to the new interest rate environment. We have maintained proactive support for our customers and have delivered relevant advice and services. We have also further developed our deposit offering for both retail and corporate customers.

The picture for net fee and commission income was mixed during the first half of the year. Net fee and commission income was down 6% year-on-year, payment and card income increased by 2% in local currencies year-on-year due to higher customer activity, brokerage and advisory fee income was impacted by lower customer activity in a subdued market and was flat. However, we are seeing signs of recovery in this area.

Asset management fee income slightly improved quarter-on-quarter, total net flow stood positive in Q2 with a continued strong inflow from internal channels. Also we have seen a positive development with regard to our pension offering. As such products are being prioritized in these random volatile markets.

Net fair value results were supported by continued high levels of customer activity. We continue to support our Nordic customers in meeting their financing and risk management needs in a volatile environment. FX and interest rate hedging products remained in solid demand. Market making operations were up during the quarter and Treasury result support their NFV development. Overall, net fair value result increased by 14%.

The higher inflation continues to affect our customers and society in general. Our cost increased by 7% year-on-year, as we continue to manage strong inflationary pressure, while at the same time making further additional investments. These investments are related to protecting us and our customers against financial crime, strengthening cyber-security and enhancing our technological capabilities even further. All this is in line with our plan.

In the second quarter we improved our cost to income ratio to 40% from 46%. Our risk position is strong and credit quality remains solid. Our pan-Nordic loan portfolio is well diversified and spread evenly across the Nordic region and across different sectors. This is a unique structural advantage, which enables us to avoid larger concentrations, we see no signs of stress in any parts of our portfolio. For instance, in the commercial real estate segment, we have a high quality portfolio with relatively low levels of risk exposure and no concentration in any specific country. Naturally, we're following the impact of macro developments on all our customers very closely.

In the second quarter, individual net loan losses remained low at €25 million or 3 basis points, despite the Nordic economies slowing. Overall, net loan losses and similar net result for the second quarter was €32 million or 4 basis points. The increase compared with previous quarters is explained by lower reversals rather than increasing new provisions. We have kept our management judgement buffer unchanged in local currencies, which translates to €572 million. In this way, we continue to ensure a strong reserve to cover potential future loan losses in the continued uncertain environment.

Our capital position is among the best in Europe, and we continue to deliver market leading returns for our shareholders. Our CET1 ratio increased to 16% from 15.7% during the quarter, this is a fourth -- this is 4 percentage points higher than the current regulatory requirement. Our capital position demonstrates our strong capacities to support customers and society. We also remain focused on capital excellency, in accordance with our strategy. As a part of this, we launched our fourth share buyback program of €1 billion at the end of April.

Let's now move on to our business area results. During first half of the year, in all our divisions income grew faster than costs and our aim is to continue to deliver positive jobs. And personal banking we grew our business volumes in line with the market and continue to build strong digital relationships with our customers. We are clearly being impacted by the economic slowdown and rate increases, mainly in terms of mortgage business volumes. Mortgage volume growth followed the slowing housing market.

Total lending volumes were stable in local currencies year-on-year, while deposit volumes increased by 1% due to savings deposit growth across the countries. Customer investment activity and demand for new loan promises remained lower than a year ago. We continue to see increased interest in deposits and further expanded our deposit product offering across the markets.

For example, customers in Sweden can now make recurring transfers into both savings deposits and investment funds through the retail channels. Meeting activity and traffic to our customer advisors remained at higher levels, driven by high customer demand for advice related to personal finances. Digital customer activity further increased, with private mobile app users up 7%, and logins up 9% year-on-year. In Sweden, we draw a 21% year-on-year increase in digitally generated leads for markets and savings advisors, supporting our continued market share growth.

By consistently adding new products and services and increasing our use of data analytics and automation, we have attracted 1.2 billion logins to our mobile bank in the past year alone. We also continue to expand our sustainability product offering the ESG share of gross inflows into funds remained high at 31%. Total income was up 29% driven by strong NII growth. Return on capital at risk improved to 27%, and the cost to income ratio improved to 45% from 51%.

In business banking, we maintained the solid business momentum and continue to grow our volumes. Total income was up 25%, lending volumes increased by 4% in local currencies year-on-year, we grew our SME lending volumes especially in Norway and Sweden. This clearly demonstrates our relevance and strengthened position in the SME segment across the Nordics.

Net interest income was up 41%, driven by lending volumes and higher deposit margins. The quality of the loan book is sound. Net loan losses of €37 million were driven by a small number of customers mainly in the construction and retail sectors. Customer satisfaction improved during the quarter, we increased our proactive support for customers to help them tackle their current macroeconomic challenges, to support our aim to be the leading digital bank for SMEs. We continue to develop the Nordea business net bank and mobile app.

The digital customer experience is getting a positive response from our customers. For example, customer feedback on the net bank improved and mobile bank ratings average above 4.4 out of 5 for the quarter. We are committed to accelerating the transition to a more sustainable economy. In May, we introduced the new sustainability guarantee which makes it easier for customers to obtain financing for sustainable investments, such as solar panels and energy renovations. Return on capital at risk and business banking increased to 23% compared with 19% a year ago, and the cost to income ratio improved to 37% from 43%.

In large corporate and institutions, we made further progress with our strategy execution. We grew lending volumes by 3% year-on-year, excluding FX impacts. We are seeing solid demand for credit among large corporate customers and with our strong balance sheet we are able to meet the demand. The positive return to more normal levels following the dividend season and the exceptional events in the first quarter. And debt capital markets, the activity level normalized but in equity, capital markets and mergers and acquisitions, the uncertainty remains. However, activity levels somewhat improved and our deal pipeline strengthened during the quarter.

Credit quality continued to be very strong, and we saw net reversals during the quarter. Global Finance Magazine named us the best bank for sustainable finance in Denmark, in Finland and in Norway. We remain a leading platform for sustainable advisory services and are on track to facilitate €200 billion in sustainable financing by '25. Return on capital at risk increased to 19% in the quarter.

In asset and wealth management, we were able to remain on the growth track even in challenging markets. Total income was up 14% year-on-year. We maintain strong momentum in private banking and continue to support our customers with high quality investment advice. In line with our growth plans, we attracted further new customers and secured positive net flows of €1.8 billion.

In life and pension we continued to execute our growth plans, gross written premium in the quarter amounted to €2.2 billion up from 1 €.4 billion a year ago. The strength of our franchise is visible, and the positive net flows of €2.6 billion from our internal channels. Asset under management were up 2% year-on-year. The net total inflow was also slightly positive during the quarter. Our long standing focus on ESG was recognized by the 2023 Responsible Investment Brand Index, which awarded us a top ranking in the Nordics.

To support our strategic objective to be a digital leader, we launched several enhanced functionalities for savings and investments in the mobile app. We also introduced features to facility closer customer advisor interaction and reduced time to market. Return on capital at risk was 60% and the cost to income ratio improved to 39% from 40%.

To sum up, the first half of the year has been strong for Nordea. The second quarter was actually the 10th quarter in a row for which we are able to grow our analyzed operating profit. Since we launched the repositioning of the bank in 2019, we have consistently improved our business performance in different economic circumstances. We have established a new sustainable, higher level of profitability, and are now among the best performing banks in Europe. And let me emphasize that all our four business areas across the countries are performing very well, and contributing to the strong group result.

With a unique business mix, we are running 18 well performing business units, and we will continue to improve on this journey. Our pan-Nordic business model is resilient, and enable us to support and advise our customers and perform well in the current macroeconomic uncertainty and volatile financial markets. Our assessment is that we will continue in this direction during the second half of the year.

To reflect this, we have upgraded our outlook for the full year, we expect return on equity to be comfortable above 15% in 2023. In addition, we are reassessing our long-term financial target for 2025, we will provide a target update in connection with the release of our fourth quarter report.

Building a successful business is a marten rather than a sprint. That is also our mindset. We are happy with the progress made so far. But at the same time, we are consistently striving to improve our performance further. We remain committed to delivering the best omnichannel customer experience, driving focused and profitable growth, improving operational and capital efficiency and maintaining positive jobs. Most importantly, we aim for nothing less than to serve our customers to the best of our ability and be the preferred partner for them, now and in the future. Thank you.

Matti Ahokas

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

Question-and-Answer Session

Operator

[Operator Instructions]. The next question comes from Magnus Anderson from ABG SC. Please go ahead.

Magnus Andersson

Yes, good morning. First of all, on NII. Since you are the only truly pan-Nordic bank, if you could tell us about the main differences now between the underlying NII dynamics in between the Nordic countries, primarily thinking about lending margins, deposit margins, but also perhaps migration from transaction to savings accounts and how you're thinking about paying a deposit rate on transaction accounts in Sweden? That's the first one.

Frank Vang-Jensen

All right. Hi, Magnus, this is Frank. Thank you for the question. So of course, a bit difficult to exactly say how is will play out, but at least some flavor. So looking at the mortgage markets, which of course is a big driver, Denmark stable, Norway quite stable, Finland a bit a bit down, but we are holding up and don't see any reasons for why that should not happen also in the future, and quite much pressure on the Swedish market. Total, it will lead to a pressure somewhat down on the mortgage margins.

When it comes to corporate lending, there's no big signs of any sort of deterioration of the market -- of the margins. And I should say that goes for all four countries. But of course, at the end of the day depends about how much growth there is in the market. And the tendency always, if you see, growth of a certain size, then it will support margins, if you really start to see very slow growth, then the competition will increase even further and price will be a pyrometer. But there are no such signs at the moment.

On deposit side, it's -- so I think, all people, corporate, societies are now starting -- or starting, they are adjusting to positive rates, and we all are learning to live with new rates. And that goes also on sort of like how to get the right offering in place, but also as customers, how you sort of like use our offering that we offer the customers. And the trend is that the use of savings account and time deposit is increasing, leading to a lower share of amount being on the -- or share being on the deposit or the transaction account.

And then where that will sort of we'll find this balance is difficult to say there will always be a significant amount on transactional accounts as it's very small numbers for the individual. It's very low, it doesn't mean anything. But of course, when you have seven, seven million customers, it will of course add on. So I should say, that's where it is, if you add it all together, and then would ask the question, what would that mean to the NII? I would say, that is very difficult to say. But it might be that it's still we'll come up a bit, but very difficult to say.

Magnus Andersson

Okay, thank you, if I might follow up, you mentioned Swedish mortgages, where obviously, we see quite fierce, competitive pressure on the three-month margin, in particular. Do you think it will be possible to increase that margin by lowering the discount because it's pretty close to record high levels from a historic perspective? And secondly, just if you could update us again, on what share you have on transaction accounts now in your personal banking and business banking operations, so that we can compare it to Q1? Thanks.

Frank Vang-Jensen

Take the first one on the mortgage markets. You can always reduce sort of that discounts, the problem is why that is then you also sends a clear signal and you will defend something but it will be -- you will be losing market share or share over time. What happens now is we have seen this so many times before. So the market is quite compressed when it comes to pricing, that's for sure. And the growth is very slow in the markets and we have chosen to be as active as we have been all the time, we're not using price as a lever, we are having a sort of cake, a little bit above average market price I should say, but still we are gaining market share. So the recipe works. And as it is a commodity to some extent, then we -- our intention is just to keep up going. And then over time when the growth in the market will slowly start to come back, the prices will adjust. But it might take some time.

Magnus Andersson

And transaction accounts in Sweden, are clients asking for it because I haven't seen you introducing a rate on those, at least not yet?

Frank Vang-Jensen

So that -- if we start with the offering, the key question is, do banks and we -- as we are talking about, do we have an offering that is attractive to our clients? And the answer is clearly yes. So if you're choosing a savings account without any sort of binding, you will probably get 1% to 2% interest rate on your deposit. If you take it with three months, three months, sort of like binding, you'll get it about 3.5%. And if you take 12 months, it's probably around 3.9 something in that area. So you get a very, very good offering. And that is what we tell our customers and we asked them to do.

And then what is left on the on the transaction accounts is actually quite limited and for most people, it means absolutely nothing, whether that were an interest rates are not on that account. And our opinion is that you know, there are so many costs related to having a transaction account. And the alternatives would to be starting to get paid for the account as such. Remember, we have 3,000 people working with nothing else and transaction monitoring, for example. And that of course brings a lot of costs, just an example. So I don't think -- it's very clear that the customers are not asking for it, the customers are asking for alternatives that will enable them to have a good return, which we have.

Over to you Ian, please.

Ian Smith

Yes, hi, Magnus. So you asked about the proportion on savings versus transaction. On average across our markets, it's around about 60% on savings deposits, varies from country to country. A higher proportion of savings accounts in Sweden and Norway, versus Finland and Denmark. And in terms of how that's moved over the last 12 months or so, probably a couple of percentage points tilted in favor of savings accounts, which is understandable, given as Frank just outlined the quality of the products on offer.

Magnus Andersson

Okay, thank you. And just the second on asset quality. I mean, if you assume that there would be a severe recession or a significantly larger downturn that currently is in the consensus expectations, just, where do you think loan losses would come from, because when I look at your slide 20, it looks like this -- like the CRE segments should be quite resilient?

Ian Smith

Even I agree, so it's clearly not the household side. And then of course, there will be sort of like individual corporates that will be exposed, I should say, within different sectors. Right now, it's a construction sector that is getting a little bit headwind here, and also some of the retail, but we don't see no stress in our portfolio at all. So when it comes to the commercial real estate, we could take that, we meet it as we touched it. So we have a very small portfolio. And I think that there is a lot of like confusion and sort of like in the market about it. In general, how big the different banks are.

Our portfolio is a very well diversified pan-Nordic portfolio. Of our total group lending €24 billion is for commercial real estate that corresponds to less than 8% of the total group lending. Looking at the Swedish share, then it corresponds to roughly and a bit less than €8 billion and that translates to 2% of our group lending. So 2% of our group lending is to Swedish commercial real estate. So it's very small numbers compared to some of our peers and also compared to our size.

I'm not concerned in any way of the exposure we have within the Swedish commercial real estate. And we do see no stress within our sort of like own portfolio right now. So of course, that will probably come some credit losses over time, as it always will. But it's nothing that can shake us in any way. That's for sure.

Magnus Andersson

Okay, and what would be the trigger to utilize, you have 572 million of management overlay and you mentioned construction that's less than 3% of your portfolio. So, how should we think about loan loss? They're close to zero now and moving into 2023 if you -- '24, if you look at the consensus GDP scenario, mean where should your net loan loss should it be -- net loan losses really with the huge reserve you already have in place?

Frank Vang-Jensen

So I think just having learned from the past, right, and the different sort of like, economic cycles, then you will always face progressions and sometimes also realize loan losses, and it will come from different angles. It could come from sort of like all sectors and we just need to be prepare for that. And I think we are well prepared I should say, we have a management buffer of €570 million.

And then this quarter actually it is not sort of like we have a bit higher, very small but a bit higher than previous great losses. And that is not due to higher gross losses, so that is due to lower reversals. So, I think what is happening now is that it becomes more difficult to sort of like solve the weak cases, the commodities are difficult to sort of like find a new home for them, find a new bank. And that's probably going to continue to be the case for at least some quarters into the future. And let's see what will happen. But I'm quite sure that we will start to see more credit losses in general in the banking industry. But there's no signs of something very dramatic happening. That's for sure. But to get a bit higher number would be just very natural.

Magnus Andersson

Okay, thank you very much.

Ian Smith

Magnus, just a follow-up, in terms of you highlighted, the conservative management judgment buffer that we carry. Those are really, I mean, in the same, I guess there's an analogy to how we talked about it with COVID, which was where we would either expect to see losses come through, and we would deploy that against that buffer against those losses. Or if we didn't see them coming through, we would release and I think we're in similar position now. We do a number of stress tests that look at where, where things might turn out, if the world gets a little bit worse, we're very comfortable that we can handle the impact of those stresses with that buffer.

Magnus Andersson

Clear. Thank you. Thanks.

Operator

The next question comes from Nicolas McBeath from DNB. Please go ahead.

Nicolas McBeath

Good morning. So a couple questions on costs. So we see that cost growth is accelerating a bit on the FTEs, or I think 7% year-on-year. So could you say something about if you expect FTE to keep increasing at a similar pace over the next few quarters? And more broadly, if you view the improved revenue conditions, as having changed your kind of costs budgeting, if you're willing to accept new projects and investments to a greater extent into the likes of tech and risk, as you mentioned, this will cost drivers in Q2?

Ian Smith

Hi, Nicolas. So yes, you do see higher than historical cost growth. But partly, that's because we're comparing with a lower run rate in the previous year. As you know, towards the end of last year, we stepped up our investment in IT and risk management. Our Q4 forecasts in 2022 were higher than you'd seen before. So, that sort of accelerated growth you saw in the first half of this year will iron out over the course of the full year. The -- so we remain committed to our guidance for the year of around 5% cost growth.

In terms of FTE increases, there's two sources there. The first is, as I said, our investments in IT and risk management, means that we've hired people and certainly on the risk management side in the area of financial crime, where we have to respond very quickly to changes in rules. The way we have to do that is to hire people, in order to undertake more transaction monitoring before we can systematize or automate anything there. I would say that we got quite far ahead in the hiring cycle over the last few quarters. And so you shouldn't expect to see substantial increases in FTE from here.

In addition, one of the drivers of the FTE increase was the acquisition of Topdanmark that brought in around 400 people. But the key message you should take away is we don't expect to see big step ups in FTE from here.

And then in terms of the revenue environment being, I guess, more enabling of further investment. I think it's still quite delicate. I mean, our culture here we've said quite often is that it's a low -- it's a very high bar to spend money. That continues, I think in some of our areas, we -- as I said in terms of things like IT, risk management, and new product development, we are investing, but I think we're quite cautious because is the uncertainty going forward.

Nicolas McBeath

Okay, thank you. And then another question related to cost, if you have any update to provide on when you expect to stop paying the resolution fund fee?

Ian Smith

So we've had a clear expectation that the 2024 resolution fund fee should be lower. Where that ends up I think is, were in the hands of the authorities, nothing to suggest that we won't see a reduction next year. And I'm hoping that given that they have made good progress on filling the resolution fund, that it should be a good dealer next year.

Nicolas McBeath

Okay, thank you. That's all for me.

Operator

The next question comes from Andreas Hakansson from Danske Bank. Please go ahead.

Andreas Hakansson

Good morning, everyone. And back a little bit to the NII and to the now famous, Slide 17, you talking now about the hedge, which is interesting. And you showed the sensitivity in the coming years. And I'm just wondering, could you tell us a little bit more about the hedge impact? I mean, we've seen now rates go from minus 50 to 350, so you have a lot of tailwind going into the next couple of years. So could you tell us in a way, what's the cumulated impact that we should see from the hedge over the next couple of years? We'll start with that.

Frank Vang-Jensen

Good morning, Andreas. So what we tried to do with our disclosures now is give a sense of the combined impact if you like when we see rate increases -- as principal rate increases, I guess it should also work in the other direction. So what we've given this time, as you see is, first of all the dampening effect of the deposit hedge we have in place as rates rise. And then there are two components. And what we're trying to show here is that there is a sort of an enduring effect, I guess, from these interest rate dynamics in NII, rather than there being a cliff edge. So the first piece that we show is that, we do have in our loan book, loans that that reprice on a three, six and 12-month basis. And so we see a spillover of NII improvement in the year following because of those effects.

And then, as you point out, as we then start to rollover our hedges, as we do every month with higher priced hedges, the dampening effect reverses and so what we see in the second subsequent year after the rate increase, is the benefit of those higher hedges coming -- those higher rated hedges coming on street. So there's a couple of dynamics at play there and we're trying to be helpful in just explaining almost like the sort of roll through effects after the immediate impact of a rate rise.

Andreas Hakansson

That's interesting. And I was listening to the Morgan call the other day, and Jamie was sounded like the net investing community was going to be a complimentary percent material significant significantly lower in in a couple of years out compared to today. Could you -- what's the outlook when you look at the NII, let's say 2025, compared to 2023, roughly, of course, not an exact guidance?

Frank Vang-Jensen

So as we see rates plateau and then start to fall, which I think is the general expectation, I think just where the markets been struggling to predict is, is the timing of that, we should expect to see something like that. But of course, a bank like Nordea, that undertakes deposit hedging, will see the impact of those lower rates softened I guess, because of the benefit of the hedges. So I suspect that general pattern is reasonable to expect. But we'll see a bit of underpinning from the hedge impact, the others that don't hedge won't benefit from.

Andreas Hakansson

Thanks for that. And then your question on Norway. We know that there's another Nordic banks, they said, they’re going to sell its Norwegian retail business. And I think, Frank in the past, you've been saying that rate to Norway is something that you could be interested in adding to, have you looked at what's for sale at the moment. Did you have any comments on that?

Frank Vang-Jensen

Not more than -- that we have a good franchise, a strong franchise in Norway, and our main focus is growing organically. But of course, if a target is for sale and the price is reasonable and we feel that it will fit well, then we of course are interested in looking into it. But no further comments and nothing to the concrete target that you're talking about.

Andreas Hakansson

Fair enough. Thanks. That's it for me.

Operator

The next question comes from Namita Samtani from Barclays. Please go ahead.

Namita Samtani

Good morning, and thanks for taking my questions. I've got three please. On the NII sensitivity on page 17, which is deposit hedge, why do you increase the size of the deposit hedge now if you're expecting rate cuts in 2024? Or is that not possible? And is it safe to assume the hedge is sort of invested in five years at swaps?

Secondly, how does the LTV on real estate management lending stay flat up 53% over the year, we can see companies such as Antra [ph] and Castellum, which you lend to, speaking about valuation declines of around 8.5% and 10% in that portfolio since peak levels. So is there some sort of time lag effect for the LTV here? And lastly, just on the fees and commissions? I find it a tiny bit disappointing this quarter, especially related to asset management, like net flows were flat quarter-on-quarter, granted driven by wholesale distribution. But are we going to see any improvement here? Or is the lack of influence the new normal now? Thanks.

Frank Vang-Jensen

Should I take the last question first, and Ian then you can take all the other ones please? So as the management, I actually think we have a strong quarter on inflow within the internal channels. And that is a main source of ours as you know, I think it was €2.8 billion in the quarter. That is not bad. We like it to be higher of course, but it's clearly progressing. So that's one.

Where we are struggling is within as you said wholesale. That's a -- the business that is external to Nordea that goes to other banks and similar partners outside the Nordics primarily, and the reason for why we have an outflow here is that we have had for six years or something like that, a quite big product with this low duration cover bonds. And that has been attractive as we had no interest rates and even negative interest rates in the environment.

Now, the investors have plenty of options to park the money on deposits and whatnot. So that's why we have -- that's the main reason for the outflow. So what it's about is that the guys are coming up with new products that can fuel sort of like growth. And of course, we would like to do so and are working on it. But the core business of ours, which is internal channels is actually looking, we're looking quite good when it comes to the progress.

Over to you, Ian.

Ian Smith

So, on the NII sensitivity. Hi, Namita, sorry, I should say good morning. On the NII sensitivity, I mean, we look at a number of things when you try to estimate behaviors in something like the deposits, and we then make a judgment about duration on hedging. And I think we prefer to focus on what we think that the duration is manage the scope of it, rather than be opportunistic in expanding the scope and scale of it.

So we have tweaked it a little bit over the last couple of quarters. But it isn't a sort of key area of focus for us. We think it's important to track the behavior of the customers there, rather than thinking about being opportunistic, as I say. And in terms of what it's invested in. It's a range of durations from three to seven years, the average is a bit over three, because that reflects the risk in the portfolio.

With the LTV flat point, I understand intuitively you would think that you would expect to see those LTVs increase. There's a bunch of different things in the portfolio. The average changes slowly because of those different moving parts. But we update each of the components quite regularly. And I think it just shows the diversification in the portfolio.

Namita Samtani

That's helpful. Thanks very much.

Operator

The next question comes from Sofie Peterzens from JPMorgan. Please go ahead.

Sofie Peterzens

Yes. Hi, here is Sofie, from JPMorgan. So, just a follow up on the hedging, please. Would you be able to just share with us what the size of your hedges and also kind of what the price book yields on this book is? And then also if everything is invested in euros?

And then my second question would be on the LCI deposits, they fell 21% quarter-on-quarter. You said it was dividends and some exceptional items in Q1. But it looks quite broad based across the countries apart from Sweden, if you could just elaborate a little bit more here. And then got of just a follow-up question on the CRE. You mentioned that 2% of your CRE book is got off there is high risk customers. How do you define high risk whether junk created going to avoid to be defined as high risk or really be defined as low risk or something medium risk? So if you could just elaborate on how you define high risk?

And then just very quick final question, what if your Nordic CREs had some FX mortgagees given that you have operations in Poland in the past? Could you just confirm that you have no FX mortgages in Poland? Thank you.

Frank Vang-Jensen

Thanks, Sophie. And good morning. That's a big list you've got there. So the easy one first, nothing in Poland. On NII, we've tried to be helpful with disclosure particularly around how it impacts around the hedge particularly how it impacts the broader NII dynamics. I'm not going to give any more than we have at the moment here, so I'm afraid I can't be more helpful to you there.

LC&I deposits, I think we need to take a bit of a step back and what we've seen in large corporate businesses over the last few quarters, we saw some quite strong, unusually strong growth in LC&I deposits, and that came particularly in Q3 and Q4 last year from companies in the energy sector. And it's a combination of both those companies being more profitable, but also building stocks of liquidity. And what we're seeing now is that normalize. So we've seen large energy companies have to meet big tax bills and pay large dividends, for example.

And so that is part of the dynamic that we see particularly moving from Q1 into Q2, as those payments have been made, and so nothing more than the, I suppose the reversal of what we saw in the second half of last year, and certainly nothing that indicates a secular trend. They are always at the margin, some large corporates that are very price sensitive, and we do see some things move in and out with those large European Corporates, depending on where the treasurer is able to get best pricing. And, you know, that sometimes come into play. But the main impact here is, is those energy companies and the reduction in deposits from them. And on a sort of broad basis, the LC&I deposit base is pretty stable.

Ian Smith

Yes. And just to add, we could we could increase it tomorrow with one that is just a price issue. There's so much money out there that that floats around. It's just a matter if you want to pay for it or not.

Frank Vang-Jensen

And your question on the definition of high risk, we'll get investor relations to clarify that afterwards. So.

Sofie Peterzens

Okay, thank you. And could I just then ask one more question. You mentioned earlier that you have got a little bit more transaction accounts in Finland and Denmark compared to Sweden and Norway. In Finland, it seems that you're still paying very little in general on kind of saving on term deposit accounts. How do you see the competitive environment for potentially more competition on the deposit side in Finland? Or do you think it will be more benign in Finland compared to the other countries. I think you only have the 2.4% flexible savings or term deposit that you're offering, the number that you see that the rate in Finland are pretty low on the deposit account. So if you could just elaborate, please?

Frank Vang-Jensen

All the contracts, as you said are different sort of like in practices, in sort of also how much is other customers distributing through our investment products and how much is on the savings account and then that of course also leads to how much is on the transaction account. In Finland, we are competitive and the product that you mentioned, the savings product is one of the blockbusters, and we have good position, I should say, and there is nothing that as of now looks as it should change in Finland. But of course, we are following very carefully and thinking about cost and thinking about sort of like the market competition.

Sofie Peterzens

Great, that's very helpful. Thank you

Operator

The next question comes from Jacob Hesslevik from SEB. Please go ahead.

Jacob Hesslevik

Yes. Hi, good morning. And thank you. I have a question on CRE lending as well. I mean, you have very low exposure and freedom, as you mentioned before, but I mean, what is your view here? Do you want to grow it? I mean, Nordea has ample capacity to take market shares in this market? Or are you more just helping your existing customers?

Frank Vang-Jensen

I should -- hi, it's Frank. The latter I should say. So of course, as you say, we have a very low share, first of all of CRE in the total group lending, that's for sure. And I think that sometimes forget that. And that is a strategic choice. And then secondly, when it comes to sort of like the Swedish market with is have, there's a lot of talks about Swedish market right now, we have very limited size. So if we would, we could increase and probably also without increasing the risk -- the average risk of the bank.

We don't have such intentions. But we of course want to help our customers, as long as it’s not too risky. And, and we can get a get comfortable about the sort of like the stickiness of the cash flow. And it's all about cash flow lending we are doing and then with some patching there in the property within a low LTV, and there will be business opportunities, but it's not sort of like a tactical area, it's more like to support our customers.

And we have done some over the last, the last couple of quarters where we've had some really high quality companies come to us. And we've been able to help them out. And it's been good business for us. So, yes.

Jacob Hesslevik

That sounds good. And just a follow-up. I mean, you're saying you want to help your existing customers, but I was just wondering how many good properties are still out there that you're comfortable to take collateral in?

Frank Vang-Jensen

But it's not about the property to be honest, it's about the company, it's about how it's run, it's about the contracts, it's about the sort of like the comfort and the stickiness of the cash flow from the company. And then of course, at the end of day, we will have to ensure that we have a property that if it should go wrong one day, then we would have a very nice property that just could very easily find a new home. That's the way we think.

And there, you know, in all crisis, and if we consider we are having some sort of crisis right now in the economies around the world, then the properties will shift hand. So wealth will shift hand in this sort of crisis and commercial real estate is always playing a role.

And I think that's what you're seeing in Sweden right now. They're well run companies that are -- and there are companies that are a little bit too leveraged. And there are companies that has had holding companies, that are way too leveraged, and then there are companies that have way too much dependency on the bond market. But that just changed the fact that there are still well run companies with fine properties in which you could take a pledge and then have a very low risk. And when we sort of like have customers having these and they want to expand with us, then we will have a positive view. But we are not going to change or increase the risk level of the bank for sure.

Jacob Hesslevik

Alright, that sounds very comforting. One may -- one last question, if I may. You mentioned you will come back with updated targets in connection with the Q4 report, should we expect the same metrics but a higher guidance or can say anything about adding or removing certain targets?

Frank Vang-Jensen

So, Jacob, we've got one target for 2025, which currently is ROE above 13%. So that's what we'll upgrade. Now, of course, we'll explain what contributes to that. But that's the target that we're going to revisit.

Jacob Hesslevik

Yes, but we should not expect you to add a cost income target anything else for 2025?

Frank Vang-Jensen

That would be more support factor as we have as of now, and we probably will look into that as well, but the target is return on equity, and that return on equity in our view consolidate is all. And here, we just have to remember that we have established ourselves on a quite much higher level of profitability wise, and we were back in the days in Nordea, and that's why we also feel comfortable about increasing the '23 full year target. And basically stating that we expect to be comfortable above 15%.

And then at the end of the day, we want to be best in Europe, including the Nordics, and when we set the target for the coming period, we will have that in mind. But no further comments at the moment. We'll come back to that, if that's okay with you.

Jacob Hesslevik

Of course, thank you so much for taking my questions.

Operator

The next question comes from Nick Davey from Exane. Please go ahead.

Nick Davey

Good morning, everyone. Two questions, please. We've covered both topics. But if we just come back on CRE, I understand the fascination with Swedish CRE risk. But just looking at your slide 20 and excluding things happening sort of outside of your bank, if you just look at your own loan book, is your Swedish CRE book, any higher risk than the other Nordic geographies? And if so, it's obviously not clear in LTV or interest coverage, multiple terms. So what is it that makes it higher risk, is it interconnectedness, or debt bond finance reliance? Just any other color on that will be helpful.

And then second question on NII. Going back to this famous Slide 17. I'm struggling to reconcile kind of the top half of the slide with the bottom half. And then the bottom half is seems to be saying that pretty much Q2 is the run rate for 2023. I mean, that gets me off the top end of the 2023 guidance, and gets me pretty close to the 2024 range. So the bottom half slide seems to say let's take Q2 as the run rate.

But when I listen to you talk about the kind of fixed part of the loan book, or what's implied by the top half of the slides there has lot of these swaps underwater would imply to me that there's quite a lot of the asset side which will yield more.

So how do I connect the two? Are you allowing something to get quite a lot worse here in terms of deposit mix, deposit pricing? Is it conservatism? If you can just help me to kind of connect the two that will be helpful. Thank you.

Frank Vang-Jensen

Sure. Good morning, Nick. So on Swedish commercial real estate. So as you say that the metrics that we that we display a relatively consistent between markets, but what I think has been a particular feature of Sweden has been the use of bond markets to finance substantial commercial real estate activity. And then the closure of those bond markets that has led to principally refinancing risk rather than anything in relation to the quality of the property or occupancy rates or anything like that. And I think that's where some of the concern and commentary has come from.

And I think that's a distinguishing feature where we've seen, for example, strong real estate markets in Norway, those has been funded through the banks rather than looking to bond market. So I think that's where the key distinction comes as refinancing risk. And then what real estate operators have had to do is, addressed that either through asset sales or rescheduling debt or those kinds of things. So I think that's the key focus in Sweden.

On NII. The bottom left of Slide 17. First of all, is focused purely on the impact of policy rates. And as you know, there's a whole bunch of other things that come into play in terms of asset pricing, and volumes and funding costs and those things that can then impact the NII outcome. And certainly, in terms of how we look at it now versus how we looked at it a quarter ago, because there are a couple of little changes in there.

The rate path expectation is -- has improved for or has increased, I guess, for Norway and Sweden, towards the end of this year. So, that the 2023 impact of expected higher rates, isn't coming through in a particular upgrade on the 2023 numbers. So I think that there's -- we can't give every piece of the jigsaw here. So that's part of the uncertainty. And as we change the rate expectations, really the impact is not that much into 2023, and a bit more into '24. So I hope that helps.

Nick Davey

It does. Thanks. I just got a quick follow up on, I take the point about the refinancing risk of the bond financed part of the Swedish CRE system. But if I look at your, the leverage of your counterparts, as represented by LTV doesn't seem that that different. So I understand what's sort of fueling the frenzy of the market debates. But I'll come back to your own loan book and ask the question, whether you're Swedish CRE counterparts are more leveraged via bond market financing then the other Nordic geographies in which you operate?

Ian Smith

I can answer. I don't think so. So I think So the funny -- the interesting part, it's not funny, it's interesting that, when you when you look at sort of like the problems or the perceived problems in the Swedish commercial real estate market, then I think we tend to forget that, in general, the commercial real estate companies in Sweden, in my opinion, is well run. And then there are some outliers, and some outliers that has not too much leverage that has to gotten too much dependent on the bond market, and also have a leveraged sort of like the holding company. And that is a bad combination.

When it comes to the more general concern on commercial real estate, that's not a Swedish issue, that's a global issue. Try to look sort of like from one of the skyscrapers in U.S., or New York, and look at sort of like how much there are is, there isn't in all the -- or not in the different towers, that goes for London as well. And I should say there we actually are in a better position, and in Nordics as we don't have these big distances through the main cities. So I would say that, that's not a Swedish issue that is a global issue. So this is about refinancing and dependency on bond market. And then it is about a handful or so that has become way too leveraged, and also have leveraged the holding company. And that's a bad combination, in my opinion.

Nick Davey

Thank you. And briefly, just to follow up on the NII question on Slide 17. Thanks for this point about the different jigsaw pieces, which I guess your colored arrows on the right hand side. I think used to say these were kind of net neutral to slightly positive. My feeling with the new disclosure on the top of the slide is that this sort of unrealized benefit to come from the swaps is bigger than some busted appreciated. Is it fair to say the sum total of these other pieces is comfortably positive into the next couple of years or is that pushing it?

Frank Vang-Jensen

I think that's reasonable Nick, and I guess particularly in relation to how we've explained the deposit hedge benefit coming through and also the just the timing on some of the loan resets. I guess the watch out is probably competition and pressure on lending margins. But I think net net, this is a solid position.

Nick Davey

Brilliant. Thank you.

Operator

The next question comes from Jens Hallen from Carnegie Investment Bank. Please go ahead.

Jens Hallen

Good morning. Jens Hallen from Carnegie. Just two clarifications on asset quality. Firstly, I mean, I'm very confident when talking about asset quality and I can understand that when I see the numbers, like given the management judgment balance that you hold, which I mean, at some point, as you say you will need to be used to release deals even come in close to your normal as 10 basis points in H2 or 2024?

Frank Vang-Jensen

That's a difficult question. But of course, a highly relevant question. I should say that -- what are we are going to need the buffer or not? That's a difficult question. And I'm not sure to be honest. But we have it for proven reasons. And if we're not going to use it, then we're going to reverse it. I clearly believe that the provisions within the banking industry will increase. And it has to come either by models or by sort of like increased sort of like realized loan losses. And it will be unlikely that the adjustment to a new -- completely new interest rate that is much higher than we had a year ago.

And with the impact on growth and the uncertainty in the -- I should say and indeed in the world in general and then we just have to remember that the Nordics are always more open economies. So we are very dependent on all sorts of roles on trade with abroad. That will lead to a higher loan losses, but will it increase to above the 10 -- normalized 10 basis points, in our view. Very hard to say.

What do you say, Ian?

Ian Smith

I think yes, to your point, Frank, it's reasonable that we would expect to see higher loan loss, gross charges coming through in the second half of this year. I mean, we've all been wrong on timing so far. We haven't seen this before now. But I think that's reasonable. And I think then the way we settle on a net basis, will depend on the scale of those losses, and whether they relate to some of the sectors that we're concerned about, and therefore would look to utilize provision. So, I think it's hard to say what the net outcome is going to be. But I think this year on loan losses, as we see in the first half has been much more benign than everyone expected. I think we'll see a bit more in H2.

Jens Hallen

Okay. Yes, thanks. And another clarification. I mean, I understand on the gross level, I think it's hard to just stay as close to zero forever. But if you're forecasting and projections are correct, presumably then you will be trying to use some other management buffer, rather than having a buffer on a buffer. I taking new provisions for something you anticipated, and then still keeping a management overlay on top of that?

Frank Vang-Jensen

I think that's a reasonable start point, Jens. But we'll have to see how things develop.

Jens Hallen

Okay. And then I have the have a question on ICR, on Slide 20. I don’t know, make sure I got it correct. So are you saying that in the ICR stress, you refinance all balance sheet bank loans and wholesale funding through regardless of maturity and current hedging at the current swap rate? And you still only have less than 1% of the portfolio with an ICR below 1%? And then the second part of that question, presumably you haven't been included to the CPI rent hikes, et cetera, in the operating revenue for these companies. So the picture is probably even stronger in reality. Is the correct assumption on how you'd under stress?

Frank Vang-Jensen

So yes, you've understood it correctly, Jens. It's a bit of a blunt instrument, we simply assume all outstanding debt refinanced at today's rates, ignore hedging, ignore the benefits of potential rent increases, et cetera. So I think it demonstrates the resilience of the portfolio.

Jens Hallen

Perfect, thank you.

Matti Ahokas

The final question now.

Operator

The next question comes from Riccardo Rovere, from Mediobanca. Please go ahead.

Riccardo Rovere

Thanks. Thanks for taking my question. Just a couple, if I may. On -- sort of to get back on the hedges again. In general, it's a conceptual question basically, you are given away the benefits of the rates hike that have been occurring or will continue to occur, the second part in 2023, and that would have had an effect in '24, because €100 million or €200 million is a very small amount.

And let's say swap this with, say lack of negatives in case rates had to be a like on the fourth chart on Slide 17, so if rates had to go down to say, 3%, over the course of the period, trying to stabilize and NII may be not at the highest possible level that you could achieve without this, but at a fairly elevated level. Is that a right way of understanding the logic you are working with? This is my first question.

The second question I have is on corporate loan growth, which has been fairly okay, fairly robust, I would say. Do you think it can go on like that for still a long period of time? Or for some time more? What do you think this is what come to -- will come suddenly to a hold? And if rates had to go down, do you think in general terms, higher volumes might eventually say, kind of compensate for lower margins? Forget the hedges, of course on the stock. Thanks.

Frank Vang-Jensen

Alright, thank you for the question. So let me take the last part first, and then Ian, please take the hedges. So on the corporate lending, at least, we don't -- so we have a lot of activity going on. And that was a case in Q2, it is a case now and we don't have any signs of the sort of lightning speed will come down during the at least the third quarter. And the interesting part is that it's driven by a lot of activities within sustainability, green transition, supply chain, the geopolitical situation is clearly playing a role here, so more concentration in the western part of the world.

And then there are a very large number of customers that are seeking or looking for growth, and that comes with investments as well. So I should say that a general broad based demand, which I, at least as of now would expect to continue for the remaining part of the year. And then whether rate decrease will fuel even more growth, it's very difficult to say. But currently corporate look quite strong.

Ian Smith

Okay. Hi, Ricardo. So look, we're running out of time. So if I haven't understood your question properly, please feel free to come back to IR. But I think what you asked me is, are we foregoing the benefit of rate increases at the moment through deposit hedging? And the short answer is, yes we are. We look at hedging are zero rate deposits through the cycle.

So we saw benefits in the low rate environment, as rates have increased, we have because of the hedging activity given up some of the benefits of that increase, but then, as we see those hedges rollover, and particularly as we then look into a flattening and then perhaps falling environment, we'll also see some benefits of that hedging come through. So we look at this on a through the cycle basis, and we're content to give up a bit of that rate benefit today to deliver that through the cycle benefit. So.

Riccardo Rovere

And if I may, sorry, you're running out of time. If rates did not go down, had not to go down, can you change the hedges?

Frank Vang-Jensen

Yes, we can. Obviously the impact then flows through over time, but yes we can, if we chose to.

Riccardo Rovere

Okay. Thank you.

Frank Vang-Jensen

All right. Thank you all for participating, for some good questions. We are running out of time. So thank you have a nice summer and if we can do anything for you as usual, Dennis just reach out to you. Thank you.