Nordea Bank Abp (OTCQX:NRDBY) Q2 2024 Earnings Conference Call July 11, 2024 4:00 AM ET
Company Participants
Ilkka Ottoila – Head of IR
Frank Vang-Jensen – CEO
Ian Smith – Group CFO
Conference Call Participants
Markus Sandgren – Kepler Cheuvreux
Nicolas McBeath – DNB Markets
Andreas Hakansson – SEB
Magnus Andersson – ABG
Gulnara Saitkulova – Morgan Stanley
Sofie Peterzens – JPMorgan
Shrey Srivastava – Citigroup
Namita Samtani – Barclays
Piers Brown – HSBC
Ilkka Ottoila
Good morning, and welcome to Nordea’s Half Year 2024 Results Presentation. I’m Ilkka Ottoila, Head of Investor Relations. Here in Helsinki, I’m joined by our President and CEO, Frank Vang-Jensen; and our Group CFO, Ian Smith.
Today, we’ll start with a presentation by Frank followed by a Q&A session. Please remember to dial in to the teleconference in order to ask your questions.
With that, let’s get going. Over to you, Frank.
Frank Vang-Jensen
Good morning. Today, we have published our results for the second quarter of 2024. It was another strong quarter for Nordea. Our return on equity was 17.9% in the quarter and 18% for the first half of the year, a level of profitability that puts us among the best performing banks in the industry.
During Q2, we also delivered year-on-year growth on our two largest income lines, supported by a higher net interest margin and increased customer savings and investment activity. The Nordic economies remained slow. However, there are positive signs for the road ahead. Household and business sentiment has improved somewhat, inflation has fallen and we saw the first rate cuts in 3 of our 4 home markets.
With further rate cuts anticipated this year, the prospect for the Nordic economies should brighten somewhat. Our results underline that we continue to make good progress on our strategic priorities. A key step this year is to strengthen our market position in Norway through the acquisition of a sizable personal and private banking business.
I have been fortunate to spend the second quarter in Norway gets an even deeper understanding of the nuances in that market. And I’m convinced that we have great opportunities to target profitable growth across the business areas.
I’m also glad to report that preparations for integrating the acquired businesses are progressing well, and we remain on track to complete the acquisition in the fourth quarter. We look forward to welcoming our new customers and employees to Nordea.
Looking at some of the highlights for the second quarter. We increased total income for the quarter by 3% year-on-year. The increase was driven by net interest income, which grew by 4% and by net fee and commission income, which increased by 6%. Net insurance result was down 7%, while net fair value result was solid but lower compared with the very strong Q2 last year.
Operating profit was strong at nearly €1.7 billion for the quarter. Our return on equity remained strong at 17.9%. We improved lending margins and grow solid lending volumes even though the markets were slow. Mortgage lending was stable year-on-year, while corporate lending was down slightly. Deposit volumes were up with retail increasing by 1% and corporate by 5%.
Assets under management grew 10% from a year ago to €400 billion, supported by continued positive net flows in our Nordic channels. Costs followed our plan and our cost-to-income ratio with amortized resolution fees was 42.6%.
Our risk position is sound and credit quality continues to be strong. Net loan losses were €68 million or 8 basis points, still below our long-term expectations, with the increase compared to last year, driven by provisions for a small number of corporate client exposures. Capital generation remained strong, and our CET1 ratio was 17.5% at the end of Q2. That’s a summary of the quarter.
Let’s now take a closer look at the results, starting with the income lines. Net interest income increased by 4%, a solid result given the strong second quarter last year. The increase was driven by improved deposit volumes and margins. Our net interest margin was higher year-on-year and was also stable for the third quarter in a row, a clear sign of our diversification and resilience.
Despite the lending market still being slow in Q2, we maintained a stable level of mortgage lending. The corporate lending market also remained muted and our lending volumes decreased 1% year-on-year. Quarter-on-quarter, we recorded a positive impact from our deposit hedging actions. We expect our deposit hedging to benefit us as rates come down further.
Net fee and commission income grew by 6% year-on-year, demonstrating that we are able to serve our customers well with our broad offering. The quarter saw increased activity in savings and investments and not outstanding performance in debt capital markets following the good Q1 as well as improved corporate finance activity. This led to higher net income from savings, brokerage and advisory. We also had higher income from payments and cards supported by higher customer activity.
Our savings fee income was supported by higher assets under management, which grew 10% on year to €400 billion. And Nordic channel’s good momentum was maintained in Private Banking and Life & Pension, in particular, with net flows totaling €1.9 billion. Net flows in international channels were negative at €1.4 billion, mainly driven by wholesale distribution. In the elevated interest rate environment, clients continue to favor out of products, including fixed term or money market funds.
Net fair value result was down 15% year-on-year. We saw higher activity in customer areas with strong demand for foreign exchange and interest rate hedging products. As we said before, this part of net fair value is more stable and clearly demonstrates our ability to support our customers in their risk management activities. Market Making was slightly down compared with the strong quarter last year when we saw high activity in interest rate swaps and FX.
Treasury had a more regular quarter. The treasury result was lower compared with the very high level of a year ago, as low volatility resulted in stable valuations of hedges and holdings.
Cost development was as planned, with an increase of 6% compared with the same quarter last year. Our costs for the year-to-date, including regulatory fees were down 2% compared with the first half last year. Our Q2 cost-to-income ratio with amortized resolution fees was stable at 42.6%. The lower resolution fees this year have given us the opportunity to further increase overall investment capacity. We have continued making significant investments into our technology infrastructure, data and AI, our digital offering as well as into financial crime prevention and auto risk management capabilities.
During the quarter, we also had integration costs from the Norway acquisition. These investments ensure the bank remains resilient, safe and trusted in a fast-evolving environment.
Fraud prevention and detection is a key focus, given it is a growing issue for societies, globally, including the Nordics. We are working hard to keep our customers safe and we aim to have a leading position within this area. We are deploying more sophisticated prevention and detection capabilities. For example, we have implemented transaction limits and introduced a safety feature that delays withdrawals giving customers more time to reach out to Nordea to interrupt a payment.
We continue to be very active in raising awareness about fraud through active dialogue and society and in our marketing. All in all, we expect these factors to drive our total full year cost to be slightly up compared with 2023.
Our risk position is sound and credit quality continues to be strong and in line with our long-term expectations. During the quarter, we had net loan losses and similar net result of €68 million or 8 basis points. This was higher than previous quarters, where our loan losses have been below the long-term average and was driven by provisions for a few single corporate client exposures. We have a very well-diversified credit portfolio spread across sectors, and this has helped us to maintain strong credit quality.
During the quarter, management adjustment allowances were reassessed and €30 million was released due to this the improved macroeconomic outlook with lower inflation and interest rates. As a result, the management adjustment buffer now stands at €464 million in local currencies.
Capital generation remained strong, and we further reinforced our capital position. At the end of the quarter, our CET1 ratio stood at 17.5% or 4.4 percentage points above our capital requirements. In July, we received ECB approval for new capital models for retail exposures. And the new models are expected to go live in Q3 this year.
The impact on REA after adjusting for the prospective rule changes recently proposed by the Norwegian FSA is broadly in line with our expectations. Following the approval, we have initiated a dialogue with the ECB regarding a resumption of share buyback programs from early 2025.
Our four business areas performed well in the second quarter. In Personal Banking, we had good income growth, driven by our deposit and savings products. Throughout the quarter, we stay close to our customers. Our advisers were especially proactive holding 7% more customer meetings than last year. Use of our digital services also grew to a record high. The number of private app users and log ins increased respectively by 5% and 12% year-on-year in the quarter. We have continued to strengthen the digital experiences for our customers and further improve the self-service features in the mobile app.
For example, customers can now enjoy improved savings insight and get a holistic overview of their earlier savings advice and profile. We have also made it easier for non-savers to start savings through the app. As a result, deposit volumes increased by 2% year-on-year. Customer investment activity picked up through the quarter, supported by the expansion of our digital deposit product offering in all countries.
During Q2, we maintained a stable level of mortgage lending, along with improved margins. The housing market remains slow in the quarter. However, there were signs of improvement at the end of the quarter where we observed a year-on-year increase in loan promise requests.
Total income for the quarter was up 4%, driven by higher NII and higher savings income. Return on allocated equity was 19% compared with 20% in the same quarter last year, and the cost-to-income ratio was 48%, unchanged from a year ago.
In Business Banking, we delivered solid income growth despite the slow markets. We maintained stable lending volumes year-on-year in local currencies. We also supported our customers in securing both equity and bond market funding in a more stable interest rate environment.
Deposit volumes grew by 1% year-on-year in local currencies. In Q2, we made further enhancements to our digital services, such as adding more self-service options. I was pleased to see our customer satisfaction scores increase.
Our net loan losses were at €29 million or 12 basis points, net of the €30 million management adjustment buffer release. While the gross losses were higher than in recent quarters, it is important to note that they were driven by provisions for a few single customers affected by specific circumstances. Credit quality remains strong. We do not view these as a trend to extrapolate from.
Total income for the first quarter increased by 4% year-on-year. The increase was driven primarily by improved deposit margins and higher customer activity, especially in the capital market area. Return on allocated equity was 18%, unchanged from last year. While the cost-to-income ratio improved to 40% from 41%.
In large corporates institution, we continue to see good momentum in the business following the strong first quarter. Debt capital markets activity was especially strong. And we supported our customers with 3,150 transactions following on from the more than 200 we did in Q1. Issuers were keen to frontload their funding plans in the current favorable market conditions and more stable interest rate environment.
In equity capital markets and mergers and acquisitions, we also continue to see improved sentiment and momentum in the market with deal activity, including initial public offerings, slowly picking up.
Deposit volumes for the quarter increased by 12% year-on-year. The lending markets remained slow with our lending volumes decreasing by 2%. The credit quality of our LC&I loan book remained strong, net loan losses and similar net result amounted to net reversals of €1 million.
Total income for the quarter was up 6% year-on-year. The increase was driven by increased net fee and commission income. Return on allocated equity was 17%, up 1 percentage points on the same quarter last year. The cost-to-income ratio improved to 38% from 41% a year ago.
Asset and Wealth Management also delivered a solid quarter. The strong momentum in our Private Banking business continued, supporting positive net flows of €2 billion. Net flow was positive in all countries with Sweden and Denmark being the main drivers.
In line with our growth strategy, our Private Banking business has welcomed an all-time high number of new customers in Sweden and in Norway in the year-to-date. Assets under management increased by 10%, supported by positive development in the equity market and the positive flows in private banking. We saw outflows in our international business. We continue to grow with strong momentum in our life insurance and pension business.
Gross written premiums reached new record highs, increasing to €2.9 billion from €2.2 billion a year ago. Total income was up 3%, driven by higher net interest income and the higher assets under management. Return on allocated equity was 36%, down from 41% a year earlier, driven by increased capital allocations. The cost-to-income ratio was stable at 41%.
To sum up, this was a strong quarter and a strong first half year followed here with good levels of customer activity despite the slow markets. We have performed well and are driving sustainable higher profitability and capital generation. Our results demonstrate the benefit of being diversified and operating at scale across the Nordics. This is something which makes Nordea unique as the only truly pan-Nordic bank.
Our results also keep us on track to deliver strong profitability for the full year. The outlook is unchanged. We expect to achieve a return on equity of above 15% for 2025 and also targeted return on equity of above 15% and for 2025. We are determined to push forward with our strategic priorities and further improve customer experience and operational performance. Thank you.
Ilkka Ottoila
Operator, we’re now ready for the questions.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Markus Sandgren from Kepler Cheuvreux. Please go ahead.
Markus Sandgren
So I was thinking about the lending margins. Could you give us some more flavor on both on the corporate space and what’s happening there, if you compare it to the bond market seems to have opened really well? And how is the competition from that?
And then secondly, on the — is there still flows from savings — sorry, from transaction accounts to savings accounts, is that factoring in, in the margin drop? Thanks.
Ian Smith
Good morning, Markus. So on lending margins, I think the last quarter, we’ve seen pretty stable, actually. And it’s welcome to see certainly that stability in mortgage margins across the board. Bond markets are very active. The first half of this year, we’ve helped our customers on record numbers of transactions. And I think rather than putting pressure on margins, I think maybe it’s an alternative, I guess, source of credit for customers, maybe rebalancing a little bit the quietness that we saw in ’22 and ’23. So an improvement in bond markets has been really good for our Corporate Finance business and overall, I think it’s been welcomed to see a bit of stability in lending margins the last quarter.
And then on the mix of deposits, it’s actually pretty stable this quarter in our retail business. The proportion, I think, is exactly the same as we saw it the quarter before. A little bit of movement on business banking, but not really that much to speak of. So I think stability and that maybe suggests that the mix shift has bottomed out for now.
Markus Sandgren
Okay, thank you. And then secondly, I was thinking about capital. Why are you talking about that you will reassume buybacks in next year? I mean should we take this as you’re adequately capitalized for now? Or why is it brought up now?
Ian Smith
So I think there’s some important news today in terms of having received the ECB approval on models, which is obviously a big impact on the CET1 trajectory going forward. We have a couple of other events coming up on the capital front. We’re expecting to bring in the new Norwegian business in Q4 this year, which will absorb 40 basis points and then some moving parts early next year.
So a couple of things. First of all, we’re absorbing and dealing with those changes over the next six months or so, and then we wanted to flag because we’re always generating capital throughout that we’d be in a position to resume buybacks from early next year. And we’ll keep that under review, of course, but I think we’re on the same page with the ECB as far as getting back on to buyback programs is concerned. And we just wanted to flag that for investors.
Markus Sandgren
Okay. Thank you.
Operator
The next question comes from Nicolas McBeath from DNB. Please go ahead.
Nicolas McBeath
Thank you. And good morning. So a follow up question on the impact from the Norwegian acquisition. So first, if you could say anything about, the kind of revenue implications, how much NII impact do you anticipate the acquisition to have?
And then also on the acquisition on the capital impact. I note that you keep the 40 basis point headwind from the impact that you guided for initially when the acquisition was announced. But I note that the lending portfolio has shrunk a lot since then. So I was just curious why the capital impact has not changed given the much lower size of the lending portfolio.
Ian Smith
Yeah. Good morning, Nicolas. So we’ve always talked in terms of what the business we’re acquiring delivered in 2022. And the reason for that is that was the best available information we had and we also have to recognize that what the NII that we will learn from it depends on the portfolio that comes across. And there’s been strong competition. I think we’ve seen Danske reporting some attrition on that portfolio. A couple of competitors in the market have been pretty aggressive. And that’s fine. We expected to see some churn and we will still acquire a very substantial portfolio that will be very good for strengthening our business in Norway.
In terms of what it will deliver, it’s hard to say at this stage. Back in 2022, it was around €145 million of NII. It will be lower than that because the portfolio will be smaller. But I think one of the things that’s good to note is that some of the business attrition has been in low-margin mortgages. And so overall, I think we’ll get a robust portfolio, but too early to say precisely what the NII will be in 2025. But it’s a helpful boost to our NII expectations in ’25, in an environment where I think we might see growth slowly starting up but it’s helpful for our delivery next year.
The other thing I think it will give us, and this is about more than NII, Nicolas. It’s a customer base that has had little by way of sales of other products into it. And we expect to be able to really work with those customers and introduce a bunch of more Nordea products to them. So it’s about more than NII.
And then in terms of the capital impact. Again, I think we just stick with our original estimate, if it turns out being lower, that’s, I guess, helpful for the CET1 ratio. We haven’t felt the need to adjust it at this stage because let’s see what the final portfolio balances are.
Nicolas McBeath
All right. Thank you. And then a question related to costs. So I think, Frank, you mentioned costs slightly up in 2024 versus 2023. I think previous guidance was flat or slightly up. So just wanted to clarify, is this kind of change in guidance? And have you anticipating more cost headwinds than previously or more investments?
And then related to that as well, the increase in cost for 2024 versus 2023, so just quite high underlying cost growth before one adjusts for the one-offs last year and also the fact that regulatory fees are coming down a lot this year. So I was just curious if you could say anything whether you think you can substantially bring down the cost growth into next year, given now that revenue trends are clearly softer versus, let’s say, one year ago? Should we think that you will continue to invest and strengthen the bank in a similar fashion also going into next year?
Frank Vang-Jensen
So thank you. It’s Frank speaking. So costs sort of like for the full year is expected to increase slightly to the full year ’23. That is basically what we have been saying all the time. We have said flat to slightly up. Now we are saying slightly up to 23%. So you’re right on that one.
If you look at the — so if you look at the Q2 to last year, it’s up 6%. If you try to sort of like split sort of like the 6% in different baskets, around 2.4% as recall it is ordinary run cost. Meaning salary inflation, inflation coming from what we buy externally. And so 3.4% is investments. So investments in technology, foundation, in digital, data, AI, and in risk management capabilities, especially within the non-financial risk area. So we have increased significantly to a high level from last year. And of course, we can change that. But currently, we have no plans changing it as we believe it will be very helpful for the bank long-term, to have an even more increased resilience and also growth.
And in the 3.4%, we have the one-offs for Solo as well so, Danske Bank’s or the acquisition of Danske Bank in the quarter. So that’s why it is a 6% run-rate, why this year. But as you understand, the majority is actually on investments.
Could we reduce the number? Yes, we could. As I mentioned, more than half of the increased costs are coming from investments. And we are investing on an already high number. So we could, but we feel it’s the right thing to do. And we are, of course, looking for positive jaws for sure, whether that is possible next year or not is difficult to say, but that’s our ambition. Ian, anything to add here?
Nicolas McBeath
Okay. Thank you very much.
Ian Smith
Yeah. I think as Frank says, we’ve gone from — we talked earlier this year about stable to slightly up. It is now very much that we would see a slight increase on last year’s total cost and you probably want to think about 1% to 2%, certainly no more than that.
Frank Vang-Jensen
Great. Thank you.
Operator
The next question comes from Andreas Hakansson from SEB. Please go ahead.
Andreas Hakansson
Good morning, everyone. I’m looking on your Slide 17, I just had some questions on your risk weights and the delay in the buybacks. And let me understand it first. You used to say that €16 billion was the increase you expected in your risk-weighted assets, €10 billion for the IRB approval and €6 billion for Basel IV. Now you said that it’s going to be €17 billion with what is it you say €4 billion coming from Basel IV. So has the IRB model gone from €10 billion to €13 billion? That’s the first question.
Ian Smith
Yeah. So broadly speaking, the — after the sort of anticipated changes in Norway and Norway has been, I think, the key sticking point for the ECB in terms of its discussions with host regulators on all of this. But our estimate is that after those changes that have been proposed in Norway. We’ll end up to start with on IRB at net €15 billion. And then the Basel impact is reduced to €4 billion overall and approximately half of that comes at the start of this year, start of next year and half the following year or later depending on what happens with the delay on FRTB. So all in all, that gives us €17 billion at the beginning of next year versus the €16 billion that we were projecting.
Andreas Hakansson
Okay. And I had a feeling, and I might be wrong, of course, that in Q1, it sounded like you expected to initiate your buybacks once you get the approval on the IRB models. And now you got it and you have delayed it. Are any other factors impacting? I mean, we’re ready in media that you have a Danish court case on AML with an uncertain outcome, of course. Could you tell us has that had an impact? And also, when do you expect to have an outcome of that court case?
Ian Smith
So let me deal with just the specific question on the court case first. First of all, it has had no impact on our thinking on capital return because as we’ve stated, based on our assessment of the case, we’re adequately provisioned for current circumstances. So that’s had no impact on our capital thinking. And I guess as to timing of the resolution of that, we will have to let the court process take its course. And so I think that will certainly be working through the course of next year. So nothing imminent in terms of resolution and difficult to predict the timing. But it’s had no impact on our thinking on capital return.
And then in terms of the rest of it, again, going back to Slide 16, we’ve tried to kind of set out there some of the different moving parts. So first of all, the impact of the IRB models and then importantly, the absorption from the Norwegian acquisition. And I guess as we look at those two, we think that generally speaking, better to generate the capital before paying it out, but we’ll deal with those moving parts, let them settle and then we’ll resume buybacks.
Andreas Hakansson
Okay. And then sorry, final question on risk weights. You haven’t put in the expected benefits from your corporate models that we expect to happen in 2026. Could you help us give us a rough size of that so we can compare to the negative impact on retail today?
Ian Smith
Yeah. We’ve stayed away, Andreas, from talking about impacts there because there are always uncertainties associated with where the ECB comes in terms of their model assessment and other things. So while we expect the — even from the removal of the risk weight floors that we have on certain portfolios, there should be benefits arising we’ve been prudent and not included those in the model for now.
The non-retail application will be submitted next year. And as we’ve said before, not before the end of ’26 would we expect it to be in but we’re being prudent in terms of impact there.
Andreas Hakansson
Okay, that’s it for me. Thank you.
Operator
The next question comes from Magnus Andersson from ABG SC. Please go ahead.
Magnus Andersson
Yes. Thank you. And good morning. I note that you have not lowered your deposit rates in Finland as a response to lower short-term rates while you did so in Sweden, and you have announced cuts in Denmark, which comes into force tomorrow, if I remember correctly. So why not in Finland, if you could tell us something around that, please?
Frank Vang-Jensen
So it’s Frank, Magnus. I can take it. So nothing sort of like bigger than we felt a need to fine-tune our pricing or the business here felt the need, and that’s why the pass-through has not been as high in Finland as in the other countries. We don’t see that as a, some signs of sort of like that could be used to any forecasting on so. And we believe that we are very well positioned price-wise now in all the markets. So that’s basically what we can say.
It would point at least if we should try to estimate that the coming rate cuts could play out as we have been saying all the time that the first one will come with a quite high pass-through — and then, of course, it’s up to competition. And so — but yeah, so nothing has really changed more than sort of fine tuning in Finland.
Magnus Andersson
Okay. So this is according to plan, so for your responses in Sweden, Denmark and Finland.
Frank Vang-Jensen
I would say so, Ian, do we have any opinions here?
Ian Smith
No, I think that’s entirely in line with plan. And as Frank says, we generally expect subject to tweaks in response to market actions and things like that to sort of pass through certainly the earlier rate cuts and therefore, NII should be resilient.
Magnus Andersson
Okay. Thank you. And sorry, I might have missed it. It was a bit noisy here. But did you say why you slightly raised your cost guidance? What it was referring to what the reason was?
Frank Vang-Jensen
That’s investments. So if you basically chop up the 6% cost growth for the second quarter to last year, around 2.6% is ordinary operational costs increases, salary inflation from things that we are buying. And 3.4% is investments in technology infrastructure, digital, AI, data and then non-financial risk capabilities in a broad — across the board, I would say. And then it’s the acquisition cost that we are taking on the Norwegian acquisition.
And we intend to keep investing on an elevated level for the coming period, as we simply believe that it is best for the bank shareholders to increase our resilience even further and invest in growth. But of course, if we can’t sort of like find the income pockets, we will, of course, reassess whether it is the right level. But currently, we are feeling that we are doing — investing at the right level at the moment. And looking forward, that will lead to a sort of like slightly higher cost this year compared with full year ’23.
Magnus Andersson
Okay, thank you.
Frank Vang-Jensen
Thanks.
Operator
The next question comes from Gulnara Saitkulova from Morgan Stanley. Please go ahead.
Gulnara Saitkulova
Hi, good morning. This is Gulnara from Morgan Stanley. Thank you for taking my questions. First one, a follow-up on the buyback. So you stated that you aim for the buyback early next year. Maybe can you elaborate how should we think about the size of the buybacks going forward? Would you still prefer to do the smaller but more frequent buybacks rather to go for a bigger size buyback once a year? And if you were to do the more frequent buybacks, would you apply for approval for the total amount at once or it will be two separate approvals from the ECB?
Frank Vang-Jensen
If I start with the first one, then Ian then take the latter part. So buybacks for us is an integral part of our capital distribution. And the only reason for why we have paused at the moment is that we are in the middle — now we were in the middle of new models. Now we have them approved, and that’s why we have initiated dialogue with ECB to get back on buyback tracks.
Then, of course, we can discuss whether it’s sort of where it could be in fourth quarter or it could be in the third quarter but that’s for us not the key, right? The key is that it is an integral part, and we have it in our capital distribution policy or plan actually.
We will likely go with smaller programs and then keep it keep it on more or less all the time, of course, dependent on how much capital we generate and how much excess capital we have. In Q4, we are using some of our excess capital to — for the acquisition in Norway. We hope to do more acquisitions, but there’s not that many acquisitions in the Nordics. So when you look at our capital generation, which we tried to explain on Page 17 in the material, we will generate capital on top of the 60% to 70% buyout and buyback is the instrument to manage the excess capital.
Ian Smith
Yeah, thanks, Frank. And Gulnara, hi. I mean in terms of size of the application, I think it’s unlikely we would apply for more than we were about to execute. But we’ve got a pretty good process with ECB in terms of submitting applications and getting them approved. So the timing and size of application, I think, will be commensurate with what we plan to execute and then we’ll go and do more when we’re ready. You wouldn’t do more than that in an approval because it would be deducted from your capital straight away.
Gulnara Saitkulova
Thank you. Very clear. And can I ask another question to follow up on the competition? How would you describe the competitive environment across your key markets and especially in Sweden, because as the market outlook seems to improve, the customer activity should return? And would you say that the competitive pressure could subside in the coming quarters? Or do you think it’s still early to see the visible improvements in the near term?
Frank Vang-Jensen
No, I think sort of like as you said, it’s early days, right, in the recovery, but I — we do clearly see that the activity is slowly picking up. A number of mortgage applications across the Nordics are picking up now in the latter part of the quarter, the bond market, so our debt capital and our ECM business was more active than before M&A, more M&A deals and so. Large corporates are quite active. I would say the small and midsize segments within corporates are still subdued, which is just natural there very much dependent on the consumer confidence. And so all in all, clearly picking up across the Nordics.
In Sweden, we are in a very good spot. So continue to win within retail. We are on the winning side as well on private banking and wealth. We’re doing very good on SME and LC&I is a continuously game about not jeopardizing the profitability, yet still capture the growth and work with all our clients to get all of the business or at least most of the business. So I would say it’s looking like we are moving in the right direction, although it’s still early days.
Gulnara Saitkulova
Thank you very much.
Frank Vang-Jensen
Thank you.
Operator
The next question comes from Sofie Peterzens from JPMorgan. Please go ahead.
Sofie Peterzens
Yeah, hi. This is Sofie from JPMorgan. Thanks a lot for taking my question. I see that in your report, you wrote that the retail model approval also includes some regulatory REA add on. And then you say that after completing the planned remediation actions you expect to get €4 billion to €6 billion of risk-weighted asset release but this is all subject to regulatory approvals. Could you just clarify for me what the remedial works are and also what these add-ons are which portfolio, what products just give a little bit more detail.
And also on the remedial work, is it more a data issue? Or is it a system issue that you’re having? That would be my first question. Thank you.
Ian Smith
Good morning, Sofie. So these add-ons, as we say, we expect to remove around €4 billion to €6 billion of REA by addressing the conditions, I guess, the ECB have put on their approval. And those conditions principally relate to some model enhancements or model replacements. So our PD models, for example, need to be further developed to ensure that we can capture the risks arising from joint obligors. That’s an example of some of the enhancements we have to make and also to enhance some of our loss given default models and in particular, to take that down a further level in terms of granularity. So this is about adding a bit more detail, a bit more detailed capability to our models.
And that takes some time first of all, to develop and second of all, to approve by the ECB. So those are the key things that are going to reduce the REA add-ons that we currently have from ECB.
Frank Vang-Jensen
Which is a usual practice from ECB add some REA on top up and then align with us on the time line and in order for the banks to remediate sort of like the things that they feel that needs to be strengthened.
Sofie Peterzens
But I guess the follow-up question here would be like how likely is it that you will get it in 2026? Is it more like a ’27-’28 or even further out considering that — I mean from the outside at least, it sounds like it’s a quite complicated process and also if all these models then need to be approved by the ECB, which we know always takes more time than expected.
Ian Smith
So yes, you’re right, Sofie. It is a complex process and can be difficult to predict. I think what’s on our side in this respect and why we feel good about the timing is, first of all, this is just in ECB’s hands. As we’ve talked about before, a lot of the why it took so long for the original approval was because of the negotiations with other regulators in our four home markets. And so it’s only in the ECB’s hands.
And the other thing is the ECB has an awful lot of model approvals on its plate at the moment and has a pretty strict schedule. So we’ve agreed a window with them, whereby we deliver the models, they undertake the review, ask their questions and then come back. And I think that so long as they stick to their commitments on timing, we should be fine.
Sofie Peterzens
Okay. Okay. That’s fine. And then my second question would be on the hedge. So the hedge — the deposit hedge, it looks like it shrank a little bit. And then quarter-on-quarter, it was small positive net interest income. But why was the deposit hedge year-on-year at €26 million drag to your net interest income? And could you just remind us how much the hedge is kind of costing Nordea’s net interest income every year? And how should we think about the hedge benefits as rates come down, especially in ’25 and ’26?
Ian Smith
Yeah. I mean, the reason it was a small increase year-on-year this quarter is really sort of a question of timing. What impacts the hedge most at the moment is the pace at which we roll off old hedges and replace them with new higher-rated hedges. I think going forward, this is probably the last quarter where we’ll have seen that sort of blip of it being slightly higher year-on-year. And we’ll see some small benefits in the rest of this year.
Where the hedge really delivers is when you start to see rate reductions. And so on the current rate path with assumptions of further rate cuts this year and next year, we’ll see an improvement from the deposit hedge in 2025.
And then just to remind you, last year, it cost us in terms of a headwind in the higher rate environment. We saw it at about €650 million, be similar this year to slightly down, and then we expect there to be a substantial reduction next year as we start to see rates move. So it will really do its job from ’25 onwards.
Sofie Peterzens
Okay. And then if I may just a final follow-up. Of the 3.5% gross invest or gross growth that you saw from the investment, how much of that gross growth comes from kind of financial crime prevention and how much of the financial crime prevention is kind of forced by the regulators because it seems that financial crime is becoming quite an issue in the Nordic region?
Ian Smith
So I mean, we haven’t talked about the different components. Financial crime prevention is substantial, and it’s certainly a driver of FTE increases because we have to — these, I guess, step-up in requirements are coming from regulatory changes. The regulators are asking for more and more. They’re adding to the rules. And the only way that we can deal with those quickly is by hiring more people.
Over time, we would expect to try and automate that and we’ve got plans for automation in financial crime, but our response now has been to new regulatory requirements and the step-up in activity that, that promotes.
Sofie Peterzens
Okay. Thank you.
Operator
The next question comes from Shrey Srivastava from Citi. Please go ahead.
Shrey Srivastava
Hi, Frank, hi and thanks for taking my questions. You’ve obviously said the distribution from ’22 to [technical difficulty] the clarity of that possible capital distribution, ’26 and onwards. Since obviously, that’s going to [technical difficulty] add-ons stated to come off in addition to potentially further broaden your corporate models. Are you thinking [technical difficulty] that’s my first question.
Ian Smith
Shrey, you broke up quite badly on that. So could you repeat the question?
Shrey Srivastava
Yeah, sure. Is this better at all?
Ian Smith
So far, yeah.
Shrey Srivastava
Yeah. So you’ve obviously reiterated the €17 billion to €18 billion for ’22 to ’25. But I’d like to get further clarity on distribution from ’26 onwards, since obviously, that’s only guiding for the retail model add ons to come off in addition to potentially a further benefit from the corporate models. How are you thinking about additional distribution ’26 onwards relative to what we can expect for ’24 and ’25? That’s my first question.
Ian Smith
Thanks, Shrey, and it’s encouraging to see you looking so far into the future. I guess our starting point is our capital policy, our capital and dividend policy. And so that remains in place. So a dividend payout ratio of 60% to 70% gives us one of the strongest dividends in the sector. And that excess capital is used for bolt-on M&A for buybacks, whatever we think is right at the time. We will continue to generate excess capital. This is a very strong capital generation machine. And so we will — there’s no reason to not see that coming through from ’26 onwards.
And it will simply be a question of, at the time, what’s that level of excess capital? Is it sort of normal generation levels, which we sort of estimated around about 25 to 30 basis points a quarter. Or is there something else that comes from regulatory improvements, and we’ll deal with that at the time. But you can rest assured that we’re firmly behind our stated policy and we would expect to be a regular strong return of capital to our shareholders consistent and reliable as you’ve come to know us.
Frank Vang-Jensen
And we’re definitely not sitting on — want to sit on excess capital. That’s for sure.
Shrey Srivastava
Thank you very much for that. And my follow-up, having looked further into the future and something a bit. The €17 billion that you’ve given for retail models in Basel IV, obviously includes €2 billion benefit from the Norwegian proposals, LGD flows and mortgage risk weights. What gives you so much confidence that those will come through to include that in your plan? If you could provide me with more detail. Thanks.
Ian Smith
Yeah. So there are two components there, Shrey, and they are currently subject to a proposal by the Norwegian FSA to the Ministry of Finance. And so clearly, the Norwegian regulator stands behind those two developments.
I think the first ought to be a no-brainer. Norway will — is expected to adopt CRR3 from January 1 of next year and the LGD floors on mortgages in Norway fall away under CRR3. So that would appear to be on autopilot and be consistent with what the Norwegian FSA has proposed.
On the other item, and we should look at them separately. Again, the Norwegian FSA has proposed a 25% risk weight flow for mortgages applying to all lenders. That that’s their prerogative, I guess. And so long as it’s applied whatever they propose is applied to everybody equally. We’ll deal with that, and the market will adapt to it. If it doesn’t happen, then the market will respond accordingly. So I think that’s the basis we think best to include these items based on our current understanding and what’s out there in the public domain. There may be some shifts and changes, but particularly if the risk weight floor doesn’t — so long as it’s supplied equally, we’re comfortable with competing on a level playing field.
Shrey Srivastava
Thank you very much for that.
Operator
The next question comes from Namita Samtani from Barclays. Please go ahead.
Namita Samtani
Good morning. And thanks for taking my questions. Firstly, does this Danish AML investigation put you off from doing business in Denmark, given how the authorities are treating you?
Secondly, do you think the good DCM activity this quarter was driven by customers front-loading, i.e., doing activity ahead of the U.S. election rate volatility? Or are we on a new trajectory for DCM and ECM and IB fees.
And lastly, just a question on the interview Frank you did with [indiscernible] Industry where you referred Nordea operating in four countries with 3,200 internal software applications and the need to reduce these applications to get processes which run the same in all four countries. I just wanted to ask, wasn’t this the point of the core banking platform project to operate on one system. And I’m curious to understand why four countries operating on one system hasn’t been achieved yet and whether you believe you can achieve cost efficiencies going forward? Or is that actually impossible given the complex that you’re operating in four countries. Thank you.
Frank Vang-Jensen
Thank you. So let’s start with the AML. So the AML case is, as we all know, a very old case, it dates back more than 10 years from the period 2012 to 2015. And it is not about money laundering. It’s about not having the appropriate process in place and practices in place at that time. And we have basically accepted that, that was the case back then that we didn’t have a full alignment to the requirements at that time, and we have also said many times that we expected to get a fine.
That said, then there are — nothing else to be expected. We would have hoped to get the case closed earlier. But as Ian explained, that has not been possible. But it should have, of course, no impact at all to the business that we run. And just to remind you about since 2015, we have invested more than €1.5 billion into fighting financial crime and we have more than 3,400 out of our 30,000 people working, fighting financial crime full time. So no concerns there.
When it comes to the ECM, I think it’s a start to a new period. Of course, it’s not a straight line, but it is seasoning up. Customers are more proactive now. They believe more in the future, and the bond market is clearly in a better shape than it has been for very long. So I would say that we have probably seen in the beginning.
And then remember, we are not sort of like operating in a single country. We are across Pan-Nordic bank. And that means that sort of like when we get all cylinders to up to run up to speed, it will be quite impactful while there are some countries right now that are more speedy than auto. So we are quite positive, but also realistic. It will take a bit of time to get it full up and running across the Nordics.
When it comes to Nordic scale, it’s much, much more than sort of like a system. It’s processes, it’s the way we work. It’s the way we work with our branding and marketing costs. It’s the way we work with our talent. It’s a way we have, for example, our data and data sources. It’s a way we run our — for example, our corporate lending, which is applications we run on and so. So T24 and core banking, that’s just one part. This is sort of like a much more fundamental cleanup that we are in the middle of now. Would it bring any cost savings, yes, of course, it will.
We haven’t mentioned a number, but there will be, of course, a significant upside when we have one process or, for example, mortgages across the Nordics instead of four different processes. I can mention the same with the payment, corporate payments instead of having a number of process, a number of applications having 1 process covering most and much fewer applications would, of course, also mean a lot.
On the data side, much more golden sources, less fragmentation very, very big sort of step to take. And all this, we are executing on concrete plans making process every single day and follow it very carefully in our leadership team and with the board as well. And I’m a very sort of like a positive to the outlook on what that will bring. But again, it’s nothing that comes easy. It’s hard work and it will take some time. But it is something that you will start hearing us talk more about and also show concrete the evidence of why we are progressing and how we are progressing on each of these streams, but more to come.
Namita Samtani
That’s helpful. Thank you very much.
Ilkka Ottoila
Operator, we have time for one more question.
Operator
The next question comes from Piers Brown from HSBC. Please go ahead.
Piers Brown
Yeah. Two for me. One is on assets under management. That number obviously still being held back for the activities you’ve seen in international AUM. Is there anything which gives you hope that you’re anywhere close to a turnaround on the international AUM picture?
And then the second question is back to capital again. But thinking about the underlying pace of risk-weighted asset growth just from new business. What are you thinking? And when you think about capital planning, what sort of case of RWA growth, excluding all of the considerations around, et cetera, are you thinking of? And I’m just thinking about the Q1, I don’t think you’ve given the Pillar 3 report yet for Q2, but to the IRB numbers, it looked like you have reasonable inflation for asset size growth but offset by reduction in — for improved asset quality and just whether you think that dynamic continues to play out in coming quarters?
Ian Smith
Yeah. So I’ll deal with the RWA question first. I think the outlook for this year, Piers pretty muted. I think we’ve said all along that we’d expect to see relatively low growth, perhaps with an improvement coming next year as we start to see the benefit of rate cuts coming through. And that remains the case. So I think fairly muted this year with a bit of a pickup next year.
And I guess what you’ll see from Pillar 3 when we publish it is it ebbs and flows in terms of credit quality. So when we have strong quarters with improvements, we see benefits coming through where we see one or two provisions needed, then it goes the other way. It isn’t going to be a big needle mover. So I think, all in all, slow pace this year and then let’s see what next year brings.
On assets under management, yes, we continue to see net outflows in international wholesale distribution. We’ve always said it’s going to take some time to deal with that, both in terms of just what’s happening in the outside world, high interest rate environments are not helpful when we have been very successful on the basis of products that work in low rate environments. So we’re turning that around.
I think we’re seeing it slightly better. Certainly, the overall net outflows were lower last quarter. And that might indicate that it’s slowing down a little bit. We’re very focused on it. We said it would take some time to fix. So we’ll update later in the year.
Piers Brown
Great. Thank you very much.
Frank Vang-Jensen
All right, I think we have reached the end of the ending of the meeting. So thank you so much for all the questions and good dialogues. And looking forward to speak to you again. And as always, just reach out, we are here for you. Thank you so much.
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