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Nordea Bank AB (OTC:NDBAY)

Q2 2010 Earnings Call Transcript

July 21, 2010 8:30 am ET

Executives

Rodney Alfven – Head, IR

Christian Clausen – President and Group CEO

Fredrik Rystedt – EVP and Group CFO

Ari Kaperi – Group Chief Risk Officer

Analysts

Geoff Dawes – Macquarie Research

Nick Davey – UBS

Chintan Joshi – Nomura International

Aaron Ibbotson – Goldman Sachs

Matti Ahokas – Handelsbanken

Fridtjof Berents – Arctic Securities

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Nordea second quarter report 2010 international teleconference call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to your host today, Mr. Rodney Alfven. Please go ahead, sir.

Rodney Alfven

Thank you, and welcome to this telephone conference. Here from Nordea we are represented by CEO and President, Mr. Christian Clausen; Chief Risk Officer, Mr. Ari Kaperi; Chief Financial Officer, Mr. Fredrik Rystedt; and Senior IR Officer, Andreas Larsson. So, please, Christian, go ahead.

Christian Clausen

Yes, welcome, everyone. And I will repeat some of the key messages from today, and then we will go through the slides I'm sure you have in front of you.

The key messages, we are delivering according to our plans and expectations from the beginning of the year and we want to underline the steady, strong customer business growth, which is bringing in more customers and more business. We see lower results from items at fair value, down from very high levels in Q1 and we have improved the outlook.

The story is very much about the development of the customer business because that is quite notable. We have the income in the corporate 10%, the income in the household segment is up 7%, total income is down, reflecting the lower items at fair value, we have a large number of new Gold customers, 73,000, or up 2.5% in the quarter, lending volumes are up nicely, both in the quarter and on year-on-year and we see a stabilization of impaired loans and credit quality in general.

We have made two changes in the outlook statement. The first one is about the macroeconomic development, where we now clearly see that the outlook for the Nordic markets have improved during this year. We expected that, but that has happened, so a steady economic growth is now clear for the Nordic markets. The global development is still fragile, not at least in Europe, but – and, therefore, we have some uncertainties there.

Costs expected to be in line and cost growth in line with '09. Risk-adjusted profits going to be lower this year than last year due to the lower income in treasury and markets we expected. And then the other change is that loan losses are going to be lower this year than last year and the credit quality continues to stabilize, and that is in line with economic recovery.

And now I will hand over to Fredrik who will go through the financials.

Fredrik Rystedt

Thank you, Christian. I will take you through the results. Looking at slide seven in your material, you can see that total income ended up at 2.161 billion, with a flat or slightly increase in net interest income, record level of net fees and commission and then a decline in net results from items of fair value.

Total expenses are in control, and I'll come back to that. Net loan losses are down, in line with our expectations, also including the provisions for the Danish guarantee package.

You can see on the next slide that the currency impact in this particular quarter is quite small. You can see the reported figures, and you can also see with local currencies in the mid column. So the differences there are quite small, but still differences comparing last quarter to this quarter in comparison to 2009 Q2, there the currency impacts are still a little bigger.

So if I take you through the different lines of our income statement, starting with net interest income. As I mentioned, net interest income is up by 1%, and we have a very good and solid trend with the customer operations, lending and deposit volumes are up. I'll come back to that. And margins are largely stable in most of our markets. Of course, on the back of low interest rate levels, it is a subdued level and we also have lower contribution from Group treasury in this quarter, which is directly a consequence of higher average funding cost when we prolong or issue new long-term funding at higher spreads in comparison to existing redeemed issues.

If you look at slide 10, you can see the underlying volume trend, that we have a good volume trend in pretty much all areas. As in previous quarters, the previous four quarters, we have had a good and stable growth in the Nordic household mortgages, as you can see. And that's also the case for consumer lending. What is a little different this time is that consumer – or the corporate lending in the Nordic area has also grown considerably to 2% in the quarter as such. And that is a little different to the slow growth that you have seen in the last three quarters of 2009 so a clear positive trend in the corporate area.

New European Markets continued to grow, and FID and shipping as well. If you look at deposits, you can see that the total deposits is actually slightly down by 1%. The major reason there is we have some more of financial deposits, so to speak, that has been exchanged versus short-term funding. But the underlying trend in Nordic households and corporate is still fine, as you can see.

Looking at the impact in terms of net result. This quarter the profit contribution from volume is strong. So you see the impact in the corporate lending volumes, and also from the household lending volumes. The margin impact is a little negative, particularly so from the household lending margins, and this is mainly an issue for Norway. And as you may have seen from the report, that decline is largely due to the so-called lag effect, the six-week lag effect, on the household lending margin. A slight decrease, also from very low levels, on the deposit side in the quarter.

We have a positive income – or impact from the FX side, as you can see, at 17 million. Nordic Banking and Institutional & International Banking producing good contributions, and then others, including Group Treasury. And there, of course, the increased funding costs is included, leading to a total change of plus 14.

The interest rate sensitivity, as you are aware of, consists of three different components, the structural interest income risks, and of course the sensitivity to margin development when interest rates go (inaudible), and then finally, we also have an impact at items of fair value from moving of interest rates. And you can see that the impact on net interest income, with the assumptions we're making on margins, is largely unchanged. A little decline from 450 to 430, and net results from items of fair value is a negative 230, which is a slight change to the 100 in Q1.

I mentioned initially that the result from net fees and commissions is up by 13%, as you can see on slide 13. We have a good contribution from the savings area, and we have remained strong inflow of 1.9 billion. And in fact, also during a fairly subdued quarter in financial markets, our assets under management increased in the quarter to EUR170 billion. We also have a good contribution from corporate advice, which as you know, is in line with our strategy to bring that offering to our customers. So, generally speaking, a very, very strong quarter in terms of net fees and commissions.

On slide 14, you can see the net result from items of fair value, down from 548, very strong quarter in Q1, down to 339. This is largely due to lower contribution, of course, from Group treasury and unallocated capital markets business. But what is particularly pleasing for us is that, the customer activity within risk management products is very, very strong and, hence, the result contribution is up by 25%. So very, very strong development for the customer business.

So turning now to expenses, we have had a remained – or continuous strong cost management in the quarter. And as you can see on slide 15, the expenses have increased 2% reported. And if we exclude currency, we have 0.6%. And we also have – as you are aware of, we have continued to invest in our Group initiatives and the strategic program that we're following. And if you exclude those investments, the cost development is, in fact, down by 1.2% in comparison to last quarter.

So, let me leave the P&L and turn a little bit to the balance sheet and risk-weighted assets. You can see on slide 16 that our risk-weighted assets have increased by 3% and of course, the main reason for it is the growth in particularly corporate lending. We have a slowdown now in rating migration, so a very small level of 0.3%. But in fact, the actual impact of credit quality on risk-weighted assets is actually positive for us for a reduction of risk-weighted assets by 1%. And the simple reason for that is that new customers have higher rating than those leaving the bank. The risk-weights are largely similar, slightly down on the corporate side at 60%.

Our capital position is very strong with a core tier 1 ratio at around 10%, or 10%, as you saw, so it's a minor decrease versus Q2. And of course, the high customer activity and the growth, particularly in the corporate side, is offset by a solid profit generation. You are aware of the fact that we are participating in the CEBS stress test, which will be released at 6 o'clock on Friday. And as we have communicated many times, our capital position is very strong, as evidenced by many external studies, and we will have no problems with the CEBS test. We expect very, very marginal movement in our ratios. And as you know, our ratios are very high so, again, no problem at all from the stress test.

Finally, just a couple of words on the funding operations, we have continued to do successfully very good funding. We have issued 10.5 billion, so now a total of 20.9, close to 21 billion, so far this year. And this compares to redemption for the full-year of 18 billion. So, again, a very strong and high activity level on the long-term funding side. So we continued to have a high portion of long-term funding, and part of the issues as you can see on slide 18.

We have done several good issues off late in June where we re-opened a market after a period of closure after the euro crisis. We have continued to prolong the average maturity. So, more out of curiosity from the issues we have made on the long-term side, this year the average maturity is six years of that 21 billion, so a very good performance on the funding side.

And with those words, I'll leave over to your, Ari.

Ari Kaperi

Thank you, Fredrik. Turning to credit quality and the main observation is that credit quality continues to improve in the second quarter. But I will just briefly start from the growth in our lending portfolio, from page 20, just showing that of course in itself that's also a signal of this kind of more normal situation in the markets that credit volume has started to go up. And as you can see, our growth in the second quarter is well diversified between household and corporate sector.

Also within corporate sector is well diversified in various geographies as well as between various industries. So, that growth is coming from all fronts. Nothing is specially picking up from that growth. And then new corporate customers, they are rated very strong so that new customers are very good in the credit quality.

Page 21 shows that the loan loss provisions in the second quarter. And as you can see, and you have heard, the net loan losses were 245 million, equal to 35 basis points. And even that figure includes the provision we made for this Danish guarantee scheme of 58 million. So that excluding this guarantee scheme, loans loss provision we are at the level of 26 basis points on the loan losses. Loan losses are coming down more or less in all countries. Only country was Denmark where the losses were up in second quarter, and that is especially because of this provision we made for all the Danish guarantee scheme. Also, cleaning that up in Denmark, also the losses in Denmark were down. In Finland, they were more or less stable. But in other areas, they were down.

Next page shows the long term trend of increased impaired loans. So that the Q2 was the first quarter in long time we saw the decline in impaired loans, so that they were down by 1 percentage point and still, more than half of our impaired loans they are performing. Still, we increased allowances provisions. And that means that then the provision ratio is going up, ending to 56 percentage points from the impaired loans. And as you can see, that still the level of our collective provisions is relatively high, it's more than EUR900 million.

Then I'm shortly talking about few areas of high attention in this credit area, our credit risk area, starting from Denmark, where we also see signs of clear stabilization to macroeconomic development in Denmark, of course, gives good ground for more normal situation. And as you can see from the slide and the graph, the loan losses are coming down in Denmark, and there you see that the impact of this Danish guarantee scheme. Still there are some areas of cautiousness in Denmark, mainly in the small and mid-sized companies, as well as some parts of the private sector, which seems to be very sensitive to interest rate levels.

But all in all, we think that the situation in Denmark starts to be more and more back to the normal state of affairs. There is a guarantee scheme will expire in the next quarter in the end of our Q3, and there we can see that what is the end result of this scheme to us.

In the worst case, we have to be prepared to provide for additional 50 million in the third quarter, but it remains to be seen if that is needed.

Turning to new European markets, and especially in Baltics, the next slide where you can also see that the situation is improving in Baltics, of course, in line with the macroeconomic situation so that the loan losses are now down in 22 million with this 114 basis points. As you remember, our credit volume in Baltics is very low in terms of Nordea's total credit. But nevertheless, we have seen high credit losses in that area, but now it has clear signs that it's coming down. And as you can see, that this is the level of loan losses we can leave in, in the Baltic operations so that in the second quarter Baltics made already operational profit, including this level of loan losses.

In Poland, in Russia, we have not had problems in the credit quality during the last years. And of course, the situation there is kept more or less in the same level so that there are no issues in Poland and Russia in the credit quality.

And the last page of this section is this rating migration, Fredrik already covered that part. But here you can see that now it's even spread between up-ratings and down-ratings in the quarter. But also, as you can see, that there are movements at both sides so that this is not any kind of static situation, so that we are – all the time rating customers. And now in this quarter we saw the situation that has as many up-ratings as down-ratings.

That was my comments from the credit quality, and now I am turning to Christian.

Christian Clausen

Thank you. I will give a few comments to the strategy going forward. And we are repeating the strategy and reiterating the initiatives, we are confirming that they are working and we are on track. But first of all, the strategy – we said in January it was all about prudent growth. There are still risks out there, one of them was the sovereign[ph] debt problem. So, it's a careful navigation between risk and opportunities if that's the case. So it's not just green lights ahead, we have to be very prudent in the way we grow.

We put up the nine growth initiatives. And we have actually, I must say, been very successful in starting them up, and we have already seen the first results. Of course, it's a long journey over the coming years. But still, I'd like to give a few comments as to how it is progressing.

On future distribution, which is clearly a very big and important project, we have – before we transform 1,400 branches to a new format, we are working with 14 pilots and it's working above expectations. Good results, high degree, number of meetings, more efficiency, and customer satisfaction. So, I'm quite certain that we will increase that number, maybe to around 28 later in the year and then we will make a full roll out in the coming period, starting with the areas where we need to relocate branches or need to change.

Customer acquisition is clearly working. We have a number of initiatives ongoing under that, and we have seen the first results. Finland is well on track. We have hired advisers. We are changing 28 branches to where the customers are, and changing them also to new formats in terms of advising. Better room for ensuring that we can advise customers and taking out transactions and cash.

Corporate Merchant Banking Sweden is clearly working, as demonstrated by one of the slides. We see progress in this very important customer segment, and we increase our share of wallet and have good progress there. Customer-driven Markets business, obviously we see from the figures, and at least the commission figures, that that is working clearly. Again, we have much more to do here. But I think we have made good progress, and we are catching up on the business our customers would have in this area.

Growth plan Poland is still delivering. Variable income is up 50% in the year and we are now ready to start launching branches, at least 40 during the end of the year, and probably delivering – continuing to deliver on this. Again, this project is very interesting, very low risk customers, high income, and a very interesting proposition. And then on the efficiency and foundation, these things typically take a bit more time. But the first deliveries are on the Market platform, where we have derivatives and commodities to deliver in the new set-up.

So, the initiatives and the strategies are clear. We're going to deliver. It takes some hard work, but it will happen. And we are quite confident that Nordea has the potential to actually deliver growth rate at least 10% per year and it will not be a straight line. As we're saying in our outlook this year, it will be slightly lower. But we are sure that over time we will accelerate the momentum because of the initiatives.

And, therefore, we can say that the key messages is, in essence, we are delivering according to our plan, we continue this very strong development customer business in all areas, more or less, credit quality is improving, and impaired loans are down and loan reservations are also down, and the focus is prudent growth and execution of Group initiatives.

Rodney Alfven

So, with this, we would like to open the Q&A session.

Question-and-Answer Session

Operator

Thank you very much, sir. (Operator Instructions). We will take our first question today from Geoff Dawes of Macquarie. Your line is now open.

Geoff Dawes – Macquarie Research

Great, thank you very much. Geoff Dawes here from Macquarie. I have gotten two very quick questions, both on the main banking operations. The first one is, at the Group level you guide for lower loan losses in 2010, can you just confirm, is that true for every country in which you operate? I can't help but notice the trends in Denmark and Finland are slightly less robust than in Sweden and Norway. The second question is on banking margins. Across the four different countries there seems to be a stalling of lending margin improvement this quarter, is that a reflection that you have simply stopped repricing loans higher or is that just quarterly noise? Thank you very much.

Ari Kaperi

Our guidance related to loan losses is not split to any specific countries. We have – we give guidance at the Group level so that it's – and will be tricky to discuss about the various countries. But we see more or less this trend, this positive trend in all of the countries. In Finland, the situation has been relatively stable but not converse. And in Denmark, it's very much related to this Danish guarantee scheme provisions which are needed.

Excluding that impact, I think that it's obvious that also in Denmark we see lower loan losses. That would be my remarks on this.

Fredrik Rystedt

Just as it relates to the margins, we have previously stated that the pick-up in margins, which has continued for many quarters, is a matter of repricing, and we have continued to do that. We have also communicated the fact that the two markets where we believe the biggest potential exists, just because of slow repricing, is mainly Finland and Sweden. And these have – these markets on the corporate side have continued to pick up also in this quarter, but clearly it has slowed down.

The general trend as we believe it should be still for margin pick-ups going forward, although difficult to forecast. But the reason of course is that most banks are likely to have higher funding spreads as we go forward because of regulatory issues.

So, we believe that the long-term trend should still be up, but we have seen a slowdown this quarter, as you have seen.

Geoff Dawes – Macquarie Research

Great, very clear. Thank you very much.

Operator

We will take our next question today from Nick Davey of UBS. Your line is now open.

Nick Davey – UBS

Yes, good afternoon, everyone. Nick Davey, UBS. Just one remaining question, actually. Just wanted to hone in on the capital markets unallocated division as you reported now and the fair value gains line, EUR60 million I think for this quarter. You mentioned in the comments around it in your quarterly report, that's obviously been impacted quarter on quarter by the challenging environment.

Should I read by that, that you might expect returns to increase again in a more normalized environment or should I still be keeping one eye, I guess, on the returns from that line pre-crisis, which were still some way below where you are on a quarterly run-rate? Thank you.

Fredrik Rystedt

Yeah, it is, as you rightly point out, something we believe is low this quarter, and it of course has been affected by the euro crisis generally. And I think that's really important to note, that the total market activity is still at very good levels for us. And if you look at the average Q1 and the Q2 total markets result, it's still on average a very good result.

So, of course it has been subdued this quarter because of the euro crisis. But – and Q1 was also very, very strong in this respect so we expect it to pick up. It is always difficult to have very, very strong quarters like Q1, and Q2 was weak in this respect, as we see it.

Nick Davey – UBS

Interesting. Thank you very much.

Operator

Our next question today comes from Chintan Joshi of Nomura. Your line is now open.

Chintan Joshi – Nomura International

Hi. Chintan Joshi from Nomura here. I have got three questions. The first question is on the SIIR calculation. On the fair value item, you have seen an increase from 100 million to 230 million, if you can just explain in detail why that has happened, essentially, how I read it is you are reducing your guidance to your rate sensitivity here. The second question for me is in Denmark you have devoted a slide to show the stabilization in Denmark, but it feels like you are still cautious on the SME sector. If you can talk about the underlying trends there, what are you seeing currently, and what your expectations are from the SMEs?

The third question is a part of the reason why you have seen weaker trading income is, according to your report, that you are positioned for a positive market outcome, and obviously Q2 has been pretty stressed. And I'm wondering if you can share with us how are you positioned for the next quarter. And kind of related to that, if you see this CEBS stress test from your vantage point, do you see it giving us enough transparency through the disclosures that we get on Friday. Thank you.

Fredrik Rystedt

Yes, I can maybe start with the interest rate sensitivity. And as you rightly point out, it has decreased from 100 to 230 in the line net results from items at fair value. And of course as we have pointed out also in the previous couple of quarters, this is a point of time and measure so it will depend on the position as we have them in any given point of time. Our natural position of course in this area is typically a minus and the reason, and the simple reason is of course both the liquidity buffer and the inventory we have in our customer trading operation is affected by movements in the interest rates so, therefore, we have a negative sign in front of that line.

Now, if you recall, in Q4 the corresponding amount was pretty close to where it was now. So we were geared for higher interest rates at the early part of Q2, or the late part of Q1, as you can see on that minus 100. So it's really a very simple math behind it, it is basically how we position ourselves against the interest rate environment. And that maybe ties into your question three, which I may ask – take the opportunity to answer at the same time. We don't normally comment on our positions, and we should not of course comment on our positions, and I won't do that now either. But generally, of course we have provided that explanation because our macro scenario is, as we point out in the outlook, generally positive on the macroeconomic scenario.

And that should lead to, at least in the longer perspective, higher loan interest rates, and etc. And of course, that was – the opposite direction was actually caused by the euro crisis so that's why we actually took the liberty of explaining that in the report. But normally we don't comment on the positions of course.

Christian Clausen

Yes, maybe on Denmark I would like to elaborate because you also had two questions beforehand, I think it's clear that the credit quality in Denmark is improving.

But there is a fairly big tale in Denmark probably among medium and smaller companies, and the reason is that Denmark was hit pretty bad by the crisis.

The bubble before the crisis was bigger, and adjustment made in the big companies we saw quickly in '08, both in Denmark and Sweden and other places, was very quick. And it means that these big companies are ready now ready to take advantage of growth. The smaller companies, typically sub-suppliers, also with a weaker competitive situation didn't make that adjustment, so they're pretty much still adjusting. And, therefore, we envisage a tail. We haven't seen it very clearly, but we envisage a tail on the small and medium sized exposures. Not of these magnitudes of course, but there will be a tail of loan losses.

And we have not, as Ari said, we are not guiding for each country, and not here either. But I think it's fair to say that where Sweden and Norway in essence have no loan losses right now, or very small magnitude, then Denmark will still have some loan losses, but the level will gradually come down. And exactly when that tale ends is more or less impossible to say. Stress tests –

Fredrik Rystedt

Yes, I can start, maybe you want to comment also, Christian. But I think we perceive it as a successful event in the US market, and of course a similar approach here also in the European market. And I alluded to it at the outset, we don't perceive this to be an issue for Nordea.

We have a very strong balance sheet and we expect only marginal changes in the stress scenarios, including the stress tests, so we are fine of this stress test. And generally, we also believe that the Nordic market, Nordic banks, are likely to be fine. It is difficult to comment on the European markets.

It's important to note that we have gone through a life stress test in the recent couple of years. And we have proven to be extremely strong, made profit in every single quarter throughout this crisis, and of course evidenced, as I said, by a very strong balance sheet at this point in time.

So, the stress tests we're typically making ourselves is more harsh than what we see here in CEBS. But generally, I think it's a good exercise, but this is not affecting us.

Chintan Joshi – Nomura International

If I may just follow up there. I was more interested in knowing if, from your vantage point, you expect that we'll get good disclosures from the stress test. Or will it be like limited disclosure, two-page, or not, or something. I don't know if you have that clarity from your viewpoint.

Fredrik Rystedt

Not fully. I think it's still not fully clear, so I think we have to wait until Friday at 6 o'clock to –

Chintan Joshi – Nomura International

Fair enough. And just to follow-up on your explanation of your interest rate sensitivity, so what I'm taking away is that currently, I mean you are probably not positioned for rate hikes. And but this could easily change in the future, your interest rate sensitivity could easily increase if you position yourself for a rate hike?

Fredrik Rystedt

As I said, this is a point of time measure so it is different in any given point of time. And of course, we have the liquidity buffer, and of course also we manage the Group equity, so we will of course adjust according to the scenarios, within our mandates naturally. So, yes, of course it will change the interest rate sensitivity.

Chintan Joshi – Nomura International

Thank you.

Operator

Our next question comes from Aaron Ibbotson of Goldman Sachs. Your line is now open.

Aaron Ibbotson – Goldman Sachs

Yes, hi there. Good afternoon. I have actually got a quick follow-up question. Fredrik, you mentioned that you sort of expect corporate lending margins to expand and I guess my question is basically why, to be honest? And because interest rates seem to be going up, at least in Sweden and Norway, loan losses are going down, and as far as we heard from the other Swedish banks and DnB NOR the foreign competition is basically at an all-time low.

So I'm just curious as to what signs you are seeing for an upwards move in corporate margins, and maybe if you could split it between large and small, or if there is any regional differences? So, that was my first question.

And secondly just a very quick follow-up on this structural interest – income activity. I just noticed, as the previous questioner did, that it's quite a big move quarter on quarter, and I was just curious if it had anything to do with redeploying maybe some of your excess liquidity, i.e., that you used some of the fuel there. Anyway, thank you.

Fredrik Rystedt

I think your question on the margin is very important, and I was merely referring to the fact that the current trend, as we perceive it is clearly from the regulatory side that liquidity risk will be focused, as you know, in the Basel III environment. And of course, that is likely to trigger longer-term funding, more generally.

And of course, longer term funding as opposed to short-term funding is expensive and thereby triggering higher average funding costs. So, the belief on the corporate margin side is merely a reflection of the fact that most banks will likely have to go down that route of more long-term funding. Not all banks have to do that, it depends on your starting position, and your overall liquidity risk, and how much we have done. But you can clearly see in our books that we have done 31 last year and 21 this year, so far these first two quarters.

So, generally, that is where my belief comes from. But it is, of course, very, very difficult thing to forecast, margin expansion or not, but that's the underlying reason.

Your other question on – it is basically not excess – deploying the excess capital. It is movements that will come from either the liquidity buffer or the inventory within the Markets business and of course, it is also positioned for gearing from different scenarios on the macroeconomic development.

So, it will fluctuate over time. There's no structural shift underneath those numbers, it is movement over time, and it will fluctuate also going forward.

Christian Clausen

I think maybe I can say one more thing about this. It's not to give any detail, we will not reveal our positions, of course. But the logic is very simple here, if interest rate moves up, we make more income on our deposits. So that's the first line. The second line is, if interest moves up we make an immediate net gains/loss on our position in our liquidity buffer because it isn't fixed rate instruments which will take a loss. How we hedge that risk in short versus long rates is exactly what will trigger how big the second line is. And that was where we were hit a bit in second quarter by the financial turmoil because it was expected for long rates to go up, but long rates fell and, therefore, the hedge was of course imperfect, to say the least. I think many banks, or not to say all banks, were hit by this movement.

So, therefore, going forward you should not see this like a black box mystery. It's a very simple thing, you have a liquidity buffer, and sometimes we hedge the interest movements towards that. And that is from time to time and according to what we think we see fit on how big the risk is.

But the first line is very much reflecting the risk, or the positive risk, you can say, of higher income because of higher interest rates.

Aaron Ibbotson – Goldman Sachs

Okay, thank you. And, sorry, Fredrik, but just to clarify then on the first question, so should I read that as if you basically see Nordea as more pre-funded, so to speak, than the main competition? And that, therefore, the main competition will have to increase their pricing and increase their absolute price level, but the net impact will be positive for you, and then maybe neutral for the others?

Fredrik Rystedt

I really don't want to make that comment, I think it's impossible to compare that. I can only speak for Nordea and, of course, saying that we have redemptions of 18 and of course we have pre-funded that, and also of course pre-funded parts of 2011.

So I think it's impossible to comment what others are doing, I can only speak for the market in general and, of course, the need for more long-term funding. It will depend on the regulatory outcome of course, but the trends there.

Aaron Ibbotson – Goldman Sachs

Okay, thank you.

Operator

Our next question today comes from Matti Ahokas of Handelsbanken. Your line is now open.

Matti Ahokas – Handelsbanken

Yes, good afternoon. A question on the deposit margins, if I may? I was quite surprised to see that your deposit margins, mainly of course in Finland and Denmark, are still going down quarter on quarter, this, I guess, is the seventh quarter in a row, or eighth. Interbank rates are up and interest rates are no longer falling in the short, and what aren't the deposit margins increasing? Has there been some kind of structural shift in this item as well or is there some technical factor explaining this all together? That would be my first question.

Then second question is regarding the lending margins. As Fredrik pointed out, and in the previous questions as well, that the lending margins as measured on the interbank rate would go up, but do you expect that lending margins measured against your average funding costs would also go up? Thanks a lot.

Fredrik Rystedt

Shall I take those? Yes, the deposit margin has continued to decline somewhat in basis points not too much. But I think it's a reflection – first of all, deposit margins will vary a little bit depending on the source and what kind of deposits we're talking about. But you can say interest rates aren't moving too much. And of course, deposit margins are extremely dependent on the absolute level of the interest rate. So, interest rate pick-up in Sweden, for instance, is likely to increase that margin for us specifically, or especially, on the transaction account, and also to some extent on the household savings side. So, of course it is subdued and it is also fierce competition.

And one pretty obvious reason for it is that many banks still have a problem in funding their operation on the wholesale market and uses its deposits to fund themselves. And that of course has a competitive impact also on pricing.

So, I think you should actually see it as both a consequence of this latter part and to some extent mix issues, but it has no – I think it will move as we see interest rate hikes. And of course, this is happening now in Sweden. So that, I think, is the likely outcome.

Relating to the lending margins, this is an extremely relevant question. I think the ability to raise lending margins above what the average funding costs will increase in terms of margins, I really will not speculate on. I think that's an extremely difficult exercise, or speculative issue, to discuss so I cannot do that. But I think my estimation is that of course it should at least follow.

And those that will need to do a lot of long-term funding, and those that also maybe will have to do long-term funding at unfavorable rates compared to other banks, will of course suffer a little bit more. So in all fairness and in rates it should be advantageous to Nordea.

Matti Ahokas – Handelsbanken

If I still may follow-up on the deposit side, has the fierce competition, as you referred to, come as a surprise to you? And has that accelerated during the second quarter or any comment on that?

Christian Clausen

Well, I think that we have to separate between time deposits and financial deposits, as we call them, and then transaction accounts and cash management accounts, and these things. So, on transaction accounts, we are very much working at getting them. When we get new customers, we ensure we get all their cash, all their transactions, all everything. There we pay more or less no interest and if interest rates go up we will make more money. Competition is not there on price that is competition about the full costumer wallet.

The second thing is then financial deposits or time deposits. There we have a margin where some customers are very seeking competitive bids whenever they have a time deposit, and so on. That has always been the case. And there margins have never been high, it's always been limited margins also when we go back. Right now it's more or less negative margins this year because, as Fredrik said, some banks use it as a funding source because they need to do that, and especially on the financial deposits that we see some movements.

It's not really a market we find attractive as a funding source because whenever these deposits expire they start new competition round on that one. So, it's not a stable funding source, it's more like a short term wholesale market funding to be compared with.

So, our fixed focus is on the transaction accounts and getting the cash where we know we have the steady and stable deposit of cash, and where we know we have a high interest rate sensitivity so when interest rates go up we will make more money. Where the other area is one where we actually rather would like to maneuver in terms of just being a little competitive and get some of them, but certainly not all just to avoid heating up the competition.

So I don't think – I would call it a bit technical. When you see small movements now in the margin for deposits, I would call it a bit technical. When we see interest rates move up like 50 or 100 basis points, I think you will see completely different figures, especially from the transaction accounts.

Matti Ahokas – Handelsbanken

Great, thanks.

Operator

(Operator Instructions). Our next question today comes from Fridtjof Berents of Arctic Securities. Your line is now open.

Fridtjof Berents – Arctic Securities

Thank you. As you mentioned, the average maturity on the long-term funding you have taken up in first half of 2010 was six years, and if I understood correctly, there were like 18 billion maturing also in first half. Do you know the average maturity of the 31 billion you took in 2009? And if I remember correctly, I think that the average maturity of the wholesale funding in total in 2009 was 3.8 years, and I wonder what that number is today, if you have one? And my second question is just maybe more curiosity. Note six in your report, looking at your net loan losses specified there, it's an off balance sheet item which is quite large, and I wonder if you could be any more specific and what that is related to? Thank you.

Fredrik Rystedt

Yes, let me start with the first question, just maybe a clarification, but 18 billion is not the first half, it's the full 2010 redemption. So, basically, we have made 21 in the first half and we have a full year redemption of 18. The first half is much less than 18 so we have pre-funded, as I mentioned.

Then coming to your average maturity for the 31 last year, I don't know exactly. But I think more relevant perhaps is the full average maturity for the entire funding portfolio, which is 3.8 years. So, that's the numbers.

Ari Kaperi

If I take your second question, this note six, or what was the number, so it's mainly two issues. This provision is part of this Danish guarantee scheme that is booked on that line, that's the other explanation.

The other explanation is that we also are providing for some proceeds in the bank guarantees we have given on behalf of our customers, and then that's, of course, off balance sheet item, that's where it's shown.

Fridtjof Berents – Arctic Securities

Okay, thank you. If I may just follow up, so the 3.8 years, was that the end of 2009? It's the same after first half 2010, or you haven't got the number maybe for –?

Fredrik Rystedt

But I said it has increased. At the end of 2009, December 31, the average maturity on the long term was 3.0 years, it is now 3.8 years.

Fridtjof Berents – Arctic Securities

Okay, thank you.

Fredrik Rystedt

No problem.

Operator

Our last question today comes from Chintan Joshi of Nomura. Your line is now open.

Chintan Joshi – Nomura International

Just a quick follow-up. I just wondered if you could remind me the volume of your transaction deposits?

Fredrik Rystedt

Yes, we can do that, 25 billion, roughly 25.

Chintan Joshi – Nomura International

Thank you very much. Have a good evening.

Fredrik Rystedt

Thank you.

Rodney Alfven

We have time for one more question, operator.

Operator

(Operator Instructions). As we have no further questions at this time, sir, I would like to turn the call back over for any additional or closing remarks that you might have. Thank you.

Christian Clausen

Yes, I'd like to thank you all for participating, and for your good questions, and for the answers given in this room as well. And I wish you a good day.

We are moving to London now, so we have a morning meeting tomorrow where you are all welcome. If you want to, you can call Rodney if you want to come in for that morning session where we intend do the same presentation. But of course you have the ability to see us live, which is a good thing.

Thank you very much. Thank you, the call is over.

Operator

Thank you, ladies and gentlemen. That concludes today's call. We thank you for your participation. You may now disconnect.

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Source: Nordea Bank AB Q2 2010 Earnings Call Transcript
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