Nordea Bank AB's (NRDEF) CEO Frank Vang-Jensen on Q1 2021 Results - Earnings Call Transcript

Nordea Bank AB (OTCPK:NRDEF) Q1 2021 Earnings Conference Call April 29, 2021 3:30 AM ET

Company Participants

Matti Ahokas - Head of Investor Relations

Frank Vang-Jensen - President and Group Chief Executive Officer

Ian Smith - Group Chief Financial Officer

Conference Call Participants

Antonio Reale - Morgan Stanley

Magnus Andersson - ABG Sundal Collier

Sofie Peterzéns - JPMorgan

Robin Rane - Kepler Cheuvreux SA

Andreas Hakansson - Danske Bank

Maria Semikhatova - Citibank

Adrian Cighi - Credit Suisse

Nick Davey - Exane BNP Paribas

Riccardo Rovere - Mediobanca

Matti Ahokas

Good morning and welcome to Nordea's First Quarter 2021 Result Presentation. Here in Helsinki we have our group CEO, Frank Vang-Jensen; and our group CFO, Ian Smith. My name is Matti Ahokas from Investor Relations.

As usual, we'll start with a presentation by Frank, followed by the Q&A session. [Operator Instructions] With that, I'll leave the word to you, Frank. Please go ahead.

Frank Vang-Jensen

Thank you, Matti, and good morning. Today, we have published our first quarter results, which show continued progress and a strong performance. Before going deeper into the first quarter numbers, let me begin with a couple of words on the current COVID-19 situation. I'm confident that we actually have many reasons to be optimistic, while remaining realistic.

The vaccine rollout is progressing. Societies are gradually opening up and the outlook for economic growth is positive. Naturally, the first quarter of the year has been a balancing act for society, between managing ongoing restrictions and preparing exit strategies from the pandemic. We still need to be cautious. We have to overcome the virus. And we will likely face some setbacks before it's over.

Also the full economic impact of the pandemic remains uncertain. However, there is light at the end of the tunnel. We are moving towards brighter times. At Nordea, we are actively supporting and driving sustainable recovery together with our customers.

I'm pleased to see that we have received encouraging feedback for our efforts and our customer satisfaction scores have continued to increase. High levels of business and customer activity resulted in a strong first quarter. We continued to grow business volumes across the Nordics.

Mortgage volumes were up 6% year-on-year. SME lending volumes increased by 5%, and assets under management were at record high levels, supported by a steady improvement in retail fund inflows.

Total income was up 21%. Naturally, our net fair value result was supported by the strong financial market activity in the quarter. But high growth rates in net interest income and net fee and commission income also contributed well. We continue to work on our cost base and cost developed in line with our plan.

The good performance during the quarter led to a return on equity of 11% and a cost-to-income ratio improving to 48%. In addition, we continue or we continue to benefit from a strong credit quality and a strong capital position. We are well prepared to pay out dividends later this year.

All in all, we are on track to deliver on our business plan and 2022 financial targets.

Let me now move on to the detailed numbers for the quarter. In the first quarter, our operating profit increased by 75% year-on-year, mainly driven by a 21% increase in total operating income.

Net interest income grew by 9%, which is the highest growth rate in 10 years. I'm also very glad to see that the net fee and commission income grew by 8% and was at its highest levels since 2017. Lending, savings, advisory fee income continued to increase, while income from card fees was still approximately 1/3rd below normal levels.

Very strong financial market activities and valuation gains supported our net fair value results during the quarter. A combination of strong revenue growth and cost discipline improved our cost-to-income ratio, which was down to 48% compared with 57% a year ago.

Return on equity increased to 11% from 6.9% despite the negative impact of the high equity base. Earnings per share increased by 73% to €0.19. In the first quarter, net interest income increased by 9% year-on-year. This is the highest growth rate in 10 years. The main driver was a continued growth in business volumes.

Mortgage volumes were up 6%, and lending to SMEs was up 7%. This shows we have been able to build better business momentum during the past year. We continue to see an improvement in lending margins for large corporates, but otherwise the margin development was fairly stable in the quarter.

Lower funding costs and recognition of the benefit of participation in the ECB's longer-term refinancing operations also contributed to the positive NII development. Net fee and commission income was up 8% in the quarter, which is the highest level since 2017. The main driver was strong growth in savings and investment income, which was up 12%. Throughout the quarter, we also had high levels of customer activity in our brokerage and advisory services, especially in our capital market business.

Card-related net fee income remains subdued due to the pandemic, but actually, it picked up slightly towards end of the quarter. Net fair value result was very strong in the quarter. The net fair value growth was high in customer areas following high levels of business activity. The high growth was supported by strong financial market activities and market-making operations.

Valuation gains from treasury revaluations also contributed to the results. Based on historical developments, it is expected that this development will settle at a more normal level during the rest of the year. We continue to work on our cost base and improve efficiency, while also driving income growth initiatives. This work is progressing according to plan, and underlying costs were down 3%. We did report a headline cost increase of 6% in the first quarter driven by higher resolution fees, exchange rate effects and the integration of Nordea Finance Equipment.

Staff costs continued to decrease and were down 2%, even after including the Nordea Finance Equipment integration. It is worth noting that this year the expected full year resolution fee was booked in the first quarter, whereas in 2020, the resolution fee was booked in 2 installments in the first quarter and in the second quarter.

Our full year cost outlook is below €4.6 billion, we are focused on meeting our guidance even though it is becoming more demanding due to the high levels of business activity and strengthening exchange rate. However, exchange rates had and are expected to have an overall positive impact on our results. The quality of our credit portfolio remained strong in the first quarter.

Realized loan losses have been low, and net loan losses for the quarter were €52 million. We have also witnessed stable portfolio development with very limited negative credit migration. The realized loan losses were mainly related to a few individual customers affected by the pandemic. We have retained also substantial management buffer of €650 million. We deem this to be prudent, a prudent approach as the full impact of the COVID-19 pandemic on our customers remains uncertain. It is too early to assess the release of the buffer at this stage. We will continue to analyze the situation closely in the coming quarters.

Our capital position is very strong, among the strongest in Europe. At the end of the quarter, our CET1 ratio was 17.5%, which is 7.3 percentage points above the requirement, even after allowing for the dividends. Our capital position enables us to both support our customers and pay out dividends to our shareholders. Our dividend plan is clear. And the Annual General Meeting in last - in late March authorized the board to decide on a dividend payment of maximum €0.72. This includes the remaining 2019 dividend amounting to €0.33 per share and the 2020 dividend of €0.39 per share.

These amounts are to be distributed after September 2021 in line with the European Central Bank's guidance. In addition, our Annual General Meeting approved the proposal for increased share buybacks. As mentioned previously, share buybacks are a part of our capital policy. And an important tool to distribute excess capital to our shareholders. We plan to implement buybacks after the current restrictions promoted by ECB are lifted.

Let me now move on to the development in our business areas and their respective results. It is encouraging to see that all business areas are progressing and delivering according to the business plan. In Personal Banking, we continue to see high levels of custom activity within mortgages in all countries. In addition, we are creating better customer experiences, which is visible in our increased customer satisfaction scores.

Mortgage lending volumes grew by 6% year-on-year, which is the highest growth rate since 2016. We have increased the focus on our savings business, and this has resulted in continued positive net fund inflows and a 6% growth in savings income. This was partly offset by lower card fee income due to the pandemic. The cost-to-income ratio improved to 52% from 55%. This is in line with our business plan.

In Business Banking, we witnessed high levels of business activity, and a positive development in customer satisfaction scores. Customer lending volumes including Nordea Finance Equipment grew by 7% in local currencies, compared with last year. The growth accelerated towards the end of the quarter with progress in Norway and Sweden, in particular. Capital markets activity among midsized companies was high as well. Costs adjusted for resolution fees increased by 3% due to the cost of integrating Nordea Finance Equipment. The cost-to-income ratio improved to 45% from 49%.

One of the highlights of the quarter was the increase in SME customer satisfaction, especially in Sweden. There, according to the yearly Prospera survey, we climbed from a fifth to a first place for personal contact and ranked second overall. We are growing lending in Sweden, the growth rate was now 6%, and we are gaining market shares. This is in line with our ambition to become the preferred Nordic SME bank.

We continue to reposition Large Corporates & Institutions with a view of achieving a more focused and profitable business area. We are progressing as planned, and the results are gradually improving. The quarter was the third in a row, which our return on capital at risk above 10%. We saw very high levels of customer activity across our focus segments, especially in our capital markets business. In addition, our markets income was very strong during the quarter. Both economic capital and costs are decreasing according to plan and return on capital at risk was 19% in the quarter.

In Asset & Wealth Management, AUM increased by 33% year-on-year to an all-time high of €372 billion. The net inflows were EUR3.3 billion, and it was especially pleasing to see the increased momentum in retail fund net inflows, which amounted to €1.7 billion in the quarter. In Life & Pension, we attracted €1 billion in net flows in the first quarter, twice as much as in the same quarter last year.

Net inflows development was also strong in Private Banking, with net inflows of €1.6 billion, the highest recorded since 2015. We saw high levels of interest in our sustainability product offering and will continue to incorporate sustainability targets into our business plans across the entire group.

Total income was up 13%, driven by the AUM growth, and it is encouraging to see that cost decreased by 3%, at the same time as a strong income and business growth. This led to a solid improvement in the cost-to-income ratio, which was 43% for the quarter, down from 49% last year. It is a sign of our ability to scale our platform in a highly effective way.

To conclude, we are well on track to meet our financial targets for 2022 with a cost-to-income ratio of 50% and a return on equity above 10%. This quarter, we actually reported stronger numbers for both key targets. But more actions and work are needed to deliver this consistently and under somewhat more normalized market conditions.

We will continue to focus on our 3 key priorities to create great customer experiences, drive income growth initiatives and optimize operational efficiency. That also means we will enter the post-pandemic future in a strong position. Our clear priorities are supporting the execution of our business plan and achievement of our targets.

We are continuously learning and improving, doing things a little bit better every single day. This is what I want Nordea to be, a strong and personal financial partner for customers, a more profitable bank and recognized as a safe and trusted member of society. This quarter showed good progress in that direction and the work continues. Thank you.

Matti Ahokas

Thank you, Frank. Now, it's time for your questions. We would like you to limit your questions to 2 per person and if there is time, you're, of course, welcome to ask any follow-up questions. In addition, if there are any questions during the day, please feel free to contact us at Investor Relations.

Operator, I think we're ready for the questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Antonio Reale of Morgan Stanley. Please go ahead. Your line is now open.

Antonio Reale

Hi, good morning, everyone. And thank you for the presentation. I've got a couple of questions, please, the first one on sort of NII and the second one on provisions. The first one, you've been successful in getting market shares across the Nordics. And you said it very clearly, you've improved customer satisfaction, which helps the franchise. My question is what are the recent trends that you see in the Nordic markets? And what are your expectation in terms of volumes and margins from here? What do you expect in terms of NII outlook for the rest of the year?

And if you could just anecdotally share how the changes implemented in Denmark has affected your business. I guess, it's a small positive contribution, but I think anecdotally, if you can share sort of feedback from the network will be very useful. That's my first question.

And second question is on the provisions. We've seen so far this cycle turning out to be lower than most of us feared this time last year. We've seen some peers starting to release provisions. And one of your Swedish peer calling for normalization provisions already in 2021. You've talked about the management overlay buffer of €650 million. You said it's early stage to release it and I understand it.

What would be a normalized cost of risk level for Nordea in this environment? What's your cost of risk on new loan originations, if you can share? Thank you.

Frank Vang-Jensen

Thank you for the question or questions. Let me start with like the expectations to the volume development at least in the near future and also our expectations to margins and the change in Denmark. And then, when it comes to provisions, Ian Smith, our CFO, will take that question.

We have a good momentum. We have a high activity and I should say a stable progress in our business within the core lines or segments in the group. And I don't expect in near future that to change, I should say, good activity in all the countries within mortgages. And I would expect us to be in aligned with our back book market share, I should say, in the near future.

Margins will be somewhat under pressure. That is like the area like in the mortgage business. Actually, there's nothing new about that. That has been the case for many, many, many years. It just goes a little bit up and down, but a little bit squeezed on the margins. But no drama, I would expect. When it comes to SME lending, it is of course a little bit more tricky question to answer, because we have a good momentum. We have high activity.

We are gaining market shares in especially in Sweden and Norway and doing very well in Finland. And Denmark is doing well. It's just a little bit repositioning, where we are working with portfolio and leaving some smaller parts of the business, where it's too risky or it's not profitable for us to be.

And I would expect that the demand for lending within the SME segments will increase post-pandemic. It's just very hard to forecast when what exactly will happen. But at least some demand, and we will take our fair share of that. That is like the expectation. When it comes to the change in Denmark, yeah, as you said, it is not a big impact on the group, but it is necessary to do, as the monetary policy leads to negative interest rates and Denmark was the first country out. And it has been more than 5 years where we have had the cost for the negative interest rates.

And now we are lowering the threshold from DKK 250,000 to DKK 100,000, in line with rest of the market, some positive impact, but nothing that will change the picture of the group.

I think I'll - when it comes to LC&I I should say just to conclude that one, I would expect it to be stable, trending a little bit downwards, and that is in line with our strategy. A more focused, a more profitable LC&I and then a very high focus on, of course, capital market business, which we have also shown in Q1.

And the provision, over to you, Ian.

Ian Smith

Yeah, thanks, Frank, and good morning, Antonio. We don't typically guide on cost of risk and we're not changing our position on that. But we think it's important to maintain our stock of provisions at the moment. And I think everyone will understand that, because we're still waiting for the sort of impact on our customers to emerge over the course of 2021 and probably into 2022.

And in terms of, what we think our sort of running cost is, if we look through the impact of - the special impact of pandemic provisions, we often talk about what we've seen in terms of our 5-year average, which is around 15 basis points for the group. And I think an additional data point to think about there is that we've been continually working with our portfolio over the last few years to derisk where we can.

And I think that's relevant to bear that in mind. So I hope that helps you a little bit anyway in terms of thinking.

Matti Ahokas

Maybe one could also add that the deposit rate changes announced in 2020, which took effect in Denmark now in the beginning of the year had roughly €7 million positive impact both on [pay bank, business] [ph] banking and the changes that Frank mentioned are, of course, then coming in the third quarter.

Antonio Reale

Thank you.

Operator

Thank you. Our next question comes from the line of Magnus Andersson of ABG. Please go ahead. Your line is now open.

Magnus Andersson

Yes, thank you very much, and good morning. Just first of all, NII continuing the discussion, there's obviously been a remarkable turnaround in your mortgage business since 2017. And I was just wondering, since you're obviously gaining market share across the board, what you think you are doing differently since we see quite different trends?

It's definitely not price, at least in Sweden from the data that we have. And also on NII, just on LC&I, you said a slight drop or something like that. So I was just wondering for how long can volumes decline without any visible impact or larger impact on NII? Obviously, you had TLTRO, I guess, in the part of it this quarter.

And my second one would be just on capital since I notice that you're a bit more firm on your statement. I mean, previously, you've talked about using buybacks as a tool in your toolbox, et cetera. Now, you're explicit to say that you plan to implement buybacks once the current restrictions are repealed and it's probably not by coincidence you put that sentence in there. So I was just wondering, do you have anything new there from ECB, et cetera, or in any wordings since Q4 in any report or anything that makes you more firm about you being able to distribute after September 30 than you were in relation to Q4 report? Thanks.

Frank Vang-Jensen

All right, thank you for the questions. Let me take the first part and then, capital, Ian, you will handle. When it comes to the mortgages, there's no silver bullet in running - I know it sounds boring, but retail is about details. And it's to get the details right. It is to be available. It is to be get all people aligned in the group about this is really a core.

It is to have digital solutions that makes the customer able to both get an approval fast, digital, but also sign it digital. It is to have a mobile meeting digitally, video on your, as I said, mobile and discussion with an adviser and it is to do it when the customer wants and not when the bank is like opened 8:00 to 4:00. So it is Sunday, it is morning, it's night. And that's where we are. And then it is a sort of commodity. And therefore, the price needs to be like in the narrow range.

But we are not aspiring for becoming or we don't want to be like the cheapest. We want to be in that corridor. And we are probably a little bit above average, but close drivers, I should say. And that totality getting it right, getting the entire group to team up about it, leads to a strong momentum. So that is what we have experienced.

And it has actually gone on for around 2.5 years. We kicked it off for real in the basic last part of 2018 and have continued to make improvements. So that's where we are. So let's hope that we are able to continue that focus and momentum and there is no signs, and clearly, no ambition that will change that.

When it comes to LC&I volumes, we are not reducing volumes by design. That was not what I'm saying at least, that was not my intention to indicate. But I'm just indicating that a natural consequence of refurbishing from basically a more volume focus to a more profitable focus, that will potentially lead to lower volumes. And that is what we have seen during the last year. And just to guide you that I hope that it will be stable and also increase if it's profitable, but I try to just manage the expectations here. It might go continued downwards somewhat, and that is okay.

So I think that's my comments. Ian, capital?

Ian Smith

Sure. Hi, Magnus.

Magnus Andersson

Hi.

Ian Smith

So there is no sort of substantive progress I guess in - because we're all waiting for September. I think our remarks simply reflect and underline the confidence we have in the strength of our capital position, and our outlook. So I think it's no more than that. We continue to work on our plans for buybacks, and we've been clear about that really for the last 1.5 years in terms of how we're working on that. And we're making good progress in developing those plans.

But nothing substantive from ECB. I know there have been some remarks in public forums. And I think people feel optimistic about a return to normal conditions. But at the moment, this is really a statement of our confidence.

Magnus Andersson

Okay, good. Thank you. And just when I have you on capital there, on risk-weighted assets, RWAs, are there any other moving parts that we should be aware of for the rest of the year than volume FX, et cetera.

Ian Smith

Certainly, nothing in terms of, I guess, sort of business as usual type of movements. As you're aware, we submitted applications in respect of our reapproval of retail models. We're working through that with ECB. We have always said we don't anticipate there to be a significant impact from that. So I think it feels like business as usual for the rest of the year.

Magnus Andersson

Okay. Thank you very much. That's all for me.

Operator

Our next question comes the line of Sofie Peterzéns of JPMorgan. Please go ahead. Your line is now open.

Sofie Peterzéns

Yeah, hi. Here is Sofie from JPMorgan. Thanks a lot for taking my question. And my first question would be on the cost line. So I recognize that it includes the €224 million resolution fund fee. But if you adjust for that and kind of it's around €1.1 billion of cost, and then you take times 4 you get €4.4 billion and then last the €224 million, around €4.6 billion. Just wondering it - the gross target looks a little bit tight, then I recognized [indiscernible] some mentioned it.

But is there anything you can do to kind of overachieve on the cost side? Are there any cost savings that we should expect in the second half of the year or anything that would boost these costs or you can start due to kind of decommission the old legacy platforms faster than expected? So if you could just talk a little bit about your costs that would be very helpful.

And my second question would be on capital as well. I recognize that the base case is very much that you will be able to pay out the dividend in the fourth quarter and also that you can start to implement the share buyback. But under a scenario where ECB for whatever reason extends the dividend ban for a long period of time, what would you do in such a scenario? Would you consider M&A or how should we think about kind of excess capital under a scenario where the dividend restrictions are extended? Thank you.

Frank Vang-Jensen

Thank you. Ian, I believe that capital is your question today, please.

Ian Smith

Okay. Hi, Sofie. So, yes, absolutely, our base case is that the restrictions are repealed. And I think the ECB has been pretty clear that it would only be if the outlook was significantly worsened that they would extend the restrictions and I think in those circumstances, we like every other institution would be obliged to reflect on that and determine the right way forward.

So I don't think it's possible to speculate about what we might do in those circumstances, because those circumstances by definition would be more uncertain. So I think that's really hard to call. There seems to be a degree of confidence at ECB level that absent those circumstances we're back to normal and that's what we're focused on.

Frank Vang-Jensen

When it comes to the cost line, then what we - the guidance of the year is €4.6 billion, which we announced in the beginning of the year. And that is unchanged. But what we also said in Q4 or in connection to Q4 was that in order to get there, we need to reduce gross cost with around 5.5%, corresponding to €250 million, €260 million.

So it is not a trivial task to get it down to €4.6 billion. And we also indicated softly that we really need to work hard with it. And thereby indicating that don't expect a big beat, because €250 million and 5.5% gross cost takeout, that is a quite big step in 1 year.

We have solid plans, showing that we are able to do so and are executing on these plans, and we are in line with the plans after the first quarter. Then we, of course, need to be aware of that we have realized or experienced FX changes during the quarter. And that increase or leverage to cost around €15 million, €20 million. So we, of course, need to have the eye on this and are doing what we can to mitigate the increased FX line.

And then, when we are showing as good growth as we are, then there, of course, are also connected costs there, IT costs and other run cost combined or connected to more business activity. And that is putting a little bit pressure on the cost line. But we are working as we used to do, with firm plans, challenging each cost line and are doing everything we can to deliver on the outlook of below €4.6 billion. Did that answer your question?

Sofie Peterzéns

Yes, that's very clear. Just maybe on the FX. Do you have any FX hedges insight or would you consider putting any kind of hedging insight?

Ian Smith

No. We don't seek to hedge the FX impact on our P&L. And I guess just to supplement Frank's point, although it puts pressure on the absolute level of costs in euros, the underlying momentum in local continues. And we also see benefits in the income line that outweigh that. So it's - overall, net-net, the performance is slightly stronger if we see appreciation of SEK and NOK.

Frank Vang-Jensen

Yeah. And the target, of course, is €22 million cost income of €50 million that is what we are working hard to achieve.

Sofie Peterzéns

That's very clear. Thank you so much.

Frank Vang-Jensen

Thank you.

Operator

Thank you. Our next question comes from the line of Robin Rane of Kepler Cheuvreux. Please go ahead. Your line is now open.

Robin Rane

Thank you, and good morning. So 2 questions, please. The first 1 on the corporate lending module, which has improved. Is this only a function of you reducing less profitable exposures or lending? Or what is driving this otherwise, since, I mean, there's much liquidity in the system, and the DCM market is pretty strong? And then secondly, back on capital and the potential of acquisitions? How would you value an acquisition options versus share repurchases, and also what options would you consider attractive, for example, looking at Norway, and would you consider expanding in mortgages, for example, through an acquisition there? Thank you.

Frank Vang-Jensen

Thank you. Let me take the acquisition as the first question. And then, Ian you can take the corporate lending margin and then try to explain the components there. So, the main focus of ours is organic growth, but then we also are positive to do M&A bolt-ons, if it is targets that are in the core of our strategy. And I should say, as a start point also creates a strategic value for us. That might be some cases that can pop-up where it's more like volumes, where we add volumes to an already strong business.

But, of course, the start point would be, could we do something that will strengthen our strategic - strengthen now offering or standing within a segment, then we would be very positive to look into that. Where could that be? It could be in all 4 countries, of course, and it would be, for example, if we take the 3 last acquisitions we have done, it was in Gjensidige Bank in Norway, that was a retail digital bank that we have integrated now or are integrating in the bank and then basically building on that when it comes to digital offering on consumer finance, for example. It was the [frend] [ph] portfolio in Norway, which is a life portfolio, and then a white labeling to some savings banks in Norway.

And, it was SG Finans that is a Nordic business. You can say main market is Norway, but also Sweden and Denmark are covered. And that has actually strengthened our business and our offering within equipment finance. These are good examples. It's good size. They are not running with too much risk, we are able to integrate them without any major problems, and they fit very well into Nordea.

And when we - and, of course, we have a target list where we would like to have a dialogue, and sometimes also have a dialogue. And so let's see what it would bring. If we don't find - if we grow, what we can within risk appetite. And when it's profitable, and we don't find any targets to acquire, then the excess capital is intended to be distributed by buybacks that's like the order. Ian, corporate lending margin, please?

Ian Smith

Sure. Hi, Robin. I mean, I think, there's a there's a mixture of things going on in the improvement of particular LC&I's margin. I think the first is that Martin and the team has done a really good job of working with customers and reshaping the portfolio. So a mix of loan repricing, picking our spots in terms of the customer business we choose to do, and so a really good sort of benefit from the portfolio reshaping. I think also we do see some benefit from we have some of our customer business with interest rate floors, and so that helps support our margin in an environment where we might see some pressure on interest rates.

And then we also in this quarter, in particular, have a very small benefit, but a benefit nonetheless from the TLTRO additional negative rate. So a mixture of things there, I think, what's most pleasing is to see the progress that Martin and team have made with the portfolio. Yes.

Matti Ahokas

Yes. We're also helped by the FX in the quarter as well. But…

Robin Rane

Okay. Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Andreas Hakansson of Danske Bank. Please go ahead. Your line is now open.

Andreas Hakansson

Thanks, and good morning, everyone. Sorry, just back on capital for a second. I mean, you're talking about your 730 bps management buffer at the moment. But, I think, we all realize that at some stage, the risk buffers are going to come back. And including your own management buffers, should we consider that 15% is really a go to number for you guys, and that would then imply that you have closer to €4 billion of excess capital at the moment and relating to that question is that if you want to do buybacks in Finland, is it easy for you to do buybacks from only 1 part here? Thank you.

Ian Smith

Sure. Hi, Andreas. Yes, you're absolutely, right. And we - the 730 bps is it's a fact. But we look to the long-term on this. And we do expect our normalized level to settle somewhere between 14% and 15% CET1, and we've always been consistent around that. So you're right, in terms of how we think about the excess capital available for deployment. So I think that's the right way to think about it. And there are whole bunch of moving parts that get us back to that normalized level, but we definitely have an eye on. That's the end point.

And then in terms of, I would say that we have the ability to conduct buybacks in a range of different ways in Finland. And it is possible to be able to do a so-called directed buyback if we felt that was the right thing to do. But there's a long way to go before September, and how we might actually do it. But we have the ability to do it should that be the right thing to do.

Frank Vang-Jensen

Yes, perfect and…

Andreas Hakansson

And then 1 more question. I mean, we are not quite but almost half a year away from 2022 now, and if we're just a few things in your P&L and your capital, you are basically reaching your targets already. So I guess most of us start to think about your next target. Can you tell us are you thinking about the discussing to host a Capital Markets Day towards the end of the year and give us targets for 2024?

Frank Vang-Jensen

So could I just - a small comment to capital. So just to make clarify that that as we said it is 7.3 excess CET1 with the current requirement, that is after allowances for the 2019 and 2020 dividend and we are accruing for full dividend 2021 as well just to clarify it. So now focus is on delivering the 2022 targets, and we are progressing well. But we - it is an exceptional quarter, and we need to do this and reach the target continuously, right? So we have a lot of work in front of us are humble about that. But we also happy for the progress we have made.

During the year here, we are working on our strategy for the time beyond 2022. And I would expect us to conclude on the strategy and during the year. And then it would be, but there's no commitment realistic to expect that we would announce new financial targets and also our strategic decisions in the spring of next year. I should say at least after the disclosure of Q4. That would be like the working hypothesis.

Andreas Hakansson

Okay. That sounds very good. Thanks very much.

Operator

Thank you. Our next question comes from the line of Maria Semikhatova of Citibank. Please go ahead. Your line is now open.

Maria Semikhatova

Yes, thank you. 2 follow-up questions on NII and on the costs. On NII, I hear your point that the repricing - further repricing in Denmark should not have any material impact for the group. But do you see any opportunities for repricing of deposits in other Nordic countries? I understand it's challenging on the retail side. But maybe it makes sense to lower for corporates especially for large corporates. And on course, given the challenges you're facing with - this is a good challenging, of course - challenges, of course, with growing business volumes. Just strategically, how are you looking at costs going forward?

Do you still think that cost cap is necessary for the cost culture that you're trying to promote within the organization? Or it would make more sense to look at cost-to-income or other metric and take into account revenue opportunities?

Frank Vang-Jensen

Yeah. So let me take these questions. So when it comes to Denmark, then what I - what we - we're trying to say is that, it will not significant then change the NII for the group, but of course, it will have a positive impact. But for the Danish business, of course, it is important. It's just that it cannot really significant change the NII for the group, but it will have a positive impact of course. When it comes to cost - our focus is cost income. And for exactly the reasons that you mentioned, the important part actually is the balance between income and cost.

And that is what we are having as a target in 2022 of 2022. And that is also the way we run the group, it is just so that we have not guided for anything else this year besides cost, I expect cost and that guidance, of course, was to basically help you about our aspirations for the year. But cost income is like the main KPI to get with, of course, return on equity.

Maria Semikhatova

Understood. Very clear. Because I think before there was an expectation there will be further progress on the cost line, at least that was the wording, but now the focus is on cost income primarily.

Frank Vang-Jensen

Yeah. And just to answer that, it might be the case. But, of course, we have our 3 key priorities to create great customer experiences, drive income growth initiatives and to improve cost efficiency or efficient operational efficiency. And, so we are trying to deliver on all the 3 of them. But if we're not really succeeding with our plans or our ambitions on the income side then, of course, we have the lever of cost and efficiency, and we will work even harder on that one. That's like - but the important part is that to understand that is, it is a combination that is showing the efficiency of the group.

Maria Semikhatova

Understood. And on my deposit cost, if you see any opportunities in other countries to move the rates on corporate deposits?

Frank Vang-Jensen

On corporate deposits, I don't have any intelligence on that question. Anything from you Ian or Matti?

Matti Ahokas

Well, especially in Business Banking, we've done quite a lot of - in all countries. So that has been and that's partly visible in the figures. But obviously, charging for negative rates for corporates has been a trend for a longer period of time. And, of course, we're trying to optimize on every front, the pricing initiatives. Thank you.

Maria Semikhatova

Thank you very much.

Operator

Thank you. Our next question comes from the line of Adrian Cighi of Credit Suisse. Please go ahead. Your line is now open.

Adrian Cighi

Hi, there. Good morning all. Thanks for taking my question. Just a few follow-ups from my side, please, one on targets and the other one on capital. On the targets, you've achieved an ROE of 11% this quarter with very strong fees, very strong trading, and 6 basis points in impairment. You thinking 11% ROE is structurally possible in the medium term given the current business mix under more normalized market conditions, and what would it take to get there? And then secondly on M&A, the discussion there. Did I understand it correctly that you would prioritize bolt-on acquisitions over buybacks? Thank you.

Frank Vang-Jensen

Thank you. Let me start with the targets and if you can take the acquisition part, Ian, afterwards. So on the return on equity, this quarter is a strong quarter, it is built up by a strong improvement in the fundamental business volumes within mortgages, SME lending, and then a strong fee business driven by asset under management and broker and advisory. So it is really most of the income lines that are looking good here, and it's consistently, I should say. So that is one.

But then we also need to remember that the quarter has been a very, I should say, exceptional quarter when it comes to volatility and so, and that has benefited our net fair value. And as we said, we expect that with our historical like data to be sort of no more normalized during the year. But the fundamental lines or like the core of our business, NII, fee and commission, costs, credit losses, I would expect to continue, of course, to show good progress.

Our targets of 2022 is a return on equity above 10%, and now we have had 1 quarter that is having a very high, and if we and credit loan losses and so. So let's see how far we can take it. So - but we are humble and trying to do progress and I think we are doing well, delivering on our plan and when we have like a new strategy in place, and also targets and we will disclose it for the time beyond 2022. Anything to add, Ian?

Ian Smith

No. So I'll just come back on your sort of M&A versus buyback point, Adrian. Good morning. You should always understand our first priority is to get capital into the hands of our shareholders both in terms of dividends, and in terms of using buybacks as a tool for excess capital. We've always thought about M&A in terms of bolt-ons. And as Frank has often use the example of SG Finans as being exactly the kind of thing we would do and of the sort of scale and other things that we think of in terms of bolt-on. So that there's no question, dividends and buybacks remain our primary tool for deployment of the capital we generate and our excess, and M&A will depend on what works for us, but definitely the priority is as I've outlined it.

Frank Vang-Jensen

Yeah. And we are not looking for targets to basically employ our capital, that's not like the situation, of course.

Adrian Cighi

Thanks for the detailed answer. Very helpful.

Frank Vang-Jensen

Thank you.

Operator

Thank you. Our next question comes from the line of Nick Davey of Exane BNP Paribas. Please go ahead. Your line is now open.

Nick Davey

Good morning, everyone. 2 questions, please. The first one on TLTRO, you've increased your borrowing up to €12 billion. I know you told us previously to think about the contribution in this quarter is a one-off. But it doesn't look like it's all of the contribution that you might get for year 1. And I guess, if you keep up lending volumes in the second year, it just strikes me we could see a few more of these positive contributions to NII. So any comments you can make would be helpful?

And the second question is back on the core banking system? I don't know if there's anything to report in this quarter. But really, the invitation is - I know, it's not central to the cost guidance you've given us already. But I wonder if you could give us any kind of updates on progress or milestones this year, so we can just keep track of, obviously, that's quite big project happening in the background? Thank you.

Frank Vang-Jensen

Yes. Thank you for the questions. Let me take the core banking and then over to you, Ian, on the funding side. There's no nothing new to update about in regards to core banking, it's progressing as planned and delivering each quarter new releases and so. But there's no nothing new, but I - let's remember to come back to the question when we have something more concrete to update about. But it's going as planned, I should say at the moment. So nothing new there. Ian, funding?

Ian Smith

Yeah. Hi, Nick. Yeah, so we like TLTRO, and hence the as it's a good source of funding for us, and hence, the increased participation. We stepped up to €12 billion from around about the middle of March this year. I think the difficulty with sort of projecting benefits from this is, because it's contingent on meeting the lending threshold requirements. And we've got to have a good sort of level of confidence that will meet the conditions before recognizing the additional benefit. So we continue to focus on that. The tail doesn't wag the dog in that respect.

First of all, we think about developing our lending in the right way, and if we qualify, then all well and good. So I think we'll come back to that later in the year, we're still making really good progress in what is chiefly lending in Finland, which is where we qualify. So I think it's a good thing to do you'll hear more from us later in the year, I think, just on how we're progressing. But at the moment, we'd want to be confident of reaching those targets.

Nick Davey

Thank you. So for now, we should just treat that as a one-off to be gone out of Q2 results. And then you'll come back presumably in Q4 based on how you've done in the second year. Is that how we should do it?

Ian Smith

It depends on how detailed your model is, Nick. We will see a little bit of spillover, because we upped up participation still within the period where we now conclude we qualified. So we'll see a small benefit in Q2. But when anything more material than that, we'll wait until a bit later in the year to see how we're progressing on lending commitments. So a little bit benefit in Q2, and I would leave anything else out of your model for now.

Nick Davey

Thanks. I'll pop that in line when passing. Thank you.

Ian Smith

…question now, operator, please.

Operator

Thank you. Our final question comes from the line of Riccardo Rovere of Mediobanca. Please go ahead. Your line is now open.

Riccardo Rovere

Thank you. Thank you very much for taking my question. When I look at your liability side, in a year, the amount of deposits has gone up by kind of €25 billion. When I see the amount of securities issued is kind of flat and the amount of subordinated debt is actually down, if I'm not mistaken, if I remember well, year-over-year, is it fair to say that strong depositing could be somehow changing your fundaments, and you will reduce the amount of medium- and long-term issuances in the coming quarter. Is that the case? And if that is the case, what could be eventually the impact on that? And still related to that, it is or could MREL be a problem in that in this case?

And the second question I have is, sorry to get back on capital once again. From all the wording - all your wording in this call what I - again, what I sense is that aside from bolt-on acquisitions, again, buyback seems to be way, be the way you prefer, why not cash, because you also stated that you are gaining confidence on your capital, while a buyback can be started but can be stopped, then shares need to be canceled?

We have already had in other banks situations where the buyback for some reasons was not completed for whatever the reason was. So why not cash dividend if you are confident in your capital position?

Frank Vang-Jensen

Yes. So let me take the capital and then funding over to, Ian. But you're right, cash dividend could be as good as buybacks. It goes a little bit up and down, what the best instrument is. But we have a policy as of now that is to distribute 60% to 70% of our earnings and any excess capital is intended then to be distributed by buybacks. That is like the policy of the company. And then that's why we follow that policy as of now.

But, of course, we have other options if we need or we want to change. So I think that could be my answer to it. So it's not a - it's just a policy we have in place as of now.

Ian Smith

And I think, Frank, we'd also listen to our shareholders and those ongoing discussions with them.

Frank Vang-Jensen

Absolutely.

Ian Smith

So rule nothing out.

Frank Vang-Jensen

Absolutely. It's a living topic. So a very relevant question, yeah.

Ian Smith

So, Riccardo, look, I think you're right to sort of spot the change in liability mix. And I think taking a bit of a step back from wholesale issuance as we did last year and also the sort of capital-related issuance Tier 2 made sense both, because we had strong deposit volumes and also, we had an excess of CET1. So I think we managed our balance sheet effectively through that. And there is, of course, some funding cost benefit. Not just from not doing some of that wholesale funding, but also picking our spots and not needing to go out and do funding at elevated levels.

Things will gradually normalize. We would expect to see deposits settle back towards more normal levels. We're sure we'll resume in due course the capital, the Tier 2 and other stuff as we need to. So I think it's part of the normalization, which we'll do in a measured way. I'm not saying it changing the dynamic particularly either through a net interest income or anything else.

On MREL, I think we're making good progress. We're - we've got a target of issuing around €10 billion of MREL by the end of 2023. We're about a third of the way through that. And we're all on track. So no concerns on I think what you've seen over the last year or so is - the team kind of optimizing the funding strategy for market conditions and we'd expect that to normalize in due course.

Matti Ahokas

That said, we obviously will get the MREL requirement soon as well. So let's get back to on that topic maybe next quarter.

Riccardo Rovere

But if I understand you correctly, at the moment MREL doesn't seem to be a matter of concern for you. For the capital return which would reduce the common equity Tier 1 and the funding [indiscernible].

Frank Vang-Jensen

You broke up a little bit there, Riccardo. But I think the gist of your point was, no, we're not seeing any sort of concerns or stains in relation to building up towards our MREL requirement, which will be confirmed in due course.

Riccardo Rovere

Yeah. Perfect [indiscernible].

Matti Ahokas

Thank you very much for your questions. And as always, you're more then free to contact us at Investor Relations and speak to you later next quarter. Thank you very much.

Frank Vang-Jensen

Thank you.