Nordea Bank Abp (OTCPK:NRDBY) Q3 2022 Earnings Conference Call October 20, 2022 4:00 AM ET
Company Participants
Frank Vang-Jensen – President
Ian Smith – Chief Financial Officer
Matti Ahokas – Head of Investor Relations
Conference Call Participants
Magnus Andersson – ABG
Andreas Hakansson – Danske Bank
Maths Liljedahl – SEB
Maria Semikhatova – Citi
Namita Samtani – Barclays
Omar Keenan – Credit Suisse
Jacob Kruse – Autonomous Research
Sofie Peterzens – JPMorgan
Nick Davey – Exane BNP Paribas
Martin Leitgeb – Goldman Sachs
Riccardo Rovere – Mediobanca
Matti Ahokas
Good morning, and welcome to Nordea’s Third Quarter ’22 Results Presentation. Here in Helsinki, we have our CEO, Frank Vang-Jensen; our Group CFO, Ian Smith; and my name is Matti Ahokas from Investor Relations. As usual, we’ll start with a presentation by Frank. And after that, you will have a chance to ask questions. [Operator Instructions]
With those words, I leave the floor to our CEO, Frank Vang-Jensen.
Frank Vang-Jensen
Good morning. Today, we have published our third quarter results. The autumn has started with high uncertainty and continued war in Ukraine, weakened macro-economic picture, rising inflation, higher interest rates and reduced consumer confidence, all of these are putting pressure on private individuals, businesses, and societies. We should expect that this uncertainty will be significant also in the coming quarters.
As a bank, Nordea is well placed to weather more difficult conditions. Our business model has been tested many times and proven to be very resilient. And we have all the tools and solutions needed to support our customers. In the third quarter, we maintained high momentum and solid business volume growth in line with our business plan and key priorities. We continue to grow lending volumes despite the volatile environment. This was led by solid growth across the board, especially in the corporate sector. Mortgage volumes were up 4% and corporate lending grew by 12% year-on-year.
Operating profit increased by 2% to €1.3 billion. Q3 is usually seasonally quieter yet we delivered 7% income growth. Net interest income increased by 15% supported by strong growth in corporate lending volumes and higher deposit margins. Net commission income was down by 6% due to the market turmoil, which led to a 13% decrease in assets under management and capital markets activity remained subdued. Net inflow remained positive in internal channels. Net fair value result was up by 18% driven by strong customer activity.
Return on equity increased to 12.7% from 10.8% last year, and the cost-to-income ratio excluding regulatory fees improved to 45% from 47%, a year ago, including regulatory fees it was 48%. Our credit quality remains very strong, with very low realized loan losses, loan losses and similar net result amounting to €58 million affected by model-based fair value adjustments in our Danish mortgage portfolio.
Our capital position continues to be strong and among the best among the best in Europe. Our CET1 ratio decreased to 15.8% from 16.6% in the previous quarter, following approval of our third buy-back program. The ratio is now five percentage points above that regulatory requirement. So all along, a strong set of results driven by the active customer focus of our employees and our decisive action to continuously improve our business momentum.
Our strong performance over the first three quarters of this year means that we have updated our outlook for ’22. The cost-to-income ratio for the full year of ’22 is now expected to be 48% to 49%. Previously range was 49% to 50%. Our return on equity outlook for ’22 is unchanged and will be above 11%.
Let’s now look at the results in more detail, starting with the income lines. In the third quarter, we maintain high customer activity and business momentum to drive volume and growth across the business areas. Net interest income grew by 15% year-on-year. Greater economic uncertainty and an increased interest rate had a negative impact on mortgage and SME lending volume growth during the quarter.
Despite this, we continued to win market shares across the region, with mortgage lending up 4% and corporate lending up 12%. SME lending grew by 6% while large corporates lending grew by 25%. We saw an uptick in event-driven financing from large corporates seeking acquisitions to capitalize on the current valuations. We also saw a significant increase in short-term liquidity financing needs, for example, in the energy sector in the Nordics. We are well positioned to meet and to capture the increased demand on the corporate side.
Alongside lending growth, the increase in net interest income was supported by higher deposit margins. On the other hand, there was visibly lower consumer activity in the Nordic housing market during the quarter. Market growth is slowing down but we are still growing and increasing our market shares across the Nordics. The margin pressure on lending continued in the current fast moving rates environment.
During the third quarter, central bank policy rates in Denmark and in Finland turned positive following those of Norway and Sweden in previous quarters. We adjusted customer deposit rates to support our deposit saving offering across the Nordics. Although the higher interest rates will dampen economic activity in the midterm, they should also be seen as healthy adjustments, gradually returning to more normalized market conditions in the long term. For many years, only two of our three engines have been working, the lending and the fee engine but now the deposit engine is back as the third one.
Higher deposit margins have clearly started to contribute to our income growth. We expect this trend and the clear positive impact on our results to continue. For Bank this signals a healthy return to more normal market conditions. Continued economic uncertainty and weaker financial market impacted net fee and commission income. Net fee and commission income was down by 6% year-on-year. Savings fees were down following the reduction in effect under the management which were 13% lower in the quarter.
Even in more challenging markets, the strength in our — of our business is visible. For example, Private Banking had a continued strong positive net flow in the quarter. Brokerage and corporate finance fees are still subdued due to lower customer activity. We have a strong pipeline and this is an area that is likely to recover when there is more confidence in the markets.
The NCI result was supported by higher payment and card income, which increased by 11%. This was due to higher customer activity, especially in consumer cards. The net fair value result was supported by our high customer activity in the quarter, the contribution from customer areas improved by 21%. The volatile market conditions have increased the demand for FX and interest rates, hedging products, and our product and service offering is meeting the high demand well.
Market making operations was also up, driven by FX rates and equity trading and supporting the overall positive result development. The overall net fair value result was up 18% year-on-year. Cost increased by 4% year-on-year in line with our plan. Cost excluding regulatory fees increased by 3%, driven by investments in line with our business plan, which prioritizes growth in specific areas. Staff costs were flat. Going forward, we will remain focused on maintaining strict cost control and growing revenues faster than costs.
Our credit quality remains strong. We have the most diversified portfolio among banks in the Nordic region, both in terms of countries and sectors. In the third quarter, net loan losses and similar net result amounted to seven basis points or €58 million. Realized loan losses were very low across the sectors during the quarter. New net provisions for loan losses increased slightly to €29 million. We also booked at €29 million model-based fair value adjustment due to lower house prices on our mortgage loans in Denmark.
We kept our management adjustment buffer unchanged at €565 million. This allowance continues to ensure a strong reserve to cover both credit losses and planned improvements to provisioning models. Our capital position continues to be very strong, and among the strongest in Europe. Our CET1 ratio was 15.8% down from 16.6% in the previous quarter, this follow the reductions due to the third share buy-back program.
As expected, our CET1 requirement increased to 10.8% due the quarter due to increased counter-cyclical buffers in Denmark and in Sweden. Our CET1 ratio is five percentage points above the current requirement. And as outlined at our Capital Markets Day earlier this year, we continue to implement an efficient capital structure and distribute excess capital to our shareholders.
Let me now move on to our business area results. Our business areas continue to deliver a strong performance in the quarter. In Personal Banking, we maintain high levels of activity and continue to provide proactive advice and support our customers during the financial market’s turbulence. Due to the market environment, our customer’s investment activity decreased while their interest in deposit products increased.
Payment and card fee income also saw positive developments. The rate hikes improved our deposit margins, whereas mortgage margins remained on pressure in Sweden and in Norway due to higher funding costs. With positive central bank rates across the Nordic Region, we now also provide our customers with broad deposit saving offering in all countries. Mortgage lending volumes grew by 4%. Despite the lower housing market activity, we continued to gain market shares across the board.
During the quarter, we launched a new version of our mobile app in Finland completing a full Nordic rollout. The new app was created based on customer feedback, and provides an even more personalized experience and further tools for customer’s financial wellbeing. Overall, feedback on the new app has been very positive. We have also continued to see a steady increase in the number of mobile users up 6% year-on-year. Total income was up 6%, return on capital at risk improved to 19% compared with 18% a year ago, and the cost-to-income ratio improved to 49% from 51%.
Business Banking continued its solid growth and as in previous quarters and lending volumes increased by 6%, net interest income increased by 23% year-on-year, driven by higher volumes and improved deposit margins following the rate hikes. Meanwhile, equity and debt capital market income remained subdued due to the macroeconomic uncertainty. Credit quality remains strong with low realized loan losses.
We are continuously developing new digital features for our SME customers in order to make banking smoother and easier. For instance, we piloted a digital cash management solution within Corporate Netbank enabling our customers to speed up, streamline, and simplify their internal treasury and payment processes. We also continue to support the transition to a more sustainable future.
Our green loans portfolio increased by 80% year-on-year and green deposits more than doubled from the previous quarter. We see a clear a clear upside in sustainability linked products and services. Return on capital at risk in Business Banking increased to 18% compared with 15% a year ago, and the cost-to-income ratio improved to 42% from 48%.
Large Corporates & Institutions continued to drive up customer activity. The combination of high proactivity and customer demand led to a significant lending growth in the quarter. Lending volumes increased by 25% as corporates increasingly turn to us for their financing needs. As mentioned earlier, we saw an uptick in an event-driven financing from corporates seeking to capitalize on current valuations.
There was also a significant increase in short-term liquidity financing needs, for example, in the Nordic energy sector. The weakening markets meant that brokerage and corporate financing or finance remain muted and capital markets activity was lower. Credit quality remained strong with net reversals in the quarter.
Within sustainability, we are on track with our target to facilitate €200 billion in sustainable financing by ’25. In addition, we were once again ranked number one for Nordic financial sustainable bonds. Economic capital was up 10% year-on-year due to the increased lending and higher requirements for market risk capital in a more volatile business environment. Return on capital at risk increased to 16% compared with 13% a year ago, and the cost-to-income ratio improved to 41% from 46%.
In Asset & Wealth Management, the quarter was heavily impacted by the weak financial markets. We maintained very good business momentum in Private Banking. Net flows were at the highest level ever for the third quarter amounting to €1.1 billion, this was mainly driven by increased new customer acquisition. We continue to leverage our internal network to attract new customers. For example, we focused on new wealth generated through sales of businesses. These efforts contributed to increase of 9% in lending volumes and 15% in deposit volumes in Private Banking.
Our private assets offering had an inflow of around €500 million in the first nine months, gaining third attraction during the third quarter. We also continued to strengthen our digital capabilities to become the digital leader within savings. Naturally, market conditions were challenging during the quarter, total income decreased by 1% following the development in the asset under management, AuM were at €341 million in the quarter, down 13% year-on-year. Despite the challenges, return on capital at risk improved to 34% compared with 28%, a year ago, and the cost-to-income ratio improved to 45% from 47%.
To sum up, Nordea showed a strong performance in the third quarter, and we made progress in executing our business plan and delivering on our financial target. The Nordic countries have faced increased macroeconomic uncertainty following the higher inflation and lower GDP forecasts. Visibility is currently low, and we expect the challenging environment to continue during the coming quarters.
The times ahead may be tough, but the Nordics — the Nordic societies are strong and well prepared to weather more difficult conditions. At Nordea, we are well positioned for this environment, and we have a resilient business model. We expect to benefit from the strength and the breadth of our business as well as from the higher interest rates. And we are committed to reaching our ’25 financial target of the RoE above 13%.
In order to improve our performance and reach our financial target, we will continue to lever on our three key priorities, creating their best omnichannel customer experience, driving focused and profitable growth and increasing operational and capital efficiency. We’re also delivering on our two key levers across the entire bank, being a digital leader among our peers, and integrating sustainability into the core of our business. Nordea is a strong and safe bank. We are here to support our customers and societies where we operate. And that is our way forward, to be the preferred financial partner for our customers, in both good and challenging times. Thank you.
Matti Ahokas
Operator, we’re now ready for the questions. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator instructions] We will take our first questions from our participant.
Magnus Andersson
Yes, hi, this is Magnus Andersson at ABG. I have three questions on NII. Just, thanks for providing that NII or interest rate sensitivity on Slide 17. I was just wondering about the interval there for 2023, you have an interval of €300 million which is roughly 5% of the probable outcome for 2022. So I was just wondering what the main uncertainties are there? Is it actually various degrees of pass through between account types, etc., you’re out about there on the slide or is there something else?
Secondly, I was just wondering about the negative lending modeling impact here. You had over €72 million in Q3. How much of that that is due to floors in euro denominated lending, i.e., how much would disappear now when we go from positive territory to positive — even more positive in Q4?
And thirdly, just on your volumes, as you say you have very strong corporate lending volume growth year-on-year. But when I look at the sequential development, it looks like it slows down a bit here in Q3 versus Q2. Whether there are any temporary bridges, etc., rolling off or if it’s just the lower demand? Thank you.
Ian Smith
Good morning, Magnus.
Magnus Andersson
Good morning.
Ian Smith
I’ll talk to you first two. And then maybe you can repeat the third because I was busy scribbling.
Magnus Andersson
Yeah.
Ian Smith
So in terms of the NII sensitivity slide, I think you indicated you understand it. It’s the gross impact of solely policy rate rises. And there are a bunch of things that will also impact the NII development next year. In terms of the interval, very specifically, I think there’s still a degree whenever you project the future of uncertainty as to timing, and quantum. And so that’s why we have a bit of variation there in our estimate.
On the negative lending margin, specifically around about €40 million of that related to the erosion of the floor boost and so, the pressure we saw on the lending side came from that. And also still a little bit of catching up in Sweden, and Norway with customer pricing versus what we’ve seen in terms of increased funding costs. So those are the components there. And of course, the floor boost is now or the floor boost impact, the negative is now largely eliminated. So that won’t be a feature going forward. Your third question?
Magnus Andersson
Yeah, yeah, may I just follow up first on NII sensitivity there? Is it fair to say then that, I mean, I see your assumed policy rate path, is it fair to assume the sum of the uncertainties due to the fact that you also have to estimate the IBOR rate moves around that? So that might be timing differences, etc.?
Ian Smith
Yes, a little bit of that. So — and yeah, so that’s why we give a range.
Magnus Andersson
Yeah. Okay, thank you. Yeah, just on the volumes, I mean, you have strong growth year-on-year there, but I noted on the business areas that the volume driven NII part is lower in Q3, than in Q2 on the corporate side, whether that’s due to anything temporary rolling off in this quarter, or if it’s more — if this is a more reasonable underlying growth quarterly growth on the corporate side?
Ian Smith
I think the key driver there is about mix. So, for example, where we are providing additional lending to very highly rated corporates, there’s a little bit of margin mix on that. So mix-related rather than anything else.
Magnus Andersson
Okay, finally, just if I may, it looks like your appetite for property management levels in Sweden is much lower than some of your peers. It’s been like that for the last couple of quarters, you have Handelsbanken and Swedbank has ramped up within that segment. We’ll see if that has continued in Swedbank next week, while you are down to almost zero growth there. Is that a deliberate decision of you to be more cautious within that segment rather than taking the opportunity and perhaps add-on some good credit?
Frank Vang-Jensen
Yeah, hi, Magnus, this is Frank?
Magnus Andersson
Yeah.
Frank Vang-Jensen
We have been cautious for quite a long time. And I think that is very helpful now, to be honest. Then it is not that we are closed for new lending, right? We just want to ensure that that the customers do have the repayment capacity if we enter new business. So you would — you should not expect us to have a, like big step-up or increase here on the commercial real estate for the coming quarters. But if there’s high quality business where we can support, of course, we would be positive to look into it. But we have to remember, it’s always what you have done up to a crisis that is important and then you can do some management within the crisis or during the crisis, but if you enter with like a solid quality and a low exposure, then of course, it becomes a bit easier.
Magnus Andersson
Okay, thank you very much.
Operator
Thank you. We will take our next questions from our participant.
Andreas Hakansson
Hi, it’s Andreas Hakansson from Danske. And two questions. Coming back to Magnus’ questions on the NII sensitivity on Page 17, if the gross number that you talked about is €1 billion to €1.3 billion and then you give us four other drivers of NII, and could you give us a little bit feel on these other four drivers? Would you say that those are going to add positively or negatively to the €1 billion to €1.3 billion, so the overall NII is going to be better or worse than a €1 billion to €1.3 billion?
Ian Smith
You want to take that one or do you want to do the second question as well.
Frank Vang-Jensen
You can take that one first, if you want.
Ian Smith
Yeah. Okay. So yeah, we highlight, as you say, Andreas, this is sort of solely related to the rate impact, clearly volumes and we expect to see some growth. And we’ll have and wholesale funding costs, it should be pretty clear that they’re going up. And we will, we also have the, I guess, a small headwind from the rolling off of deposit hedges, certainly in ’23, and a little bit into 2024. So those are things that go against us. The one that is very difficult to call is what happens on the pricing side on lending, and particularly the impact of competition and so difficult to understand where that will end up. Our estimate is certainly that volume benefits outweigh the two negatives of funding cost increases and deposit hedging. And the big unknown is asset pricing and Andreas, we have to leave some things for you guys to guess.
Andreas Hakansson
Now we appreciate that. Thanks for that, then I have a question on costs, because clearly, now you’re guiding for what seems to be a very attractive revenue momentum. And you have very much talked about cost-to-income now in this year. And if I just put in the revenues into consensus, we start to see a cost-to-income ratio coming down quite low already down to where you’re really targeting for 2025. Could you give us any sort of guidance where we should expect cost-to-income to move next year, compared to the 48% there, roughly this year?
Ian Smith
I think it’s a little too early to call that Andreas. We’re all dealing with some uncertainty in relation to inflation, not that the inflation, not — there’s no uncertainty as to the existence of inflation. But we’re about to enter into negotiations in relation to salary increases and other costs for the coming year. And there’s no question there is some pressure on those costs. And that will, I think feed through into the cost base. It’s hard at the moment until those are concluded to give any clear guidance. So that’s something we’ll come back to in Q4. But the key message is that we do expect to see some pressure on the cost base from inflation.
Andreas Hakansson
Yeah, perfect. And then just a quick question just on commercial real estate, we saw that Stage 3 loans fell in the quarter but we don’t see how Stage 2 is developing. We saw that your provisions you take Stage 2 for commercial real estate. Could you tell us what was the movement in the CRE at Stage 2?
Ian Smith
So I don’t have that in front of me. So I guess, if, Matti, if we don’t have that —
Andreas Hakansson
I can take it with Matti later on, with that.
Ian Smith
Take it afterwards, yeah.
Andreas Hakansson
Yeah, thank you.
Operator
Thank you. [Operator instructions] We will take our next questions from our participant. Your line is now been open. Please go ahead.
Maths Liljedahl
Thank you, Maths Liljedahl, SEB here. And some follow-ups on the corporate side LC&I, there was a huge deposit growth as well, if you can shed some light on whether that was driven by FX or dollars or if it is companies actually preparing here pre-funding and preparing for tougher times. That is question number one. And then, two, if you could also give us some more insight to the loan losses in Denmark, should it should we see this as a one-off adjustment due to the lowering house prices or could we expect this to continue? Thank you.
Ian Smith
Morning, Maths. So yes, the LC&I deposit effect was heavily influenced by deposits and companies in the energy sector who are both stocking up on liquidity but also have seen strong cash inflows and those deposits are held to cover, amongst other things, increased margin costs on collateral etc. So there’s a degree of, both general deposit growth, and then a significant impact in relation to companies in the energy sector, for the reasons I’ve described. So an element of that is and we would, to some extent expect that to be with us for a while, because energy companies do face those challenges around liquidity for the next sort of 12 to 18 months or so in relation to their forward commitments. In terms of the Danish fair value model valuation adjustment, very much front-end loaded. So, we’ve seen the negative developments in house prices in Denmark over the last couple of quarters and we wouldn’t expect to see much sensitivity to that going forward, we’ve taken that up front.
Maths Liljedahl
Okay, thank you. Then, maybe one follow up returning to our favorite beloved slide here, Slide 17 on the NII sensitivity, if I look into the rate path there, are you using your own macro team? Because I see there’s no [TIL], if I look at market expectations, we start to actually drop the interest rate in the end of 2023. So that we start to see lowering of interest rates or what is this based on this, is that the macro team or how do you see it?
Ian Smith
Yeah, that’s Nordea house view. And as I guess, as you’ve implied, things are moving around quite a lot. But, yeah, it’s the Nordea house view.
Maths Liljedahl
Okay, thank you.
Ian Smith
Just, they’re not that different from the kind of general development, we have a terminal rate in Europe at 2.25%, Denmark 2.15% and Norway 3.25%. So, but these are the assumptions that we base it on and of course they change on a daily or even weekly basis, Maths, but we’ve given what we believe is the case.
Maths Liljedahl
Yeah, okay. Perfect, thank you.
Operator
Thank you, we will take our next questions from our participants. Your line now has been open. Please go ahead.
Maria Semikhatova
Yes, hello, thank you. This is Maria Semikhatova from Citi. A couple of questions, first, again, on Slide 17, thank you so much, that’s quite useful, just wanted to get a better understanding on your assumptions. But first of all, what you assume as pass through on savings and transactional accounts, and maybe if you could remind us the split between these accounts, as of the end of the third quarter? Then on contribution from central bank, I believe you have €45 billion with the ECB, just wanted to check, given the current debates on tiering, what is included in your assumptions on benefits from central bank and if it’s included in the Finnish part? And then outside of an NII outlook, just would your thoughts on challenges that households are facing. I know you have a relatively small part of consumer loans around 8% of your total book. But do you see any signs of stress across your portfolio? And then with regards to mortgage exposure, if you have received any requests to suspend amortization or any other kind of issues that you see from your own customers? Thank you.
Ian Smith
Good morning, Maria. I’ll deal with the question is on NII and hand to Frank on the perspective of households at the moment. So we’re not giving our assumed pass through here. It’s broadly based on how things have been to-date. And our assumptions going forward are quite sensitive, I think, in terms of both sort of competitive view, so we’ll keep that to ourselves for the moment, but it’s a fairly balanced approach. And in terms of just our split on deposits, you can work on sort of roughly 50/50 between transaction accounts and savings accounts, at the moment. Now that profile may change. But that’s how we’d look at it.
And in terms of our assumptions on what happens with money at central banks, and particularly ECB. We haven’t baked in any assumptions or scenarios on reserve tiering or anything of that nature, we were planning on the basis of current arrangements proceeding. And I guess what I would point out is in relation to TLTRO, which is where a great deal of this sensitivity and speculation comes from, we were amongst the lowest users of TLTRO. There are many estimates out there of impact of TLTRO in the current environment, I think some published by your own house. And its lowest impact for us if anything changes there compared to some of our peers across Europe.
Frank Vang-Jensen
Good. Regarding the household side, it’s a very strong portfolio we have and nothing has changed. And there are no signs as of now, of any weakening of the portfolio. Looking at the Personal Banking of ours, the total lending is around €170 billion, of which €150 billion is mortgages. And mortgages is having, in general, a quite low LTV, stable, and people pay their mortgages. That is how it has played out, in many, many, many, many last years. And that is also our clear assessment that that will happen this time. The last 20 or the last part of the portfolio is collateralized and non-collateralized, the total amount is €20 [million]. So out of the €170 billion, €20 billion is, you can say, auto lending, around €14 billion, as I recall it, €14 billion or €15 billion of that €20 billion is collateralized lending. That would be mortgages booked in the banking book. It could be car financing, these sorts of things. And then there are some €5 billion, €6 billion left within consumer lending, you can say, non-collateralized with credit cards, it could be sort of top-up loans, these sorts of things. And there’s no signs in these portfolios at that points to a weakening credit quality as of now. And I should say, we don’t expect to see any major credit losses within the Private portfolio.
Maria Semikhatova
Thank you so much. Just a quick follow up on the transactional and savings accounts split. This is applicable for both Business Banking and Private Banking deposits, to refer to total?
Ian Smith
Yeah, it’s a high level assumption, but it’s reasonable.
Maria Semikhatova
Thank you very much.
Operator
Thank you, we will move to our next questions from our participants. Your line will be open, please go ahead.
Namita Samtani
Hey, it’s Namita Samtani from Barclays. I’ve got two questions, please. Firstly, what percentage of your cost base is directly linked to inflation? Secondly, could you tell us what you’re seeing with respect to household deposit movement in Sweden and Norway, in particular? Are customers changing behavior and moving their deposits from transaction accounts to savings accounts? And also just on the corporate deposits, what is Nordea paying to corporate customers? And lastly, has the LTV on the commercial real estate book changed from last quarter? I think you said it was 55% in the second quarter. Thanks.
Ian Smith
So in terms of, — good morning, Namita, sorry. I mean, broadly speaking, our principal sensitivity on inflation is what happens with wages and salaries. And that’s pretty clearly sort of 60% or 60-ish percent of our cost base. And that is something that we will determine over the course of the next couple of months, are in terms of wage and salary settlements. The other items in there that have some sensitivity, clearly there is the general inflationary pressure on all costs at the moment. The one that feeds through immediately is lease agreements, property lease agreements with indexation clauses, that’s actually relatively small in the cost base. So the main focus is on payroll.
In terms of households deposits, we’re not yet seeing a shift between transactions and savings account balances. I think the more relevant observation is, customers taking much more interest in remunerated deposits and channeling savings that perhaps would otherwise have gone into fund investments into deposit accounts because we’ve got some good offers on those. So nothing in terms of movement between transactions and savings, but a real focus on remunerated deposit products as opposed to fund investments. On corporate deposits, off the top of my head, I don’t have what we’re paying on those. But Matti, can you add that?
Matti Ahokas
Well, they’re very much linked to the, obviously, the money market rates and also individual pricing. So there is no price list on corporate deposits that we could give. Whereas for retail deposits, you can actually track them in on our local website, so what do we pay on savings account? For example, in Sweden, we’re paying 2.9% for two year money at the moment. So that is an important also kind of addition, now as Frank mentioned, to the savings offering on the retail side, but corporates, it’s linked to money market rates and individual pricing.
Ian Smith
And then your last question just on LTV movements in commercial real estate, nothing substantial there. And we indicated back in Q2 that it was a bit above 50% LTV, so nothing substantial in terms of movement.
Namita Samtani
That’s helpful. Thank you.
Operator
Thank you, we will move to our next participant. Your line now has been open. Please go ahead.
Omar Keenan
Good morning. It’s Omar Keenan at Credit Suisse. Thank you very much for taking the questions. Can I ask a follow-up question on the rate sensitivity? Thank you for the €350 million to €400 million. I was wondering if you could elaborate on the pass through assumptions that are in that number. And I wondered whether you could perhaps elaborate on the deposit hedging a little bit and which geographies that impacts? Presumably, I guess that, that I guess deflate some of the rate sensitivity down to €350 million to €400 million. And it means that there might be a ongoing margin benefit a couple of years down? And secondly, I just wanted to ask your thoughts about lending margins and where you see front versus back-book lending margin trends in key product segments and geographies? Thank you
Ian Smith
Yeah, the first part of the question, Omar?
Omar Keenan
Pass through rate.
Ian Smith
Pass through rate, yes, I beg your pardon. So, good morning, Omar. As I said before, we won’t elaborate publicly on pass through assumptions, those are sensitive and are determined based on issues such as whatever is happening in the market at the time, so, but there is nothing unusual in expectations both on the lending and deposit side. And yes, you’re right, the deposit hedging, impact is a small headwind against or in the NII sensitivity in the short term. But as those hedges unwind as the sort of caterpillar effect feeds through, that will start to diminish particularly in ’24 and ’25. So, there will be a bit of margin pickup that comes from that. And in terms of lending margins and —
Frank Vang-Jensen
I can take that one. So, mortgage margins stable in Denmark, stable, a bit down in Finland, not much. Some pressure in Sweden and in Norway. Norway primarily to the — due to basically the market had increased funding and a general competition. Sweden, basically, because the competition is hard, some are pricing very low and some are more slow in the pricing and we are, I should say, in the middle of the pack, but some pressure downwards, you should expect.
Ian Smith
On corporate margins, what we’re hearing back from the businesses, where we’re, it depends on mix clearly. I said earlier that what we’ve seen in the quarter is a chunk of lending to very highly rated corporate and we price accordingly. Generally speaking, across the board, though, if you leave that aside, is we are seeing some margin widening on the corporate side, because we are, seeing some business opportunities there that have come from, whether it be other banks or from bond markets being closed. And I think there’s an opportunity for margin widening there.
Frank Vang-Jensen
With the information we have, as of now, it would be reasonable to expect that the margins will at least be stable, but probably upwards, yeah.
Omar Keenan
Yeah. That’s correct. Could ask just briefly on the on the deposit hedges, can I ask what the size, what the notion of that is? And can we assume it’s fairly even between the currencies or was it focused in one particular area?
Ian Smith
We haven’t given detail on that before, Omar, leave it with us. If it’s something that we think is helpful to share, we will do that widely. Maybe you can, of course, assume that in the countries where the interest rates have been the most negative, there the hedging has been needed, so don’t hedge for positive rates.
Omar Keenan
Thank you very much.
Operator
Thank you. We will now move to our next questions from our participants. Your line now has been open.
Jacob Kruse
Hi, thank you, Jacob from Autonomous. So I had two questions. First off, the — just if you could comment on the CRE book, we got some disclosure from Handelsbanken yesterday. Could you talk at all about what kind of operating net income relative to loans you have on your property management company? And what kind of interest coverage ratios you’re currently seeing and if there are any sensitivities there?
And then secondly, on the NII sensitivity slide, I think in Q2, you commented that you felt consensus for the rest of the year, was too low. And in this quarter with this slide, it seems to imply that if you add your sensitivity to current 2022 expectations, consensus has quite a bit of headwinds built in relative to where you get to if you just add that sensitivity. So is this your way you’re kind of repeating that you feel consensus outlook for NII is still too conservative? Or do you in fact, see these major headwinds in addition to the rate, positive rate dynamics? Thank you.
Ian Smith
Morning, Jacob. So on the CRE book, we haven’t given those kinds of disclosures up till now. It’s, as you know, a much smaller proportion of our credit portfolio, both in terms of overall, but also our exposure to Swedish real estate. And so I think it’s a– it’s not such a big conversation for us, compared to others.
Frank Vang-Jensen
I recall that actually, it’s — what is it, Matti, 3% of our group lending go into Swedish commercial real estate as I recall it. So it’s slightly less. So it’s not — it’s not really a big issue for us, Jacob, but I do understand the question. But we are just having a different portfolio. So it’s not having the same, say, attention.
Ian Smith
Yeah, in terms of our public disclosures, but we’re still very focused on it at a business level, as you can imagine. So and in terms of net interest income, yeah, we did indicate it was, we felt consensus was on the low side back in Q2 and it still is, but I can understand why. And there are a lot of different moving parts involved here and that’s why after careful thought we tried to be helpful here with giving one of the components but probably the most important component in terms of NII sensitivity, and I guess that ought to help with the — with you guys and your estimates going forward. So trying to be helpful here and I am not, there are no significant headwinds in relation to NII development other than the items that we’ve talked about in terms of wholesale funding costs, etc. So a complex picture, difficult to estimate outside in. But there is a very powerful NII driver in our deposit base.
Jacob Kruse
Great, thank you very much.
Operator
Thank you. We will take our next questions from our participants. Your line has been open, please go ahead.
Sofie Peterzens
Yeah. Hi, here is Sofie from JPMorgan. Sorry, to go back to Slide 17. But I was just wondering, what has kind of changed between now and the second quarter, given that previously you said that the rate sensitivity guidance would be slightly above €350 million from 50 basis points parallel shift in rates, and now its €350 million to €400 million. So if you could just elaborate that what actually has changed? And then my second question would be on capital outlook, are there any regulatory headwinds or tailwinds that we should be aware of? And can you just give us an update on the IRB model approvals? Thank you.
Ian Smith
Okay. Morning, Sofie. In terms of what’s changed, when we’ve talked about this in the past, we were always clear that the initial rise, rate rises were helpful. But we had to get from negative into positive territory in Finland and Denmark. And, of course, now we’re there. And that is, therefore, all in more valuable. And that’s the key driver. That’s what’s changed in terms of the guidance as well a little bit with deposit volumes that are stronger than when we were originally estimating guidance and sensitivity there, but it’s principally about all rates now being in positive territory. So
Sofie Peterzens
Yeah, yes. Just related that, may I just ask us, should we expect that when rates move further into positive territory, that the rate sensitivity should decline, given that competition potentially, and pass through increases? Or should we expect the range of €350 million to €400 million go to remain unchanged, assuming rates really go according to your market expectation?
Ian Smith
So I think that this is a good rule of thumb. But look, it’s an estimate. And going back to one of the earlier questions about, why do we have an interval or a range, but that’s because circumstances can change. But I think this is a good, it’s a good rule of thumb for measuring the gross impact of the 50 basis points increase in rates. So I think it’s a good tool for that. In terms of our capital position, and what we see going forward, nothing that we haven’t spoken to you about already. There is an important decision coming up in Finland in relation to reciprocation of the Norwegian systemic risk buffer. So let’s wait to see what that says. But we’ve always flagged that as something that was pending, and giving you an indication of the impact of that. Let’s see what happens. In terms of IRB, we’re still working with the ECB on their approval. I think we flagged last time around that, that would be expected in the first half of 2023. No change there in terms of timing, and we don’t have anything new to add in terms of tailwinds or other things.
There is a new disclosure this time around that we’ve talked about before, but we have actually quantified now, which is the implementation of IFRS 17. As of first of January this year, we’ll reduce equity by, as we say in the report, around €500 million to €700 million net of tax. We’ve flagged that, that that implementation would be a deduction from equity, this time we’re quantifying it for the first time. So that’s something to, I guess, include in your thought process.
Sofie Peterzens
Thank you. That’s very clear. And just on the Norwegian systemic risk buffers, so you expect the decision before end of the year from the Finnish authorities?
Ian Smith
It’s scheduled for delivery in Q4 this year.
Sofie Peterzens
Okay, great. Thank you.
Operator
Thank you. [Operator instructions] We will take our next question from our participant. Your line now has been open.
Nick Davey
Good morning everyone. I am Nick Davey from BNP Paribas Exane. A few questions, please. The first one, sorry, I know we’ve done Slide 17 to death, but the bit of it I can’t understand is the wholesale funding cost reference. Could you just — could you describe to us how you view that because I assume it’s not the rate that you pay on funding costs, I presume that it’s the spread. But either way, with the scale of funding that you have that can do some — quite a lot of damage to the gross positive of raising rates by playing around with your funding costs. I just want to make sure that I’m scaling the right thing there.
And second question, please would be on risk weighted assets were keeping up this amazing ability to keep RWAs below one €50 billion, despite all the positive noise on loan growth. So could you just update us please on the capital efficiency efforts that you’re going through and how you’re managing so effectively to keep RWAs down when I suppose volumes and maybe some risk migration, I would expect to be putting some upward pressure on RWAs by now?
And maybe just a final question. I think in the comments at the beginning, Frank, you mentioned some of the corporate lending demand as being liquidity facilities, particularly for energy companies. And I just wondered if you could flesh out at all the outlook on corporate borrowing, either near or medium term, if when things calm down, you expect a little bit of deleveraging from some of these facilities, or whether just the pipeline is strong enough to — for this to be a sustainable positive? Thank you.
Frank Vang-Jensen
Good, thank you. But let me take the last one and then Ian, please take the two first one. On corporate lending, the picture is lending activity within the SME market is a bit slower than it has been previous quarters. And it’s the best estimate, of course, we can give but I believe that it will continue to be a bit slower in the coming quarters. And then the question, connected to the LC&I, the large corporates and it is, yes, we had — correct that we had high activity supporting the energy companies with margin calls and lots of things. I don’t think there will be any big change in position here in the coming quarters. And the activity level, at least in the start of the quarter here has been quite high as well. So what exactly — how it exactly will play out the coming quarter, it’s hard to say. But we would expect a nice growth within LC&I, the coming quarters as well. But again, we don’t have any concrete data that basically supported more than activity level is — in the market is high. Did that meet your expectations?
Nick Davey
Yeah, very helpful. Thank you.
Frank Vang-Jensen
Ian?
Ian Smith
Hi, Nick. Yeah, so wholesale funding, because it is in reference to spreads and you need to also have regard to mix. We’re seeing, higher levels this year but in relative terms, the increase in impact, say in covered bond funding versus what we’re seeing in senior unsecured or more, so long term issuance is considerable. But we have lower requirement for issuance in that space. So, yeah, it’s an impact, but it isn’t something that, to use your phrase, will do a great deal of damage to the NII position. But it’s something that I think, wholesale funding markets have been quite difficult for certain issues over the last few months. We continue to be a leader in that respect.
On risk weighted assets, so we do see some volume impact impacting the CET1 ratio this quarter. So it’s in there, but we’re offsetting it, as you say, with other actions and continuing to work on capital efficiency, there are no big features in there. So we’re not seeing any particular step down and you see, it’s just tackling a whole bunch of things on profitability. We, in terms of migration, we’re not seeing any sort of rating migration at the moment, that could certainly be something that we see going forward. But in a number of our portfolios, we’re currently well below the RWA floors. So in our mortgage book, in commercial real estate and shipping, so we have risk weight floors imposed there and we have a fair bit of headroom to those floors at the moment if we do see some adverse migration, so it isn’t a concern in the short term. Yeah.
Nick Davey
Very helpful, thank you.
Operator
Thank you. We will take our next questions from our participant. Your line now has been open. Please go ahead.
Martin Leitgeb
Yes, sir. Good morning, Martin Leitgeb from Goldman Sachs. Could I have two, please, and the first one, just a broader one on mortgages, across your footprint. I was just wondering how you see the affordability of mortgages in the respective market, just given them the comparative sharp in terms of rate expectations [probably]? And secondly, I was just wondering if anything has changed with regards to how you look at scope for capital return? On one hand, macro uncertainty has increased since the last reporting date. On the other hand, Nordea keeps generating excess capital and given the increase in growth rate outlook. And the guidance on all the comments on NII, seem to suggest that the capital generation could continue to potentially improve. Is buy-back, in principle still is a tool, you could envisage over the near to medium term? Thank you.
Frank Vang-Jensen
Ian, if you take the last one, could just ask for the first one, I didn’t really get the question as the phone was active. So — Ian?
Martin Leitgeb
I apologize for that. Yeah. I was just wondering, I mean, given the given the meaningful increase in interest rates, I was just wondering how you see the affordability of mortgage borrowers across the [four] markets, are you concern in terms of potential affordability issue for parts of your mortgage book?
Frank Vang-Jensen
Yeah. The answer is we are not concerned. And the reason for that is, first of all, we have — when, so, if you look at our portfolio, we are testing typically around 6% with an interest rate of around 6%. So, customers should be able to cover and if they are not able, then it’s because they are spending more money than they did when they took the loan. And the way I look at the portfolio is basically slicing it in three, you can say, different parts. You have the customers that has a strong cash flow, that has liquidity, that will be able to without any problems cover for the increased cost of living, including energy costs and increased interest rates. They will probably still be concerned and that will income this — impact the spending and then hitting society in broader but it will not be a problem for the repayment capacity.
Then you have the ones that have the capacity, but have increased spending and they will have to reduce the spending, change a bit their habits. They will start to travel less, they will buy less clothes, they will you know do things a bit a bit different, buy cheaper food and so on. But they will have the ability to pay and they will pay because the last thing you stop paying on, that is your mortgage. And that they — and remember in the Nordics, you can’t get rid of mortgage, it is for life, until you have repaid it, also if you go bankrupt, which you then don’t do in Nordics as a as a general rule. The last customer group or we can say party — can say a citizen is the one that is having no assets, so you live in a rented apartment, rented home, you don’t have any assets that you can pledge, you don’t have any liquidity and you are a bit squeezed.
From a bank’s — from Nordea’s perspective, it does not bring any risk because we don’t have any exposure to that customer group. And if we have any, it’s very, very limited. But that is a social issue, right? So it’s societal issue that, of course, is problematic. And of course, as — we should be concerned, but from a bank’s perspective, Nordea’s perspective, it doesn’t bring any losses because we are not exposed with any big number there. So I should say, no, no big concerns there. Then activity, of course, is coming down in the market as people are, sellers at the moment want a higher price, buyers want to have a decrease in the price and then one day they will meet and the activity will start to pick up again. Now we are sort of in a transition. Ian?
Ian Smith
Yeah. Morning, Martin. So in terms of capital return, maybe take you back to how we talked about this at Q2, which was — we announced our third substantial buy-back program, and indicated there that we’d sort of dealt with the obvious excess capital. And as you point out now, it may be that as we continue, and we had an expectation that we would continue to generate capital, and that we would use buy-backs along with other tools for managing the capital base going forward, so almost into a business as usual deployment of buybacks rather than tackling these obvious excesses. And it may be that we will now see stronger capital generation as a result of the interest rate environment. But I think we would still temper at this stage, any expectation there with acknowledging that there’s some uncertainty in the economy, and how that might impact our customers.
And so right now, I think we stick to our philosophy, which says that, in getting down to a sort of 15.8% CET1, we’ve tackled a good deal of our excess capital. And you’ll see us use buybacks going forward, but alongside our dividend policy and perhaps deploying capital into growth or M&A opportunity. So in a more sort of even way, I guess, between those different ways of using capital. That being said, the buy-back program, the third buy-back program is about sort of 40% of the way through, it’ll keep us busy until Q1 next year. And that’s probably a good time for us to just update you guys on the thought process going forward. And we may have a bit more clarity on economic developments and things like that by then as well.
Martin Leitgeb
Thank you.
Operator
Thank you. Now we will move to the next questions. Your line now has been open. Please go ahead.
Riccardo Rovere
Good morning, everybody. Riccardo here from Mediobanca. Just one quick follow up on the NII slide, when you show in 2022 the €300 million, €400 million carryover effect, should we consider the starting point more or less at the level that we have seen in, say, the first half of 2022, given that, like the vast majority of the rate hike will have an effect in the second part of ’22?
And the other thing I wanted to better understand from you, when you say, we should make our assumptions on lending margins, are you referring to competition that is hard at the moment for you to kind of understand where the competition is going to go?
And still related to that, do you have the feeling that the system is still flooded with a lot of liquidity, which may have an impact on deposit betas? I’m not asking you what you plug into that — into those numbers, you won’t tell that. But in general, as a general rule, would you see the system is still lagging with the fairly low, loan-to-deposit ratios and so on impacting deposit betas? Thanks.
Ian Smith
Morning, Riccardo. And so, just look, I think our 2022 sensitivity estimate here is, it’s a good illustration of how to use this. So we show the gross impact on the full year of policy rates. And amongst that, then, when we’re thinking about what happens to NII, we’ve got other factors such as floor boosts and lagging in asset pricing, say for example, in Norway, where we’ve seen those rates — successive rate increases with a lag on repricing assets versus liabilities, so a bunch of different things. So it’ll say that our net impact on or are all-in impact on NII needs to be — needs to take into account some of those different things.
The other important thing to understand is it’s been a build through the year. And so Q4, we’ve seen successive in Q2, and Q3 successively higher contributions, particularly from deposits, as we’ve moved interest rates up. And so you should expect to see a really strong Q4 on the NII side, from this impact. So it’s not even in that regard. And it’ll probably be a similar picture as we go through ’23 although we have that cumulative effect of the rate rises in ’22 contributing.
In terms of lending margins as being affected by competition, I mean, there’s no question that, one of the things that will impact NII development is the competitor response, and particularly in relation to a smaller mortgage market in the short term that, let’s see how the different players react in that regard. Our own view is we don’t chase volume, we keep — we think it’s important to maintain discipline around the development of our mortgage book. Let’s see if others have the same philosophy.
Frank Vang-Jensen
And also just the data point that we have — we haven’t had the cheapest prices until now, right? We have been in, I should say, a bit above the average in the narrow corridor among peers, and hadn’t been outgrowing the markets. And yeah, let’s see, we are getting chosen not because we are the cheapest, because we have a very good offering, and being very easy to deal with and being available. So and I think that that recipe will continue to be a good one.
Riccardo Rovere
Thanks. Thank you very much. And if I may, just a quick follow up, with the US Treasuries 4%, 4.5% or whatever it is, with [Bond] rising to, in general, all sovereign yields rising. Is that a problem for your asset management operations? Meaning should we expect that fixed income funds which represent a non-negligible part of your assets under management, will soften on the back of these, let’s say, sovereigns could become kind of competitive products versus assets under management with lower cost and stuff like that?
Ian Smith
So look, I think you might see some short term impact on valuation, for sure, as those change but then the running yield that you get in that fixed income portfolio has got a bit more attractive, so I think it’s hard to call the balance between those but it isn’t a concern at this stage.
Riccardo Rovere
Very, clear. Thank you
Operator
Thank you. It appears there are no further questions at this time. I’d like to turn the conference back to our host for any additional or closing remarks. Please go ahead.
Frank Vang-Jensen
Just say, thank you guys. Thank you for a good conversation and looking forward to speak again. And have you have any questions, as always, then just call us any day. Thank you.
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