Nordea Bank Abp (OTCQX:NRDBY) Q4 2023 Earnings Conference Call February 5, 2024 4:00 AM ET
Company Participants
Ilkka Ottoila – Head of Investor Relations
Frank Vang-Jensen – President and Chief Executive Officer
Ian Smith – Group Chief Financial Officer
Conference Call Participants
Magnus Andersson – ABGSC
Andreas Hakansson – SEB
Namita Samtani – Barclays
Sofie Peterzens – JPMorgan
Tarik El Mejjad – Bank of America
Hugh Moorhead – Berenberg
Jacob Kruse – Autonomous
Geoff Dawes – SG
Markus Sandgren – Kepler Cheuvreux
Ilkka Ottoila
Good morning and welcome to Nordea’s Fourth Quarter and Full Year 2023 Results Presentation. I am Ilkka Ottoila, the Head of Investor Relations for Nordea. Here in Helsinki, we have our CEO, Frank Vang-Jensen and our CFO, Ian Smith. Today we’ll start with a presentation by Frank followed by further details on our updated 2025 targets by Ian. After that, you will have a chance to ask questions. Please remember to dial into the teleconference to ask questions.
With that, I’ll leave the stage to our CEO, Frank Vang-Jensen.
Frank Vang-Jensen
Good morning. Today, we have published our fourth quarter and full year 2023 results. 2023 was not a strong year for Nordea. Despite the weakening economic environment, we kept up good business momentum and we moved forward in line with our priorities and business plan and this led to solid financial result. Our return on equity was 16.9% for the full year, up from 13.8% in 2022.
The trend has clearly been positive. Return on equity has consistently improved over the past four years, making us one of the strongest and most profitable banks in Europe. Our higher level of profitability and strong capital generation have above all else, given us a great capacity to support our customers. This has always been our priority and is all the more important in the current economic climate.
Rising prices and higher interest rates have affected economic activity. Households and businesses are feeling more uncertain about the future, but our customers have generally adjusted well to the new environment and the Nordic economies have demonstrated considerable resilience. At the same time, we have seen that our customers continued to show trust and confidence in Nordea as their financial partner. This was evident in higher customer activity and improved customer satisfaction scores in 2003. All-in-all, this was a good year for Nordea with good business momentum, which we also carried through Q4.
If you look at the highlights for the quarter, our return on equity was 15.9% excluding the write-offs of intangible assets we made in Q4. Earnings per share was €0.31. Our underlying profitability was supported by a 19% increase in net interest income as net interest margins continued to improve. Net commission income decreased by 3% year-on-year and net insurance result decreased by 15%. Net fair value result was unusually low after being negatively affected by interest rates volatility. Total income was up 1% year-on-year despite the very low net fair value result.
In Q4, we continued to see robust levels of lending despite the slow markets. Mortgage lending was stable and corporate lending was up 1%. Our cost to income ratio was 42% excluding regulatory fees and the write-offs. We continued to have low net loan losses and our credit quality remained strong, as did our capital generation. Given our strong financial position and our full year results, our Board has proposed a dividend of €0.92 per share for 2023, a year-on-year increase of 15%.
Today we have announced an updated 2025 target. We are now targeting a return on equity of above 15%. I’ll come back to this a little later. For 2024, we expect our return on equity to be above 15%.
Let us now take a closer look at the Q4 numbers, starting with the income lines. Net interest income grew by 19% year-on-year. The increase was driven by higher margins resulting from higher policy rates in all our home markets. These positive impacts were partly offset by lower lending margins and FX impacts. Our deposit hedge continued to be a headwind given the higher rates, but will support our net interest income when rates starts to decrease. With inflation and interest rates at the highest level in 15 years, the housing market has been subdued. Demand for mortgages continued to be slow and demand for new loan promises remained lower than a year ago.
In this market we maintained market shares in our home markets and continued to grow our share in Sweden. In line with the market trend, our mortgage margins remained under pressure. In the corporate market, activity was lower than a year ago; however, we grew our corporate lending by 1% and increased market shares in our prioritized segments.
For net fee and commission income the picture was mixed for the quarter. NCI decreased by 3% year-on-year driven by FX impacts, lower lending related commissions and lower net income from payments and cards. Excluding FX impacts, NCI was stable. Brokers and advisory fee income increased on the back of higher customer activity. Savings income decreased slightly due to lower average assets on the management.
We continue to generate positive net flows within our internal channels €1.9 billion this quarter. The institutional and third-party wholesale distribution net flows remained negative in the current environment. Net fair value was unusually low in Q4 after a very strong quarter a year ago. The treasury result was negative €47 million compared with positive €117 million a year ago. The lower result in treasury was mainly driven by interest rate volatility that caused negative revaluations as widening spreads pushed bond prices down in the liquidity portfolio and hedge inefficiencies, most with short lived impacts.
The evolution resulted in particular from the substantial decline in long-term interest rates, a large part of which happened late in the quarter. These impacts were largely similar, but in the opposite direction to the impacts we saw in Q4 2022. However, customer activity remained strong. This was driven by FX and rate products. Costs for Q4 developed in line with our expectations for 2023. Costs increased by 2% year-on-year, excluding write-offs for intangible assets. Most of these write-offs were due to a change in our accounting practice for development costs related to digital services, which we already communicated about in December. Going forward, we will continue to manage cost with strict discipline.
We are continually investing to further strengthen the bank. In the course of 2023, we invested an additional €240 million into strengthening our technology and risk management capabilities. We have made significant investments in financial crime prevention, business continuity, data protection and enhanced digital services. The investments help us to further improve our position as a digital leader, protect our customers and ensure we are a safe and trusted banking partner for them. They also keep us aligned with the evolving regulatory environment. We anticipate that in the coming years we will maintain additional investment spend on our technology and risk management capabilities as we did in 2023.
Our credit quality remains strong and our net loan losses have continued to be low. Our loan portfolio is very well diversified across our four Nordic countries and multiple sectors and is supported by prudent credit policies. During the quarter, we experienced some minor impacts from higher interest rates and inflation in our loan portfolio as we expected. We have made a small number of specific provisions against lending to corporate customers, those in industries more affected by the macro conditions. However, net loan losses were low at €83 million for the quarter. We have kept our overall provisioning levels and our coverage unchanged.
Our management adjustment buffer stands at €495 million. We have also provided an updated overview of our commercial real estate exposures. Our commercial real estate portfolio continues to perform well. Overall our customers and four home markets continue to show considerably resilience. Naturally, with the environment being what it is, we are continuing to closely follow the impacts on our customers and are prepared to help when needed.
Capital generation was strong in Q4 and our overall capital position is good. At the end of the quarter, our CET1 ratio was 17%. This is 4.9 percentage points above the current regulatory requirement and demonstrates our strong capacity to support our customers, shareholders and society. Looking ahead, as we previously guided, we expect our new retail models to lead to some capital headwinds and now estimate a risk exposure amount, REA increase of around €10 billion in the second half of 2004. This is still uncertain and subject to regulatory approval, but will reduce our CET1 ratio on implementation.
Our acquisition of Danske Bank’s personal customer and private banking business in Norway will also consume some CET1 capital. Our CFO, Ian Smith will talk more about this later in the discussion on our financial target. Given our strong financial performance and capital generation, we are able to deliver solid returns to our shareholders. We are continuing in this manner with the proposed increase in dividends for 2023. Our Board has proposed a dividend of €0.92 per share for 2023 a year-on-year increase of 15%. Together with our share buybacks last year, the total distribution will amount to approximately €1.27 per share, or 11% of our market capitalization.
More than half of our shares are held by Nordic investors, including over 570,000 private individuals, which means that our dividends and buybacks help drive economic activity across the region. Through our distributions, our lending and financing activities and our contribution as a major Nordic taxpayer, we are pleased to do our part to help the Nordic societies stronger.
Let’s now turn to the results of our four business areas. Each performed well in 2023, a trend that continued in Q4. In personal banking, we drove solid business momentum, using our omnichannel model to connect with customers and support them with their banking needs.
Use of our digital services reached a record level with logins for 2023 as a whole, up 13% year-on-year and our advisors were highly active, holding more than a million advisory meetings with customers, an increase of 9% on 2022. The Nordic housing market has been subdued and in the fourth quarter there was lower demand for new loan promises than a year earlier. Still, we held our ground in mortgage lending, maintained a stable level of volumes with some pressure on lending margins in line with the overall market. We maintained our market share in mortgage lending across the Nordics and we continued to grow our share in Sweden.
In Q4, our deposit volumes increased by 1%, supported by new deposit products launched during the year. We also continued to see some further migration from transaction deposits to savings deposits. Despite the economic climate, customers have increased the savings activity as seen in the net flows of €400 million into Nordic retail funds in the fourth quarter. Our plan to strengthen our position even further in the Norwegian market are on track.
During the quarter, we got approval from the Norwegian Competition Authority for our acquisition of Danske Bank’s Norwegian personal customer and private banking business. The acquisition is expected to close in the fourth quarter of this year. Total income grew by 10% year-on-year, driven by a 16% improvement in net interest income. Return on capital at risk improved to 26% from 23% in the same quarter last year, and the cost to income ratio improved to 45% from 46%.
In business banking, we continued our solid performance. Despite the slow SME market we grew lending volumes by 1% in local currencies year-on-year, driven by Sweden and Norway. Deposit volumes increased by 1% too and we saw increasing demand for our savings and fixed term deposit products. Alongside being very proactive towards our SME customers, we have continued to develop our digital offering.
For example, in the autumn we launched a new version of our award winning Nordea business app, which lets customers manage and purchase products through their smartphone. We have improved the user experience and added new self-service features including improved transaction search and multiple new savings and investment functions.
The expansion of our digital services has supported increased usage and logins in Q4 were up 8% year-on-year and 7% quarter-on-quarter. Our efforts have helped us to improve customer satisfaction with scores higher in all countries and segments in Q4. A key focus is on supporting our customers’ sustainable transitions. During the quarter, our green asset portfolio increased to 11% of total lending.
Demand was also high for our climate-focused deposits, which offer customers a way to invest their excess liquidity while helping to finance green assets. Total income was up 10% year-on-year, driven by improved deposit margins and higher lending volumes. Return on capital at risk was 23% compared with 21% in the same quarter last year and the cost to income ratio improved to 39% from 40%.
Large corporates and institutions continued to focus on being proactive and offering good support to our customers in turbulent economic conditions. In Q4, lending volumes were broadly stable. Deposit volumes decreased by 7% year-on-year in local currencies, but were up 4% from Q3. The credit quality of our LC&I loan book remains strong and loan losses continued to be low and driven by two customers in different sectors.
Investment banking had a strong end to the year, delivering its second strongest performance to date. Debt capital markets activity continued at good levels, with increased investor appetite for bonds in the tighter credit spread environment. In equity capital markets and mergers and acquisitions, market conditions remained tough, although activity levels somewhat improved, particularly in private equity.
Our total income decreased by 4% year-on-year, driven by the significant lower net result from items at fair value. This was offset by the strong growth we had in net interest income and net fee and commission income. Return on capital at risk was 19%, down 2 percentage points on the same quarter last year.
In assets and wealth management, higher customer activity in private banking contributed to continued good net flow momentum in internal channels. We were able to drive this performance even despite the continued market uncertainty. Q4 net flows from internal channels amounted to €1.9 billion. Net flows were positive in all internal channels. In life and pension we continued to put our growth plans into action supported by recent acquisition of Topdanmark Life, now Nordea Pension, an [indiscernible] that strengthened our position in savings.
Gross written premium in the quarter amounted to €2.3 billion, up from €1.2 billion a year ago, driven by the Nordea Pension acquisition and growth in Sweden and Norway. For the full year, gross written premiums reached an all-time high at €8.5 billion. In external channels, net flows were negative due to the market environment as clients continued to favor fixed term or money market funds, traditional banking products and direct government bond investments.
Assets under management, AUM, increased by 5% year-on-year, driven by appreciating stock markets. Total income for the fourth quarter was down 6% year-on-year, mainly due to lower net insurance result. Return on capital at risk was 44% a year-on-year increase of 3 percentage points. The cost to income ratio was 50%, down from 43%, impacted by the integration of Nordea Pension in Denmark and investments in nearshoring and risk management.
Looking ahead, today we have announced our updated financial target for 2025, which is a return on equity above 15%. Ian will go into more detail in a moment, but let me give a brief overview of why we are confident in our ability to sustain high profitability.
Our confidence is grounded in the progress we have made over the past four years. When we set a new direction for Nordea, we promised to focus on improving the customer experience and driving profitable growth for the group. Despite the constant changes in the external environment, we have done this.
The significant structural improvements across the group has led the foundation for consistent high quality earnings with high profitability and less volatility. Today we have a clear, proven strategy that is working for us. We have a very strong business franchise supported by a diversified business model with operating income spread across our markets and business areas.
We have a leading market position in all our markets and business areas with a leadership position in the Nordics as a whole. We have a Nordic market with great characteristics, including higher per capita GDP growth compared to the rest of Europe, strong welfare systems and a very digitalized economy and we have a Nordic banking sector that is low risk, stable, and profitable.
Our foundation is strong and we have a clear direction forward with the ability to make tactical adjustments where needed. In the current environment it means for instance, shift in focus on ancillaries and cross selling within and between our business areas. A key growth opportunity for Nordea will be in further realizing our scale advantages as the largest financial service group in the Nordics. All-in-all, we are well-equipped to drive sustainable higher performance.
Finally, we have today also disclosed our outlook for 2024. We aim to again grow our income faster than our costs, though with narrower positive jaws than in 2023. We expect to deliver a return on equity above 15% for the full year 2024. And to conclude, Q4 was a solid quarter for Nordea rounding off another strong year.
I would like to use this opportunity to thank all our customers, shareholders and other stakeholders for their feedback and cooperation during 2023. I’d also like to thank our employees for the great efforts during the year. Above and beyond the strong 2023 figures, we continue to deliver on our purpose and priorities.
The role we play in society drives us to continually improve, build a leading bank in Europe and earn the trust and loyalty of all our stakeholders. Our ambition is unchanged to be the preferred partner for customers in need of a broad range of financial services.
Thank you and Ian, over to you.
Ian Smith
Thank you, Frank and good morning everyone. I’m going to run through how we see the operating environment right now and briefly recap our progress in recent years. Both of these are helpful in understanding where Nordea is today and the outlook for the next two years. After that, I’ll take you through the drivers and key assumptions underpinning our updated 2025 financial target, and also provide some insight into how we expect 2024 to develop.
Nordea operates in attractive markets with stronger growth prospects and lower credit risks than the rest of Europe. The Nordic region boasts open export led economies with strong fiscal positions, modern infrastructure, world leading digitalisation and robust labor markets underpinned by effective social safety nets.
That provides a solid backdrop for Nordea to deliver best-in-class performance, and that is our aim. We are focused on our four home markets with fairly even distribution of income in each and with room to grow. Nordea is the largest and the only pan-Nordic financial services group in the region, providing scale and diversification and crucially, lower earnings volatility. That confers a number of advantages on Nordea.
For example, our ability to spread our risk, find pockets of growth, efficiently, develop digital solutions that can be deployed across the region and fund better and cheaper than our peers. Delivering our strategy has led to a sustained improvement in return on equity. We refocused Nordea’s business back in 2019 and since then have driven meaningful increases in profitability, delivering a sustainable step up in performance well ahead of the interest rate hike cycle.
We regained market share, focused relentlessly on operational and capital efficiency, and grew our derisk credit portfolio by clearly focusing on our Nordic home markets. Alongside this, we’ve also delivered a marked improvement in quarterly capital generation. The recipe is working well for us.
In addition, we acted promptly with the support of the ECB to distribute excess capital following the lifting of the COVID payout restrictions. This has significantly improved our capital efficiency, helping to underpin our profitability. Looking back at our 2022 Capital Markets Day, we were confident that we would reach a return on equity of above 13% in 2025, assuming quite modest rate increases.
Of course, the environment is now very different. Rates have moved sooner and higher, and while they will likely come down between now and 2025, we think that they will normalize at higher levels than in the past 15 years. A new normal, one could say, that has enabled us to increase our target for 2025, cementing Nordea’s position as market-leading on profitability and shareholder returns.
At the halfway point of our strategy period, Nordea’s return on equity has raced ahead of expectations set at the Capital Markets Day. Income has been much stronger, although our cost discipline, very low credit losses and accelerated buybacks have all contributed.
Our income outperformance, of course, been helped by rate hikes, but we should also look at what happened in the other key income lines. Net commission income was solid early in the period, but softened a little as the changed macro environment put pressure on assets under management and customer activity has been more subdued in recent quarters.
Net fair value gains have been exceptionally high over the last two years, particularly as we help customers deal with economic turbulence and higher volatility, and that also helped to boost our stronger operating performance. That tailwind from volatility may subside over the next two years. And then capital, and it really is a game of two halves. In the first half of our strategy period, we quickly reduced excess capital and drove significant improvements in capital efficiency.
In the second half, we will absorb some known and previously discussed headwinds, including higher macro prudential capital requirements and Basel IV. We will therefore need to retain a small part of our strong capital generation in equity as we absorb these capital demands over the next two years. And while this naturally will be a minor drag on RoE, overall, we are fully on target with capital plans.
So how do we see the next two years? Key to this assessment, alongside the continued execution of our strategy, are the expectations for economic growth and interest rates, and there’s still a high degree of uncertainty for those. But we’ve taken a view, and we show our assumptions for these parameters later in the slide deck. We expect to see cuts when central banks decide inflation is under control, even if the extent and timing of those cuts is uncertain.
Our rate path assumptions are based on market expectations at the end of 2023, and even those have moderated a little since then. Critically though, we share the market’s view that rates will settle at positive levels, most likely around 2%. We think that volume growth will remain subdued in 2024 and be stronger in 2025. But whatever happens, we expect that Nordea will continue to increase volumes and market share as we have done in the last few years.
I’ll talk in more detail about operating performance and capital in a moment, but let me deal quickly with loan losses. These have continued at very low levels, averaging 3 basis points over 2022 and 2023, but they will normalize at some point. As you know, our view is that normal level of loan losses are around 10 basis points per year, due to our strong credit quality and the derisking of our portfolio over the years. That remains our view. Although the current macro pressures may elevate provision charges in the short-term, and that is why we maintain a solid additional provision buffer of almost €500 million.
Over the next two years, our aim is to continue to take market share and thereby grow lending a little ahead of the market. Even though interest rate cuts are likely, we expect NII to be fairly resilient. The pass through on the later rate hikes was higher than the first rises and similarly those first rate cuts are likely to have a smaller impact.
So while we will see some reduction in net interest margin, we should retain the NIM improvement we saw in the early stages of the rate cycle. In addition, we’ll see some benefit from our deposit hedge and remember that our acquisition in Norway will increase net interest income in 2025.
Net commission income will depend on activity levels and the development of assets under management and so on that basis we can expect 2025 to be better than 2024. On net fair value gains, those can be impacted by macro volatility, of course, but our base case is that in a more stable or subdued environment we will see lower levels than the average of the last couple of years. Costs grew in 2023 due to higher inflation and substantial investment in further strengthening Nordea in key areas such as digital, financial crime prevention and technology, and we will continue to invest in those areas.
2024 will also incur the majority of the costs for on-boarding our Norwegian acquisition. Offsetting the costs of those investments, you can expect to see our usual discipline in seeking out and delivering cost efficiencies each year, and we continue to expect a significant reduction in resolution fees in 2024. This points to us broadly maintaining our cost income ratio in 2024 and 2025, although there are a lot of moving parts to manage. Importantly, if the environment turns a little tougher, you can expect us to respond with cost initiatives.
Turning to capital, I think you’re familiar with the story so far. We were well prepared for the lifting of COVID restrictions on distributions and Nordea was the first bank to gain ECP approval for buybacks. Since then, we’ve steadily increased our dividend per share with high payout ratios in line with our policy, and acted quickly to reduce our structural excess capital through swift and substantial buyback programs. We’re therefore well progressed on our CMD commitment to return €15 billion to €17 billion to shareholders by the end of 2025.
I’ll briefly summarize how we expect our current capital excess to evolve through to the end of 2025. The normalization of regulatory capital requirements is still in progress, although there is good line of sight of where we should end up given the announced increases in macro prudential buffers. That will absorb some of our current excess as we hit our estimated regulatory requirement, which, together with our adjusted management buffer of 150 basis points will give us a target operating level a little above 15%.
REA [ph] inflation from the implementation of new capital models for retail later this year, and the initial impact of Basel IV in early 2025 will further absorb excess capital. And of course there’s business growth together with our Norwegian acquisition. We’ll therefore need to retain a small part of our strong capital generation in equity to ensure that we maintain our target operating level.
Having said that, Nordea has substantially increased its quarterly capital generation over the last few years, and this lays a strong foundation for funding our growth, meeting the higher regulatory requirements that we flagged at CMD, and continuing to return capital to shareholders through an appropriate mix of dividends and buybacks.
Over the next two years, we reaffirm our capital policy, strong dividend payouts supported by steady increases in dividend per share, and as previously guided, we will use buybacks as a primary tool to trim the excess capital we continue to generate, so likely to be smaller programs than before, but on a regular basis. All-in-all, we expect to slightly outperform our earlier commitment and return a total of €17 billion to €18 billion to shareholders by the end of 2025.
Let me close by repeating Frank’s key messages. Our clear, proven strategy and key priorities are unchanged. Nordea is well-equipped to deliver sustainable high performance in the attractive and low risk Nordic markets, and our aim is to be the best performing universal bank in Europe. Thank you.
Ilkka Ottoila
Operator, we’re now ready for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Magnus Andersson from ABGSC. Please go ahead.
Magnus Andersson
Yes, good morning. Just starting with capital, you had risk rated assets of €139 billion now in Q4. If you add the retail model’s Basel IV and the risk rate for Norway, we end up at around €160 billion. So I was just wondering, we talked previously about corporate IRB models potentially being approved in 2025. That’s one outstanding issue. If you could comment anything about that, perhaps round estimate whether it’s still 25 or whether we should still expect [indiscernible], et cetera? That’s the first question.
Ian Smith
Good morning, Magnus. It’s Ian here. Yes, we still expect to deliver new models on corporate IRB. We think that they will come in in 2026, though, so they’re outside the period of our guidance, our return guidance, but still in progress. As we’ve learned, it’s a long process with the ECB on approval and currently scheduled for 2026.
Magnus Andersson
Okay. And in terms of magnitude, is it likely to offset the retail model impact or could it deviate substantially?
Ian Smith
So we think it’s positive. It’s difficult to estimate at this stage the extent and will depend on a number of different things as we finalize the models, but we expect it to be positive.
Magnus Andersson
Okay, good. So in addition to the €160 billion we have now in 2025, it’s primarily asset growth that is missing.
Ian Smith
Correct.
Magnus Andersson
Yes, okay good. Secondly, just on costs, you mentioned about the outlook there and that you were prepared to take measures if necessary. I note that headcount has been flat now for three quarters in a row. Do you expect to keep headcount flat, excluding the Norwegian acquisition, of course, in 2024?
Ian Smith
Yes, it’s good you highlighted the Norwegian acquisition because that will bring in 300 or 400 new colleagues, but we expect to manage over the piece flat. You might see a blip up and down here, but, yes, we ramped up extensively, as you know, principally in the area of financial crime and technology broadly flat from here.
Magnus Andersson
Okay. And finally, then on costs, are you prepared to quantify the expected impact of the reduced resolution fund fee?
Ian Smith
It’s very hard to come up with a precise number at the moment. We expect a material reduction, but until we hear from the SRB, it’s difficult to put a number on it. But look, we’ve been consistent on this over a number of quarters now to expect a substantial reduction in the resolution fee this year.
Magnus Andersson
Okay, thank you very much.
Operator
The next question comes from Andreas Hakansson from SEB. Please go ahead.
Andreas Hakansson
Yes. Good morning, everyone. So my questions were mainly on capital as well, but I think we covered it now. But if we think about the net interest income, you have the hedge in place, of course, but if we ignore the hedge, could you talk a little bit about what natural hedges you have in the different markets when it comes to potentially expanding deposit margins or how much you’re going to be willing to reduce your savings account rates and how much that could help you in the NII in 2024 and 2025? Let’s start there.
Ian Smith
Yes. So I think overall, as we said in the presentation, we saw quite high pass through rates on the later rate reductions and so I think that dampens the impact of the first cuts, I guess, when they reverse. And when we think about, as we call them, natural hedges, one of the things we have seen in the past is as deposit margins come down, we see a bit of strengthening in lending margins, and I think that should also help.
We also think we will see some modest growth that will also help to underpin net interest income. And then, as we indicated, obviously 2025 will see a step up from the Norwegian acquisition. So there are a few things in there that help to provide some resilience in the impending rate cut environment.
Andreas Hakansson
Would you be happy to give any type of indication how much lower weight could add in 2024, or rather in 2025?
Ian Smith
The difficulty with that, Andreas, is that it will depend on the portfolio that comes across. So we obviously have the 2022 numbers as a reference. We disclosed those last quarter. But when the portfolio lands with us at the end of this year, the net interest income level will depend on how many customers come across. So it’s difficult to call at the moment.
Andreas Hakansson
Just may be a detailed question. But we saw in Norway that new credit increased its client discount to [indiscernible] on, I think was another five basis points. Have you done anything with your pricing, given that new credit now seems to be quite significant below you in terms of mortgage pricing in Denmark?
Frank Vang-Jensen
Hi, Andreas, this is Frank speaking. We have not done anything, so actually; I think we are in a quite good position. But of course, if we wanted, we could. And when you calculate sort of like the impact, it’s manageable both to Denmark and the Group. But actually, I think we have, as of now, a decent, good outcome of what we are doing there without buying customers. So it is about more than just the price, and I think the team is very well aware of how to continue to run the business with high quality.
Andreas Hakansson
Okay, thanks. That’s it from me.
Operator
The next question comes from Namita Samtani from Barclays. Please go ahead.
Namita Samtani
Hi. Good morning. My first question is, are you seeing clients move their deposits into mutual funds, or is it too early for that? And secondly, just going back to the question before, how exactly do you manage to compete against non-listed players such as My Credit [ph] in Denmark and OP in Finland? I think they’re offering quite competitive discounts on mortgages or customer bonus rates on deposits or interest rate caps. So what’s Nordea’s competitive edge in these markets? Or are you seeing signs of market share loss? Thanks.
Frank Vang-Jensen
So, hi, it’s Frank speaking. Regarding the mutual funds, I think what you’ve asked is when will be the tipping point where people start to look for investment opportunities as interest rates on deposits are coming down that much that they will look for more risk. We don’t see such a big movement right now, but we actually had a quite nice inflow in our retail funds. I think, as I recall it, €400 million in the quarter, so good activity. And we are stable on retail deposits, so very sticky. No sort of like deterioration or neither any big growth as the market is basically stable on deposits, on retail, and the funds keep growing, which it should.
So I would say that continue to look at or expect that the mutual funds will be growing both within life and pension, retail and private banking. And then at a certain point, there will be some tipping towards sort of like more risk, but that will be, I best guess, will be 25 from my side. When it comes to competing, the competition in the Nordics are high, but sort of like it has always been the case.
And yes, our mutuals usually do things differently, they calculate differently, but we are used to that. We have been in banking for 200 years, more than 200 years in the Nordic. So it’s just a different sort of like competitor to a more predictable listed one. But we are used to it. So I don’t see any special challenges here, honestly. They use the price. We use, of course, also competitive prices, but it’s so much more than just a single price. So I don’t expect any change in our competitive position to what we have seen in many last years.
Namita Samtani
Thanks very much.
Operator
The next question comes from Sofie Peterzens from JPMorgan. Please go ahead.
Sofie Peterzens
This is Sofie from JPMorgan. So my first question would be on the dividend. The dividend per share was $0.92 slightly below consensus. How do you think about the dividend? Do you expect or should we expect the dividend to be progressively higher every year or will it really just be a function of the 60% to 70% dividend payout that you target?
And related to that, I can see on Slide 23 that you got to imply a total shareholder payout of €7 billion [ph] to €8 billion [ph] over the next couple of years. Consensus has slightly more than €9 billion payout. Should we kind of expect the share buyback to give in or come in a little bit lower than consensus expectations or is the risks more due to dividends? If you could may be just talk about the kind of €7 billion [ph] to €8 billion [ph] payout that is expected?
And then my second question would be on deposits. If you could just remind us how much you are paying for deposits on transaction and savings accounts across the four Nordic countries? Thank you.
Ian Smith
Yes, good morning Sofie. So, yes, our dividend at $0.92 squarely in the center of our dividend payout policy. We think it’s important to continue to show progress in dividend per share, 15% up this year, and we’d like to see that progress in dividend per share continue, and always with regard to our payout policy, so that’s the context there. And then when looking at our €17 billion to €18 billion commitment, we’re at €9.6 billion so far. So you can do the math in terms of what capacity remains. And we’re still very much committed to strong dividend payout and buybacks on excess capital generation, so we think we’re on track. And €9.6 billion so far and we expect to deliver €17 billion to €18 billion over the piece. On deposits on transaction accounts…
Frank Vang-Jensen
I can say it here Ian.
Ian Smith
Yes.
Frank Vang-Jensen
So, hi, Sofie, it’s Frank speaking. So we have roughly one-third on transaction accounts and two-third is on savings account/term deposits. And I would say that transaction accounts is usually a little bit difference between the countries, but usually 25 basis points. Then we have the, and now I’m telling retail, then we have the remaining part, and that would be between 2% on savings accounts as a start point in many of the countries, or most of the countries and then it is up to fixed term, that is basic market interest rate minus a small margin.
And if you take, for example, what should we take as an example? Let’s take Finland there you would have 3.5% or something like that, as a deposit rate. So it depends, of course, about what product it is, but the margins are small on term, little bit higher on the accounts, savings accounts with flexibility and then where you have full flexibility and all the tools and so transaction accounts the margin is highest. That’s basically how it is.
On the corporate side it’s much more money market based, and it is basically a floating rate, and then with a reduction of or deduction of a margin, and then margin will be unchanged as long as sort of like the rates are, or unless non-dependent on how the rate develop. Then of course, there would be also a small part to the smaller client which is closer to how we reprice retail. Did that answer your question?
Sofie Peterzens
Yes, that was very clear. Thank you.
Operator
The next question comes from Tarik El Mejjad from Bank of America. Please go ahead.
Tarik El Mejjad
Hi, good morning. I have one question left on capital, please. Would you be able to give an indication what would be the net impact of the retail models, inflation, post removal or reverse of the add-ons, just to have a sense of the net impact? Thank you.
Ian Smith
Yes, morning, Tarik. Look, the €10 billion is an estimate of a number that’s still in subject to agreement with the ECB. So typically what we’ve seen with other banks when these processes have been finalized, is that the add-ons are anything from 20% to 30%. And those add-ons relate to required improvements in processes, improvements in data, other things so capable of remediation. So I’m not going to give a precise number of that, given it’s an estimate at the moment, but a pretty good idea based on what other banks have seen. And our intent is that wherever we end up with these temporary add-ons, you can expect us to work very hard to reduce them. So whatever we get at implementation, we would expect to take that number down a little bit as we fix the issues that we need to.
Tarik El Mejjad
Thank you. And in terms of communication of the increase of these RWAs from retail models and the releases I mean is that come simultaneously, or it will be. So you said second half, but actually said in implementation. So that basically will have every quarter, some additional retail, some inflation for retail models, or would be on one go, or how does it work?
Ian Smith
So the way the process works is, the ECB will come up with a decision, and that decision we currently expect to be, I guess, two or three months from now. You then have some time in which you bring the new models into force and start using them, that implementation period. And it’s from implementation that you would see the REA increases. So that’s what we will see in the second half of this year.
Tarik El Mejjad
Okay. Thank you.
Operator
The next question comes from Hugh Moorhead from Berenberg. Please go ahead.
Hugh Moorhead
Hi. Good morning, and thank you very much for taking my questions, one on NII and one on capital, please. Firstly, on NII, it sounded like you were guiding that because pass-throughs were higher. The most recent couple of rate hikes, we’ll also see less NII sensitivity to the first rate cut. So are you suggesting you can lower prices at a similar speed that you’ve raised them in response to the recent hikes? And then secondly, on capital, with your guidance for more frequent buybacks, might we see these as frequently as quarterly, not dissimilar to some of your Nordic peers? Thank you.
Frank Vang-Jensen
Good morning, Hugh. So, yes, we are, I guess, indicating lower sensitivity to initial rate cuts, but that’s, of course, subject to whatever happens with competition and other things. But certainly, if we mirror what we saw on the way up, that’s what we would expect to happen. And, of course, all of this is subject to people’s best guess of when rates move and how far they move, those kinds of things. So there is some uncertainty out there. But I think the message you take away is we expect to see some resilience in our NII and then on frequency of buybacks. Let’s see. We have typically done larger scale buybacks than our Nordic peers, and I think even if we move to more frequent programs, that will still be the case, but let’s see.
Hugh Moorhead
Great. Thank you very much.
Operator
The next question comes from Jacob Kruse from Autonomous. Please go ahead. Jacob Kruse, Autonomous, your line is now unmuted. Please go ahead.
Jacob Kruse
Thank you. So just a couple of questions for NII, please. Firstly, on the hedge shift, I think you gave a number of a €600 million cost, roughly met for the hedges in Q3 on a full year basis. And would you be able to say something about how much the hedge is costing you on an annual basis, given the size that you have now and what you put on?
And secondly, you used to guide a bit for how you saw rate policy rate changes impact your NII in 2023 and 2024. Could you say anything about how that analysis looks for you into 2025, please? That’s it. Thank you very much.
Ian Smith
Yes. Good morning, Jacob. So the absolute cost of the deposit hedge in 2023 was €660 million. And I guess the rate path that we’re assuming has rates coming down mostly in the second half of 2024. So we shouldn’t expect anything particularly different in 2024. But then we’ll see the benefit roll through as the rate cuts start to happen.
And then in terms of guidance on rate changes, on NII and other things, our focus now is, I guess this quarter has been on giving real clarity on what we expect on sensitivity. So our Slide 17 has updated sensitivities for 50 basis points moves. And I guess the thing to understand there is those are, if you like, raw sensitivities that can also be impacted by pass-throughs, by what happens with wholesale funding, other things like that. So it will vary from cut to cut as to the extent to which that flows through, and as we’ve guided, probably lower sensitivity on the initial rate cuts.
Jacob Kruse
Okay, thank you.
Operator
The next question comes from Geoff Dawes from SG. Please go ahead.
Geoff Dawes
Yes, good morning, everyone. It’s Geoff Dawes here from Soc Gén. A couple of questions from myself. First of all on fee income growth, that’s clearly going to be doing some of the legwork in 2024 and 2025 in driving revenues and you note that you do expect some activity and savings growth. Can you just give us an indication? Is that something that you’re actually seeing in the books at the moment, or is that something that you just expect — the expected path of rates growth and everything else. So is it a real effect right now or just an expectation and also some sort of split as to how you see that between the different divisions, I assume mostly in asset and wealth management, but let us know if there’s any other big areas of that?
My second question on provisions, you noted again in the presentation that you have around €0.5 billion of management overlays. First of all, is there a kind of timeline for when you might release those? And second of all, to confirm that doesn’t feature in the 10 basis points guidance that you have for 2025, the management overlays are separate to that. Those are the questions. Thank you very much.
Ian Smith
Hi, Geoff. Thanks for the questions. So let’s be clear on fee and commission income. So what we’ve seen, certainly over the course of 2023 and probably towards the end of 2022, was NCI starting to slacken off a bit. And that’s because savings and investments driven by AUM is a big proportion of our fee income. And then what we’ve seen is some ups and downs in activity levels. You can see in the current environment that certain lines can be subdued.
So our expectation is, as we talked about in the presentation, that 2024 is probably going to see something similar. So I think a reasonable expectation for 2024 is to look at the run rate from Q4. And as we see, first of all, I think growth return, a bit of confidence return towards the end of 2024, and activity levels increase together with a lower rate environment. I think you can expect to see NCI start to increase. And that’s the picture that we’re seeing at the moment.
Geoff Dawes
Got it.
Frank Vang-Jensen
Hi, Geoff, it’s Frank speaking on provisions. I would say that, as we said in Q3, and have been saying all the time, sort of provisions will come up. It’s just a matter of time in the industry, and I think we have seen that in Q4. We don’t expect any drama. There’s nothing in the figures right now or sort of like a portfolio that points to any elevated provisions to what we see in Q4 for the coming period of time. But of course we have to say that sort of like its still uncertain, but it’s a very high quality portfolio we run and no signs right now that it should be elevated to what we saw in Q4. If it should happen, then we would have the provision. But that is not the management buffer. But that’s not our start point. Does that answer your question?
Geoff Dawes
And kind of. But just to confirm that the 10 basis points, that means 10 basis points underlying, it doesn’t mean 20 basis points underlying. With the benefit of writing back, let’s say 10 basis points from the management provision overlay.
Frank Vang-Jensen
With the information we have right now, then you’re correct.
Geoff Dawes
Great. Thank you very much.
Operator
The next question comes from Markus Sandgren from Kepler Cheuvreux. Please go ahead.
Markus Sandgren
Good morning. Cost guidance for 2025. Can you give some more flavor on the costs alone as the €44 to €46 in cost income is highly dependent on what you expect from NII and so forth, please?
Ian Smith
So I think, let’s first of all talk about what we see in 2024 in terms of the development and the puts and takes there are, we continue to see cost inflation that we need to manage. As Frank talked about in the presentation, we’ll continue to invest in strengthening the bank. And I guess the one new thing for 2024 is we’ll see the integration costs for the Norwegian acquisition and then offsetting that.
We’ve got our usual productivity and other efficiencies and as we have flagged a significant reduction in resolution fee. So that kind of says that net-net, you can expect some stability, maybe slightly up on 2023. Bottom line, when we look into 2025, I mean clearly there’ll be further developments. Let’s see what happens. But I think that you can look to our regular reputation for managing costs and cost growth. So we don’t expect to see anything untoward in 2025, but we’ll obviously keep you updated on that as things develop.
Markus Sandgren
Okay, very good, thanks. And then next, if I may ask, on deposits, do you see the continued trend of a drift towards more savings accounts, or has that stabilized? And do you expect it to be at this level please?
Ian Smith
So Q3 into Q4, we saw a slight movement, but nothing dramatic. And I guess if we’re seeing, I guess, some stability on rates, some stability on deposit volumes, it should be, I guess, stable in terms of migration between accounts. So I think that’s the broad expectation, nothing dramatic.
Markus Sandgren
All right, thanks.
Ilkka Ottoila
And operator, I think we’re ready for the last question. Thank you.
Operator
The next question comes from Riccardo Rovere from Mediobanca. Please go ahead.
Riccardo Rovere
Thanks for taking my questions. All on capital, what stock is down 4%. Maybe one of the reasons why it is down so much is because you proposed $0.92 consensus is going for 96 income consensus. So my question, getting back to what Sofie asked at the beginning, what’s the point of insisting with buybacks at 1.5, 1.6 times a tangible equity, with the risk of falling short on the cash side, why did you just push up the normal cash payout and let’s say, and leave buybacks at 1.5, 1.6? You don’t buy many shares at 1.5, 1.6 times the tangible equity. This is my first question.
The second question I have is, the 15% internal target when RWA will go up because of internal models overall and so on. Can it go down? Because I would imagine the capital is set in millions of amount of millions of euros. And then the third question I have is on synthetic securitizations have been pretty successful in using these instruments. Is there scope for doing a little bit more than that? Can it eventually help you bringing down the impact of models overall? Thank you.
Ian Smith
Hi, Riccardo. We have to always balance the mix of dividends and buybacks, and thinking about price to book premium always comes into play. At the moment, we think we’re managing that balance appropriately and we’ll continue to do so. I think the important thing here is to continue our reputation as a strong returner of capital to shareholders. So I think you raise a relevant question, one that we always think about, and we make our decisions based on how things look. So there is no set path there other than to be a strong returner of capital to our shareholders.
And then your question on REA increase, yes, I think you’re right. There are obviously the upward pressures that we talked about. And when you think about the work we might do to reduce, say, the REA increase coming from models on remediations, we’re very focused on that. I think there is still a process of getting used to the Basel requirements and thinking about how we might be able to deal with some of those over time. And then you have highlighted our success with securitizations and we, I think, will do that on a fairly regular basis as well.
You’ve always, again, got to balance the cost of those securitizations with the capital relief. But they’ve been pretty good for us in 2023 and will still be an important tool in the armory. So I think there are, you can expect us to work at finding ways to offset the REA increases that we’re exposed to.
Riccardo Rovere
Thanks, Ian. And on the 16% internal target that you mentioned on Slide 12, can it go down when you sort of said it go up?
Ian Smith
The internal target? Look, at the moment, I think we’ve got, and with the small tweak we’ve made this quarter, I think we’ve got a pretty clear capital policy, which is that we’ll be 150 basis points above regulatory requirements. Are there circumstances where you might dip into that buffer? It’s not something we plan, but it’s a very high buffer when you consider, first of all, the resilience and the capital generation that we have in Nordea. So I think we’re pretty clear on how we expect to manage the bank.
Riccardo Rovere
Okay, thanks. And if I’m just quick follow up, how do you see your 5% ledgeration? Are you okay with that? Do you think it’s large enough because other PAs are working with numbers that are definitely ahead of that, regardless of what the RWA?
Ian Smith
Yes. Look, I think we’re pretty content with where we are on the leverage.
Frank Vang-Jensen
Absolutely, all fine with us.
Ian Smith
Yes.
Frank Vang-Jensen
Okay, good. Thank you so much and we’ve come to the end for today. Thank you so much for participating and good discussions and good call. And as usual just come back to ask if you have any questions we are here for you. Thank you so much. Have a nice day.
