NBNKF - Nordea Bank Abp (NRDBY) Q4 2022 Earnings Call Transcript
Nordea Bank Abp (NRDBY)
Q4 2022 Earnings Conference Call
February 02, 2023, 04:00 AM ET
Company Participants
Matti Ahokas - Head of IR
Frank Vang-Jensen - CEO
Ian Smith - CFO
Conference Call Participants
Andreas Hakansson - Danske Bank
Magnus Andersson - ABG SC
Namita Samtani - Barclays
Maria Semikhatova - Citi
Omar Keenan - Credit Suisse
Maths Liljedahl - SEB
Riccardo Rovere - Mediobanca
Martin Leitgeb - Goldman Sachs
Nick Davey - Exane
Piers Brown - HSBC
Presentation
Matti Ahokas
Good morning and welcome to Nordea's Fourth Quarter and Full Year 2022 Results Presentation.
Present here today, we have our Group CEO, Frank Vang-Jensen; and 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 get a chance to ask questions. To ask a question please register for the webcast.
Now, I'll leave the word to our CEO, Frank Vang-Jensen.
Frank Vang-Jensen
Good morning.
Today we have published our fourth quarter and full year '22 results. If we look back on our results announcement last year and reflect on how we entered '22, the world then was quite different to the one we are facing today. At the beginning of last year, we were dealing with the last big wave of COVID restrictions in the western part of the world.
At Nordea, we were introducing our updated strategy and our new financial target for '25. Little did we know, '22 will turn out to be very different than expected. We witnessed Russia's invasion of Ukraine causing significant human suffering and societal and financial uncertainty across Europe. We returned to a more normal interest rate environment after a decade of extremely expansive monetary policy which has been one of the biggest financial experiments in many decades.
In the financial markets, we saw the worst combined returns across bond and equity markets since the late '60s as inflation and interest rates shifted material higher. Despite the changed environment, our direction and purpose as a bank have remained unchanged. We have stood by our customers, supported our Nordic societies and delivered on our strategy. This has led to another strong year for Nordea.
Last year, we once again showed that we have a resilient business model and our business plan stands the test of time. So one of the highlights in '22 were, our business volumes grew and we gained market shares across the Nordics. Our mortgage lending grew by 3% and corporate lending by 19%. We continued to improve customer experiences in all channels. Our '22 operating profit was €5.4 billion which is 9% higher than '21. also a strong year.
Our return on equity was 13.5% up from 11.2% in the previous year. Our credit quality remained strong with low levels of net loan losses and our capital strength continues to be among the best in Europe. So, a strong set of results driven by our employees' relentless focus towards our customers and our decisive actions to continuously improve business momentum. Looking at the fourth quarter results, we were able to continue to grow business volume despite higher economic uncertainty. Corporate lending was up 9% year-on-year and mortgage volumes were up 3%.
Net interest income was up 31% driven by growth in lending and deposit volumes as well as deposit margins. Net commission income decreased by 12% due to continued lower capital markets activity and lower assets under management due to market turbulence. Asset under management recovered and were up 5% quarter-on-quarter. We have very strong net fair value result, net fair value was up 69% supported by strong customer activity. Our return on equity was 15.9% and the cost-to-income ratio improved to 45% from 48% a year ago.
Reflecting our strong financial performance and the strength of our business, the Board has proposed a dividend of €0.80 per share. This will benefit our shareholders consisting of more than 565,000 private individuals, pension funds and other investors and would also support society during difficult times. For our '23 outlook, we aim to continue to improve our profitability and expect the return on equity to remain above 13%. I'll come back to the outlook at the end of the presentation.
Let's now look at the fourth quarter results in more detail. In the fourth quarter, we focused on providing proactive advice and driving high business activity. This led to solid business momentum where we maintained volume growth and gained market shares across the Nordics. Net interest income grew by 31% year-on-year. The rising cost of living and greater economic uncertainty has cooled down the Nordic mortgage markets leading to lower transaction volumes and lending margins. Despite this, we were able to keep a good activity level with mortgage lending up 3% year-on-year.
Lending demand among our corporate customers remained high. Total corporate lending volumes grew by 9%, SME lending grew by 5% while large corporate lending grew by 12%. We are well-positioned to adjust to the changing environment and capture the growth opportunity available.
Our deposit volumes also continued to increase up 7% year-on-year. We offer a comprehensive and competitive deposit product arranged to our customers. Our deposit margins have benefited from the return to a more normal interest rate environment after a decade of extremely expansive monetary policy at negative rates.
Of course, the banking industry is experiencing some tailwind due to the normalization of interest rates following a highly unusual and prolonged period of negative rates. At the same time, we are facing headwinds due to the uncertain environment.
For the financial sector also the ultra-low rate environment has naturally posed some challenges. One, the deposit engine has not generated income in several years. But as a broader question, the negative rates have caused an unhealthy situation for both individuals and for society at large. While some have said the zero rate environment won't last forever, we believe that has not been a proper realistic understanding of the cost of money during the past years.
All in all, the return to more normal rates is a healthy and needed adjustment to create a foundation for sustainable growth. We expect that our net interest income will continue to benefit from the higher policy rates in '23 even if we expect the rate hikes to slow down toward the end of the year. We saw a mixed picture for net commission and fee income in the fourth quarter.
While payment and card fee income was clearly up, lending-related NCI and savings and brokerage and advisory fees were down. Net fee and commission income was therefore down 12% year-on-year, payment and card income increased by 12% year-on-year due to higher customer activity. Savings fees were down 1% quarter-on-quarter and down 13% year-on-year following the lower asset under management. The strength of our franchise was visible. Even in a muted environment, we continue to have positive net flows from internal channels. Brokerage and advisory fees were up from the seasonal quiet third quarter but challenging market conditions are still impacting customer activity.
We expect this area to recover when the market confidence increases. A very high customer activity led to a very strong net fair value result in the quarter. The contribution of the customer areas was substantial and we achieved a 16% improvement compared with the same period a year ago. This was driven by high demand for FX and interest rate hedging products. Treasury income increased by €73 million, market making operations were also up driven by FX rates and equity trading. The net fair value result increased by 69%.
Cost increased by 12% year-on-year including one-off items such as costs related to the acquisition of Topdanmark Life. Underlying costs were up 3%. Higher inflation is leading to increased cost pressure in our businesses similar to what our customers are experiencing. In addition, we've made significant investments in selected areas, for example, in digital and also technology and risk management.
In the fourth quarter, we invested €50 million to increase our financial crime prevention capabilities and to make our IT infrastructure even more resilient. In '22, our income growth allowed us to make these selected investments to improve the resilience of our business even further while still improving our profitability. For '23, our plan is to remain focused on maintaining strict cost control and growing revenues faster than costs while continuing to invest to strengthen the bank even further.
Our credit quality remains strong and we are well-positioned to handle the continued economic uncertainty that will impact our customers. Net loan losses and similar net results amounted to €59 million or 7 basis points in the quarter and one basis point in the full year '22. Despite the economic slowdown, individual provisions and net loan losses remained low and amounted to €40 million. We didn't see any particular industry concentration in the losses.
Following an assessment of the potential impact of higher cost and reduced consumer spending on our customers, the management adjustment buffer was increased by €20 million to €585 million. Our buffer continues to ensure a strong reserve to cover potential and expected loan losses. Our capital position continues to be among the strongest in Europe. Our CET1 ratio was 16.4% that is 5.3 percentage points above the current requirement and continued capital generation enables us to support our customers and remain a leading bank in shareholder distributions.
Reflecting our strong financial performance in '22, our Board has proposed a dividend of €0.80 per share. Together with our share buybacks during '22, the distribution to our shareholders will be approximately €1.5 per share or 15% of the current market capitalization.
Dividends are important for our shareholders for more than 565,000 private individuals, pension funds and also investors. Our dividend payments support economic activity, drive growth in the Nordic societies and channel funding into innovation and education and also societal support. This is especially important in more challenging times.
Let's now move to our business area results. Our business areas delivered strong performances in '22 and continued on the same path in the fourth quarter. In Personal Banking, we maintained high levels of activity and continued to provide proactive advice and support to our customers during the financial market turbulence. Our approach helped us to gain market shares in mortgages across the Nordics even in a muted environment. The overall cooling down of the mortgage market has slowed down the growth rates compared with the previous quarters.
In the fourth quarter, mortgage volumes increased by 2%, deposit volumes increased by 4% with improving margins. In turbulent times, customer investment activity and demand for new loan promises have decreased. Customer focus has shifted towards broader personal finances which include deposit products. Our comprehensive offering and holistic expert advice help our customers manage the rising interest rates and high inflation. We also continue to build strong digital relationships with our customers and support them proactively.
For instance, we saw a 50% increase in their interactions with personalized digital messages on our mobile app and Netbank. We also continue to see an increase in the number of mobile users up 6% year-on-year. The market environment impact the savings and investment income which was partly offset by higher payment and card fees. Even in a challenging savings market, the ESG share of gross inflows to funds reached an all-time high at 32%. The credit risk picture remained stable across the Nordics despite high inflation and rising interest rates.
Total income was up 18% driven by strong NII growth, return on capital at risk improved to 23% compared with 17% a year ago, and the cost-to-income ratio improved to 47% from 51%. Business banking ended the year as it started delivering solid growth, volumes increased by 5% led by strong performance in Sweden and in Norway. Total income was up 21%. Net interest income increased by 34% year-on-year driven by higher volumes and improved deposit margins. Equity and debt capital markets activity remained subdued.
The credit quality continued to be stable. Loan losses were mainly driven by a small number of customers. We maintained close dialog with our customers to support them as they face the current macroeconomic challenges. We engaged in more than 50,000 meetings and continued to support them with the financing needs during the quarter.
During the quarter, we also launched a new Nordea Business Net Bank in Norway, the Net Bank is now available in all markets, and the business mobile app in Denmark, Finland and Sweden. This is an important milestone on our journey to become the leading digital bank for SMEs.
We also saw a positive development in customer satisfaction in both the Net bank and mobile app. Our focus on driving the transition to a more sustainable future continues. Our green loan portfolio more than doubled year-on-year.
In October, we entered into a partnership with Normative, the carbon accounting software provider. With our new business carbon calculator, our customers can understand the missions and identify climate transition opportunities. Return on capital risk in Business Banking increased to 21% compared with 15% a year ago and the cost-to-income ratio improved to 40% from 46%.
Large corporates and institutions continue to focus on high customer activity. Our productivity and expertise led to high net interest income and net fair value growth. Lending volumes increased by 12% and higher deposit margins contributed to 38% net interest income growth. Capital markets remain challenging but we saw somewhat improved sentiment during the quarter. Credit quality remains strong.
Net fair value analysis was up 94% driven by high demand in our FX and rates products. Our market-leading service offerings and expertise help to capture the increased demand. And the yearly Prospera customer satisfaction survey ranked as the Best Corporate Bank in Denmark. In addition, our corporate banking scores continued to improve in the Nordics reaching an all-time high.
SEI's contribution was critical to our delivery of €58 billion worth of sustainable financing transactions in '22 contributing to our '25 target of more than €200 billion. Despite increased lending, economic capital was stable year-on-year, supported by solid capital discipline. Return on capital at risk increased to 21% compared with 13% a year ago. And the cost-to-income ratio improved to 36% from 44%.
In Asset and Wealth Management, we continued solid income delivery despite challenging market conditions. We maintained good business momentum and delivered growth in our private banking business. With especially strong results in Finland and in Sweden, we continue to attract new customers and increase lending and deposit volumes during the quarter. Net flows were positive in Private Banking. Equity and bond market sentiment continued to be challenging and total income decreased by 1%. Assets Under Management decreased by 13% year-on-year in line with the overall market.
During the fourth quarter, we saw signs of improvement with Asset Under Management up 5% quarter-on-quarter. We also finalized the Topdanmark Life acquisition during the quarter and we are now ready to offer attractive and competitive pension products and services in Denmark. The cost-to-income ratio was 45% and increased due to the Topdanmark Life costs. Return on capital at risk improved to 38% compared with 31% a year ago.
To sum up, '22 was a strong year for Nordea despite the uncertain environment. I would like to thank our very skilled and dedicated employees for supporting our customers and making it possible to achieve these results. Now as we enter '23, macroeconomic uncertainty remains high. We expect the challenging environment to continue during the coming quarters. We have a very resilient business model and the Nordic societies are well positioned to weather the challenging conditions.
We are committed to delivering on our key priorities and our '25 financial targets. We aim to continue to improve our profitability and expect the return on equity to remain above 13% in '23. This is already in line with our financial target for '25 and we plan to provide a target update by the year-end '23 when the environment is hopefully more predictable.
In order to improve our performance further, we will continue to deliver on our three key priorities creating the best omnichannel customer experience, driving focused and profitable growth and increasing operational and capital efficiency. We are 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. Our key focus is and always will be, to serve our customers to the best of our ability. We recognize that without the trust and loyalty of our customers, we would not be where we are today.
I'd like to use the opportunity to thank all our customers, shareholders, and other stakeholders for your feedback and very good cooperation during the year. Our role in society is the same as it has been for 200 years. We are here to enable dreams and aspirations for a greater good. That is also our way forward to be the preferred partner for our customers in both good and challenging times. Thank you.
Matti Ahokas
I will open for the Q&A session now, please.
Question-and-Answer Session
Operator
[Operator Instructions] Next question comes from Andreas Hakansson from Danske Bank. Please go ahead.
Andreas Hakansson
Thank you, everyone. First question, yes, that's what everyone has been focusing on in the banks here [indiscernible] in the presentation pack where you show the sensitivity for 2023 was 1 to 1.5, but then you have the arrows to the right showing what would impact the NII in the year and I remember I think Ian in Q3, you said that the rates should more or less cancel each other out. So it should really be rates that's going to drive the NII. Could you give us an update on how do you think those areas are going to weigh on the total NII, please?
Ian Smith
Good morning, Andreas. I don't think we've got a different view now. There's always a number of factors that come in and out of this. I suspect that the most important sensitivity to the development of NII is deposit betas, which have been the banks have not passed on a great deal of rate increases so far. I think it's reasonable to expect that to change in 2023. But I think we still feel pretty good about the estimates we provided.
Andreas Hakansson
Yes. Good. And then on asset quality, you now you have 585 in your buffers and I'm looking at consensus 565 in the provisions for 2023. I mean how do you think, should we, I mean, either consensus believe that you're going to write it back and provisions roughly underlying going to be double or we don't believe that you're going to write back any of it? Could you tell us a little bit, how long are you going to actually keep adding to it and when are we actually going to start to release it from the 585? Thanks.
Ian Smith
Yes, that's a good question, Andreas. I can't speak for how analysts are thinking about the development of provisions. From our own perspective, we've done a pretty thorough job of assessing where the risks lie, looking at sectors that might be impacted more than others in the current environment, and that's led to our assessment of 585 as being the requirement. I think then the key thing is to think about when should those losses manifest and when we might see them coming through. I think at the moment given the strength in the portfolio and the leading indicators, that's something that feels like it's a little bit later in '23 and perhaps into '24.
And we would expect to use those additional provisions to offset losses that we see arising. The provisions are held for a very specific purpose. So I think it's always hard to estimate with precision where we might see losses coming through. But it feels like it's later in '23 and those additional provisions are there to absorb those losses.
Andreas Hakansson
Yes, thanks. It's just very quick. Sorry, Ian.
Ian Smith
No, just if they come and Andreas, we see this as a prudent action. So it's best to be prudent than the opposite.
Andreas Hakansson
Yes. And Frank, on the prudent comment, on the above 13% already for 2023, I mean you are at 16% now in Q4, and you still have sensitivity to rising rates. So should we basically ignore above 13% because it's probably going to be quite significant above 13 and how should we really view that number?
Frank Vang-Jensen
Yes. The start point, of course, the floor would be above 13 and as you say, it's too early to comment on any details yet. Our internal environment has changed a lot since a year ago. There are positive and negatives. However, we aim to be the best bank in the Nordics and that should also be seen in our operational performance and as well as our financial target. So let's see how the year will end and let's come back to the update discussion in the second half of the year.
Ian Smith
And I think, Andreas, Q4 was a very strong performance for Nordea but it's still an environment in which we're seeing lower than even normal levels of loan losses and other things. So I think we do need to work through as Frank says a couple more quarters to see how things are tracking.
Andreas Hakansson
Okay, thank you very much.
Operator
The next question comes from Magnus Andersson from ABG SC. Please go ahead.
Magnus Andersson
Thank you. Just continuing on NII there. If I look at your NII on page 8 in the fact book, the deposit margin impact is seen under €336 million quarter-on-quarter. So I was just wondering if you could give us a feeling for the regional split there. Which countries have contributed the most and what you see going forward? From the business area accounting, it clearly looks like Finland was the strongest performer followed by Sweden. But if you could give us that split, it would be helpful.
Ian Smith
Hi, Magnus. Yes, you're right, Finland has performed extremely well in Q4. And you would expect that to be the case because we've moved into positive territory with ECB hiking. I think all three of our countries on the retail side are continuously improving our performance. And as you know, we're working very hard, particularly in our retail business in Norway where there's always a bit of a challenge with the notice periods and other things and we had indicated that 2023, we would expect to have worked through that hiking cycle and I see a strengthening of performance particularly impaired in Norway. So I think that's the picture.
Magnus Andersson
Okay. For example, if I just follow up in Finland, you had €26.5 billion in deposits and how much of those did you pay zero interest rate in Q4?
Ian Smith
We've got a really strong market share of deposits in Finland and that's what helps with our deposit income performance. We've said before that we're about sort of 50-50 across all of our countries, Finland is probably a bit higher than that in terms of transaction accounts.
Magnus Andersson
Yes. Okay, and if floor effect remaining at all in Q4 and the negative effect remaining as you had a quite significant one in Q3.
Frank Vang-Jensen
Yes, we did see some impact from floors estimate is probably around €20 million. But I think we've now worked through that particular impact.
Magnus Andersson
Okay, thank you. And then secondly just on costs. You made some proactive investments in Q4 here on additional IT risk management of €50 million. And I also noted that I mean headcount is up around 600 of which 300 is Topdanmark. So it continues samples in underlying terms, is this something we should expect also into '23 given your strong income growth, and if so, could you quantify those investments, please?
Ian Smith
So we're investing more in people and processes to further strengthen our risk management across the board. A couple of key areas are financial crime prevention and IT resilience and that has involved hiring more people as you spotted. We do expect to continue to invest but comfortably within cost expectations for 2023. And we think it's the right thing to do to try to get ahead of the regulatory curve as best we can, particularly in some of those areas of high scrutiny such as financial crime prevention. So, yes, we've made those additional investments. We'll continue to invest there and also in areas where it's important to the development of our strategy within our cost envelope, I guess for 2023.
Magnus Andersson
Okay. Yes, but you're not willing to share any absolute number there in investments, targeted investments within these areas.
Ian Smith
It's just part of a range of different things for us, it isn't something that needs to be called out especially.
Magnus Andersson
Okay, thank you very much.
Operator
The next question comes from Namita Samtani from Barclays. Please go ahead.
Namita Samtani
Hi, thanks. I've got two questions, please. Firstly, for 2023, you're reiterating the 3% to 4% cost growth, which I think Matti spoke about on the previous call. And secondly, just on deposit because why do you think they are much lower in Denmark versus Sweden or Norway. Do you think it's a matter of catch-up because rates are further behind or do you think there are some sort of structural differences? Thanks.
Frank Vang-Jensen
Deposit betas in Denmark. Ian, please.
Ian Smith
Good morning, Namita. So our expectation for '23 cost is probably around 5% cost growth. Combination of inflationary pressures which are still quite intense and our commitment to invest in our business. So, probably a bit higher than the 3% to 4% that we've been talking about up until now.
Still expecting strong positive jaws and a strong ROE performance but I think around 5% feels about right. And then in terms of deposit betas in Denmark, I mean, I think the market is just a little bit slower. When rates started to move, we are among the leaders in offering really market-leading savings products. Transaction accounts have been pretty stable and I think the market is just moving a little bit slower.
Namita Samtani
Thanks very much.
Operator
The next question comes from Maria Semikhatova from Citi. Please go ahead.
Maria Semikhatova
Yes, hello. Thank you for the presentation. A couple of questions. First of all, on your NII sensitivity. Compared to your previous guidance, you revised slightly down by €50 million. I see that this change is coming from a lower impact expected in Sweden and in Denmark. Just wanted to check with you, why you lowered the sensitivity in these two countries and why you're still confident that you can deliver the same sensitivity for the future hikes in Finland. That's the first question.
Ian Smith
Yes, good morning, Maria. So I think the key thing to understand here is that our NII expectations remain strong for 2023 and the benefits that we highlighted at the end of Q3 in terms of seeing the rate rises in the Eurozone and Denmark starting to come through are going to be a very positive development for our business.
Our sense on trimming back slightly the sort of level of sensitivity for 50 basis points rise, it's exactly that we might expect to see, for example, Sweden, which is quite far ahead in hiking cycle start to increase the passthrough rate on rate rises on deposits. And then in Denmark again, I think we might see some competitive elements lead to higher passthrough rates. So it's really a small adjustment to the thinking but the overall picture here is an expectation of a strong development of NII in 2023.
Maria Semikhatova
Thank you. I appreciate your comments and then the second question is on capital development. If you could confirm that you still expect IRB model approval in the first half of this year? If there is any impact that you can share with us and kind of general thinking on buyback outlook because I believe the current one is going to be completed before the end of this quarter.
Ian Smith
Yes. So I think we all need to be patient on the IRB model approvals, I think it's taking longer than expected, but we continue to work with the ECB on that. And in terms of buybacks, the Nordea capital efficiency and capital return story continues and we are still in the middle of that. We're nearing the end of our third buy-back program that as I've said before should keep us going through Q1. We're thinking about what we do for the next buyback and it will continue that sort of capital efficiency and getting down to our 15% target range is still very much front of mind for us. So no change there.
Maria Semikhatova
Just to clarify, aside from IFRS 17 impact of roughly 20 basis points you don't expect any headwinds coming this year.
Ian Smith
Sorry, Maria, could you repeat?
Maria Semikhatova
Yes, just to confirm on capital headwinds aside from IFRS 17 impact which you provided of 23 basis points, there is nothing else to flag.
Ian Smith
Certainly nothing at the moment. There are plenty of future developments out there. We're aware of, for example, things like countercyclical buffer increases and other things but these are all factored into our guidance.
Operator
The next question comes from Omar Keenan from Credit Suisse. Please go ahead.
Omar Keenan
Thank you very much for taking the questions. So I just had a quick question on the CET1 target and getting down to 15%. Can I ask if you will look to get down to 15% as rapidly as possible? And the reason I'm asking that if I just wanted to thrive likely buyback to be announced within 2023 or are there any potential uses or optionality that Nordea would like to keep. That means that the Board may not want to pay down to 15% immediately in the very near term. And the second question I had was just on the lending growth outlook. Now clearly Nordea has had a very nice market share story which I would expect it continues. But if you think about system-level lending growth in your different geographies, could you help us think about your views on lending growth in households and corporate in the bulky markets? Thank you.
Ian Smith
Yes, morning, Omar. I'll take the first question and then Frank will talk about the outlook on lending. So first of all, I want to be clear. We don't have a CET1 target as such. The target that we have is ROE and we've highlighted both for 2023 and 2025 of our expectations there. What we've always said is that where we think we should be depending on a whole bunch of regulatory developments and other things is around about 15% and that remains our position and we will we've always sought to balance pace in getting there with all of the different things that we would have to do within our business. And again, that doesn't change. So our view is that the long-term level is 15%. If we're seeing opportunities or other things that might cause us to vary the pace of getting there, we'll consider them.
So at the moment, we are pleased with our progress on capital efficiency. We're also extremely pleased with our capital strength which is our CET1 ratio is up 60 basis points quarter-on-quarter as you can see but we're not driven by any sort of particular thoughts on pace. We will come back as previously flagged in Q1 to talk about where we go next on buybacks. We still have an excess capital position that will seek to manage down.
So I think what we said back in Q3, very clearly was we dealt with the obvious excess, and we now have a comfortable sort of excess to our target that we would think about whether we deploy for growth, whether we deploy for other opportunities, or we worked through with buybacks and buybacks is still a big part of what we believe in.
Frank Vang-Jensen
When it comes to so lending growth, let's start with the overall level within the different baskets. When it comes to mortgages, which as you know is like the majority of our household lending, it's super hard to say exact number, but the activity has clearly come down significantly across the Board. Highest increases did we see in Sweden and least increase in the market in Denmark and then also in between. My best guess and it will be a guess only would be 1%, 2% market growth in the mortgage year, in the mortgage market for this year.
And then, I can't see any reasons for why we should not keep on taking our share and perhaps a little bit extra and there's not really any super big differences between the countries. This is just what usually happens, so uncertainty leads to be customers to being cautious. When customers are cautious they start to look at the prices.
The seller want to sell to an old price, the buyer wants to have a discount to the new price and then it takes time before it meet. When it will meet, activity levels start slowly to come up again. We are not there yet but it is developing. So this year we'll be sort of like in a between year, I should say, and let's see then how it will play our. My best guess is 1% to 2%.
On the corporate side, it's a bit tricky, because the large corporates are in good shape. Most of them are hungry. They want to invest, they want to look into sustainability investments, and they want to look, so for example, supply chain investments. So there is actually a very, very high activity and parallel, we are having a dysfunctional bond and partly also equity market, and then of course that creates an opportunity for us to help where we can and we are doing so. So large corporates' lending I would assess to being pretty positive during this year as well, but let's see how it plays out finally.
Then you have the SME and that's twofold. It looks like the mid-cycle but still are active. They are looking at a bit like the large corporates and I would expect to see a continued lending growth within that area and then we have the small businesses and remember many of these are impacted by the lower consumer confidence and the less spending and will be impacted, I think, through the entire year. So there, I expect to see very, very low growth and when you combine that, it's hard to say a number but clearly more positive than the household market.
Omar Keenan
Thank you very much.
Operator
The next question comes from Maths Liljedahl from SEB. Please go ahead.
Maths Liljedahl
Yes, good morning. Thank you. A slightly detailed question on the AUM coming from Topdanmark, if you could comment on that. Is that margin accretive or is it a lower margin than the back book of the average AUM? And then secondly, I mean do you dare to put out the cost-to-income ratio for a target for 2023 as well as you will have a positive jaw and you ended 2022 at a very low level or below the 2025 target? Thank you.
Ian Smith
Good morning, Maths. The €11 billion or so that came in from Topdanmark is neither high nor low, it isn't. I would think of it as being just consistent with our average margin now. In terms of cost-to-income ratio, we are firm believers in delivering the best ROE among European banks. And so our focus is on all of the levers that contribute to ROE. We gave cost-income ratio guidance last year because of the developments such as additional regulatory fees coming from Swedish bank tax and other things. We think now our cost picture is well understood, consensus indicates that. And so we've chosen deliberately to go to our primary focus which is on ROE of greater than 13% next year.
Maths Liljedahl
Okay, thank you.
Frank Vang-Jensen
And also just to add to it, we expect positive jaws for '23 as well. So I think you have most of the components and without having a clear guidance.
Maths Liljedahl
Okay, thank you.
Operator
The next question comes from Riccardo Rovere from Mediobanca. Please go ahead.
Riccardo Rovere
Thanks. Thanks for taking my questions. If I get back once again on slide 17 where you provided the outlook for '23, when you talk about €1.1 billion to €1.5 billion NII carryover spec in '23, should I read this number in connection with the chart where you show the policy rate path expectations, so to go down at some point in the Euro area and then in Sweden and in Sweden too and related to that, when you say actual passthrough will vary between account types and countries, does it mean that you expect, let's say, the 1.1 to 1.5 is built with the assumptions that the positive EBITDA will go up or what we have seen so far? The other quick question I have is on the cost. Ian before mentioned kind of 5% maybe. I would imagine this 5% should exclude or should be on let's say on underlying basis excluding some of the one-offs that you had in '22 and in Q4, probably. And then I have a curiosity rather than a question. Do you see any pressure from ESG investors to improve their remuneration of your deposits which will help households weathering and facing ultra inflations in the various Nordic countries. Just a curiosity, which I honestly do not to know.
Ian Smith
Okay. Hi, Ricardo. I'll take the first couple of questions and Frank will come back on the picture on deposit rates. So yes, you should read the NII estimates of policy rates alongside the graph of policy rate expectations and you'll see that we've upgraded the estimates of net interest income impact given the expected development of policy rate since Q3. And subject of course to the things that we've talked about that can impact it, we think it's a pretty good estimate.
What's included there is our assumptions around policy rates and as we've indicated in certain jurisdictions, we might expect those pass-through rates to increase beyond what we've seen in 2022. But I think we've been pretty helpful there. So hopefully that works and on costs, we're very straightforward here in Nordea, we're not acute at all. So when I say that we can expect cost growth next year of around 5%, it's on our totaled 2022 number rather than any additions and deductions.
And there are still a number of things that remain to be settled within that. We're still negotiating pay settlements with collective pay agreements with unions and others. So a slightly moving picture driven by inflation and all of those complexities. But you also should look to our track record in managing costs. And so when we say around 5%, that's based on our total cost out turn for 2022.
Frank Vang-Jensen
In regards to the ESG question you posted, our purpose is to enable dreams and aspirations for the greater good. We have been over 200 years. And our customers and the society in which we operate should see us as very predictable in Nordea, very strong, very stable, and being there to support all our customers also in tough times. And that is actually what we are doing and that's why it's so important to have capital planning that is long term, to have a prudent approach advising our customers to be resilient and predictable. And I can't say enough how important it is for societies to have strong banks and we are super strong in the Nordics.
When it comes to pricing then it is a matter of competition. And the competition is high. It's high on mortgages, it's high on lending to corporates and the margins are coming down. And deposit margins are coming up. And what we have seen in regards to deposits, that is we came from negative margins, then we were building a neutral margin, and then we have increased the interest rates on deposits while we at the same time have built a margin.
So we have established the third engine, which has always been crucial to running a bank, lending, deposit, and fee engine. The third one now is being established. So that's the way we assess it and I think that's the way it should be assessed and is assessed by basically all banks. There is no pressure or there is no anything else from investors or authorities as we believe and I believe that they believe that the way it should be done and why that is to have healthy and strong banks to support the societies and our customers.
Riccardo Rovere
Thanks, thanks for sharing those thoughts. Thanks.
Operator
The next question comes from Martin Leitgeb from Goldman Sachs. Please go ahead.
Martin Leitgeb
Good morning. Thank you. Thank you for taking my questions. I would just like to follow up on these three engine comment in terms of profitability mix or split between lending and deposits. And then obviously historically been heavily skewed towards the lending and fee side. Do you see the risk that some of the lending economics transition more into the deposit and here in a way that mortgage margin as an example could be lower from here as trying to access the balance between the three engines or do you see some of the weakness we currently see in certain markets in terms of mortgage pricing to be more transitional in terms of nature.
And secondly, I was just wondering in terms of the deposits 50-50 mentioned earlier, have you seen any discernible change so far in terms of the rate path in terms of customer shifting funds from transaction into savings and where would you kind of expect the steady state balance to be between those two going forward if rates stabilized at a higher level. Thank you.
Ian Smith
So if I deal with, I'll deal with this question on sort of the balance in deposits and I guess your question on mortgage margins as well. So on deposits and deposit mix, we are seeing over the past few quarters, and particularly the last couple of quarters, a move into savings deposit products, and that is I think a combination of, it's certainly driven by customers looking at some very attractive rates now and so that is natural. We definitely see a substitution, I guess, in customer conversations between say market-based investment products and deposits because of current conditions. That's natural.
The shift from off-balance from transactions to savings accounts, it's happening in a small way, and you can expect that to continue but probably not to a significant structural change because customers have always been pretty good at managing the level of balances on transaction accounts versus where they might put their money to earn some return.
So we're seeing a small shift between transactions and savings but not marked. It will continue, I think, but again not something we're concerned about. And the more interesting conversation is customers looking at deposits and savings products as an attractive alternative to perhaps putting something into funds or something like that. And I think we're in really good shape there. We've got market-leading deposit products, saving products in all of our countries and I think we will win market share as a result.
And on the lending margin, we've seen, you can see through the numbers that the contribution from deposits, the gross contribution was offset by a reduction in lending margin and that's natural, I think different dynamics there, some of it is a bit competition related particularly in a muted mortgage market and also to a certain extent where we're catching up with passing on cost of funds increases through lending rates and other things. So certainly our base cases perhaps continued lower contribution from lending margin which is more than substituted by what we see on the deposit side and our base case for 2023 is some continued net interest margin expansion.
Martin Leitgeb
Thank you. Could I have one more follow-up please just on the structural hedge? Just looking at the strong NII progression quarter-on-quarter, it seems like the is comparatively small. I was just wondering if you could give us any steer in terms of how big it is and in which country currency it might be. Thank you.
Frank Vang-Jensen
So the size of our structural hedge has been pretty stable throughout the last few years and so no changes there. We are seeing, it's one of the, I guess a headwinds in the net interest income picture but we are seeing such strong performance on deposits that it isn't a particular feature.
Martin Leitgeb
Thank you.
Operator
The next question comes from Nick Davey from Exane. Please go ahead.
Nick Davey
Good morning, everyone. So just a couple of questions, please. The first one, can I tempt you into guessing when peak net interest income will appear in your P&L? The reason I ask is just going back to your famous slide 17 if I annualize our Q4 net interest income, you'd be running around €900 million higher in 2023 versus 2022 already, so that's sort of €1.1 billion to €1.5 billion guidance for the increase in 2023. It seems like at this pace of momentum, you have sort of hit that peak quite soon, which maybe surprised me a little bit based on where rates were in Q4 and where you're expecting them to be in the middle of the year. So any question on -- any comments on timing would be helpful.
And the second question please, just on deposit balances. I can see across Personal Banking lots of Business Banking and large corporates, you've had some deposit contraction in local currency in most markets. Is that seasonal patterns and typical or do you think there's anything more structural going on there? And maybe if you can just develop any thoughts on deposit strategy from here and I think you just made a comment about taking market share from here. I think it will be accustomed in recent years to focusing on lending market share, I just wondered whether you felt as optimistic about being able to take deposit share without sacrificing on price using some of this Nordea secret source you found as successfully as you've done on the lending side. Any comments there would be helpful. Thank you.
Ian Smith
Good morning, Nick. Matti, do you want to take the question about peak and then I'll come back on some of the deposits?
Matti Ahokas
Sure. Hi, Nick. You should compare the full-year '22, so i.e. the €5.6 billion not Q4 annualized. So that's the short answer for the first question.
Ian Smith
In terms of deposit balances probably a couple of influences there. Yes, I mean I think in our business banking, business areas there is no discernible trend. I think it is seasonal flows and indeed on average balances, we're continuing to see some growth there. In LC&I, it can be a bit lumpier and at the end of Q3, we saw a significant jump in LC&I deposits driven by companies in the energy sector and the reduction that we've seen in Q4 is also those energy companies kind of regularizing their sort of cash flow and cash flow position. So it's just some special lumpiness rather than anything else.
In terms of deposits and market share ambitions and other things, one of the areas where we focused on seeking to I guess recapture market share has been in Norway and we've done that with some special product offerings and I think we've been managing our way through that without having to give away too much on pricing, I think that's building up that deposit capability, that muscle. It's been an important thing to do for us.
In other markets where we're much more strongly established in terms of transaction accounts and other things and I would say more in balance, we feel pretty good about our ability to capture market share in deposits because of our relevance in terms of product offering in terms of our focus on customers and others. So Yes, I guess it will be something that we talk about a bit more than we have in previous years because of the focus on deposits now, but we feel like we should be able to do well there.
Frank Vang-Jensen
And just to add. So the start point of us is that we are in a relationship bank and that means that when we work with the customers we are covering every part of their business. So you are not experienced us to start to compete on price going broad and be [monolinear]. But you are seeing in Nordea that is even more disciplined and structured also covering the deposit part of the customer's business in a more like firm way than we have done before and the reason for that is that for customers, it has not been a product of attention in some of our markets.
Now, of course, it is due to its carrier interest rates and it's a very, very good product for some customers to reduce risk for example to park money or to be an alternative waiting to re-enter sort of mutual funds and whatnot and therefore we have put it into basically all conversations with customers and just doing our work and bringing the deposit market share up to our natural market share would lead to a market increase, market share increase on the front book.
Nick Davey
That's really helpful. Thank you. Can I just pick up on the net interest income question, this one more time? I take the point in that Slide 17 has a full-year, on a full-year effect, I think my point is if we just start with the Q4 base that you're running with into next year and if that was the run rates already that will be enough to give you €900 million of this €1.1 billion of annual increase. So if I take the low end of your guidance for 2023, would involve something like €50 million more rate benefit to come in Q1 and then the fund is over. So, I'm just a bit puzzled really why the low end of the range sort of still exists in a way or whether you really think net interest income starts to cap out that quickly in the coming few quarters of 2023?
Ian Smith
So look, Nick, I think it's a broad range. And I think it's reasonable given uncertainties around competition, all those other things that we give that breadth on the range, I think you can expect us to perform strongly in NII in 2023.
Nick Davey
Okay, thank you.
Matti Ahokas
Last question, Operator, please.
Operator
The next question comes from Piers Brown from HSBC. Please go ahead.
Piers Brown
Good morning, thanks for taking the question. Just one question actually it's on slide 19 and regarding the decline in your Stage 2 loan balances. We've seen some of your competitors starting to prudently lower some of the credit ratings across their corporate portfolios. So I was just interested in that context, see if your Stage 2 balances are still declining, and I'm just wondering if you could give us any color in terms of the composition of that number and whether this particular corporate sector where you're starting to see negative ratings' migration and particular corporate sector that you're putting on to increased monitoring at this point. Thanks.
Ian Smith
Hi Piers. So yes, we have a watch list in the same way exactly as you'd expect us to do but that isn't growing at this stage but it's somewhere where we stay vigilant. The positive development in Stage 2 and Stage 3 is, I mean, it's not particularly sector concentrated with perhaps one exception.
We continue to work with some restructuring cases in oil, gas, and offshore and we've delivered significant improvements in that particular sector over the last few quarters but otherwise it's across the Board. We're not seeing yet negative rating migration even as we update our assessment of customers. It's something that we're sensitive to going through 2023. But I think this is just an indication of portfolio strength at this stage.
Piers Brown
Okay. Thank you very much.
Matti Ahokas
All right. I think that's the end of the session. So thank you everyone for the call. And as always, just call us if you have further questions, thank you so much and see you soon.
For further details see:
Nordea Bank Abp (NRDBY) Q4 2022 Earnings Call Transcript