Equity and liabilities –
Capital and funding management
Group Capital and Risk Modelling
Louise Lindgren
12 May 2011
2
Agenda – Capital and funding management
Adapting to the New Normal
Changed environment – new demands
Focus on returns and business efficiency – capital efficiency, cost efficiency
Balance sheet management – minimising total average cost of capital
Capital efficiency
RWA efficiency, management and mitigation
Capital base optimisation – tier 1 capital, tier 2 capital, contingent capital
Funding efficiency
Broad funding base and active management
Funding in relation to assets – pricing of liquidity risk, asset matching
Conclusions
3 3
Adapting to the New Normal
4
Efficient
management of
funding
Efficient
management of capital
Efficient
management of
liquidity
Efficient
management of
assets / income sources
The pressure on a bank’s balance sheet
increases dramatically
Regulators Shareholders
5
Increased capital requirements…
7.5
10.7
2007 Q1 2011
Core Tier 1 capital ratio (excl. Hybrids), %
23
56
2007 Q1 2011
2.3 2.1
3.0
3.7
2007 2008 2009 2010
Liquidity buffer, EURbn
Average bond maturity, years
…as well as liquidity buffer
…and prolonged long-term funding
Changed environment – higher raw material costs
6 6
Nordea focuses on returns and business efficiency
Focus on return on equity (RoE)
Cost efficiency
Business mix and income efficiency
Capital and asset efficiency
Funding and liquidity efficiency
7
Assets Liabilities and equity
Other assets Other liabilities
incl. Life incl. Life
Derivatives Derivatives
Liquidity
buffer
Loans to credit inst. etc Deposits
and
Corporate wholesale funding
and other
lending
Household
mortgage lending Tier 1 and tier 2 capital
Equity - Core tier 1
Off-balance-sheet
commitments
Balance-sheet management
7
Liabilities – efficient management of funding
Diversified sources
Deposits
Pricing, matching
Capital
Risk-weights
Segmentation of assets
Equity and capital instruments
Liquidity
Liquid assets
=> Minimising total average cost of capital
given the new set of requirements
Pricing,
matching
RWA
Liquidity
8
Efficient management of capital
9 9 9
Increased capital efficiency
Impact from new regulations is expected to be offset by mitigating
actions and increased efficiency in risk weights of assets (RWA)
Capital base optimisation
Tier 1 instruments
Tier 2 instruments
Contingent capital
Focus on capital-light products
10
Review of credit risk process
PD: use of rating models, scoring models, risk transfer, rating migration,
default management
LGD: collateral coverage, collateral eligibility
EAD: guarantees, commitments, netting agreements
Nordea IRB roll-out
Currently approved to use IRB Approach for 77% of the total credit portfolio
Review ongoing of further roll-out of remaining portfolios, eg foreign branches
IRB Advanced application for corporate portfolio
Mitigating actions regarding RWA impact, eg CVA risk
Other initiatives
Insurance
Securitisation
Risk-weight (RWA) overview
11
Capital base optimisation – loss absorption in
tier 1 and tier 2 capital under Basel III
=> All tier 1 and tier 2 capital instruments will include
enhanced loss absorption mechanisms
Tier 1
Main terms
Gone concern features –
default absorption
Tier 2
Perpetual
Deeply subordinated
No step-up
Callable after 5 years
No dividend pushers*
Going concern features -
loss absorption
Discretionary non-cumulative coupon deferral
Conversion to equity or principal write down upon breach of trigger
Trigger 5% to 7% core tier 1
Conversion applicable if not already converted
Minimum maturity of 5 years
Subordinated
No step-up
Callable after 5 years
None
* Unclear if CRD IV will allow dividend stoppers
Conversion to equity or write off at the point of non-viability (contractual vs statutory approach, EU directive on resolution)
12
Capital base optimisation –
role of instruments under Basel III
Role in the Capital base
Core tier 1
Tier 2
Comment
Minimum core tier 1
Additional tier 1 capital
Total capital
Capital buffers
SIFI requirements
Additional tier 1
Cost efficient way to cover additional Tier 1 capital requirements
Instrument
Additional tier 1 capital
Total capital
Total capital
CoCos (non-tier 1 or tier 2)
Countercyclical capital buffer?
SIFI requirements?
Cost efficient way to cover total capital requirements
The Basel Committee is still reviewing if CoCos could cover the Countercyclical buffer and any SIFI requirements
=> Tier 1 and tier 2 capital instruments will be
highly interesting for minimising capital cost
Core tier 1 will be the most important form of capital. Shall cover large part of minimum requirements as well as buffer requirements
13 13
11,689 12,82114,313
17,76619,103 19,408
2006 2007 2008 2009 2010 Q1 2011
Dividend payout
Ability to adjust asset growth
without jeopardising returns
CAGR in core equity of 9.1% after
dividend and rights issue
Core tier 1 ratio 10.7% in Q1 2011
Strong capital generation
Core tier 1 capital, EURm
14 14
Efficient management of funding
15
Funding management – business efficiency
15
Focus areas for funding and business efficiency:
Efficient use of diversified funding base for various issues
Use of covered bonds for matching of asset types
Pricing of liquidity cost and risk
Matching between behavioural maturities of assets and liabilities
Management of the economic funding gap measure
Relative pricing attractiveness
=> A diversified funding base important for
minimising average cost of capital
16
Assets Liabilities and equity
Other assets Other liabilities
incl. Life incl. Life
Derivatives Derivatives
Liquid assets Liquidity buffer Deposits from cred inst Short-term
Short-term funding liabilities
Loans to credit inst etc
Deposits from
Corporate the public
and other
lending
Stable Long-term funding Stable
long-term liabilities
assets Household
mortgage lending Tier 1 and tier 2 capital
Equity - Core tier 1
Off-balance-sheet
commitments
Covered bonds
Broad funding base and high portion of
long-term funding and stable liabilities
Asset type
matching
Behavioural
maturities
Pricing of
liquidity cost
17
19 18
27
33
12
2007 2008 2009 2010 Q1 11
17
High activity and good funding name reception
Very good reception of the Nordea
name in all funding markets
Attractive relative pricing
Norwegian and Finnish covered bond
platforms launched in 2010
Major transactions 2011:
USD 2.75bn 144a triple-tranche – 3y, 10y
EUR 3bn EMTN dual-tranche – 2y, 5y
EUR 1bn EMTN Finnish covered bond
USD 2bn 144a covered bond (N Eiend.kr.)
SEK 10bn covered bonds
NOK 6bn Norwegian covered bonds
Large volumes of long-term funding
issued already in Q1 2011
Issued long-term funding,
excl Danish covered bond, EURbn
18 18
Conclusions
19
Key messages
Focus on returns, capital efficiency, funding efficiency
Adapting to the New Normal
Target to minimise average total cost of capital
Enhanced RWA optimisation for capital efficiency
Capital base optimisation – tier 1, tier 2 capital, CoCos
Strong capital generation and capital position
Diversified funding base important for minimising cost of capital
Active funding management, pricing of liquidity risk, matching of assets
Interlink between capital and funding efficiency – risk, rating